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Market risks may be the most prevalent risks associated with gold. What is market risk? It’s the fact that whenever you buy an asset (physical, common stock, and so on), its price is subject to the ups and downs of the marketplace. In gold, as in many investments, the price can fluctuate and can do so very significantly. What if you buy today, but tomorrow there are more sellers than buyers in the gold market? Then obviously, the price of gold would go down. The essence of market risk in commodities such as precious metals is supply and demand.

Another element of market risk can occur when you’re involved in a “thinly traded market.” In other words, there may not be that many buyers and sellers involved. This is also called liquidity risk. This can happen, for example, in futures (covered in Chapter 12). Although futures are usually a liquid market (an adequate pool of buyers and sellers), there may be some aspects of it when it may not be that liquid. Say that you want to sell a futures contract that you recently bought that isn’t an actively traded contract. What if there are no buyers when you want to sell? Your order to sell through the broker may sit there for a long time. The sale price of the contract would drop, and you would lose some gain or even end up with a loss. Be sure to communicate with the broker regarding how active that particular market is.

Another example is the market risk of mining stocks. The stock of mining companies certainly can go up and down like most any other publicly traded stock. Stock investors can sell stock when they see or expect problems with the company. If, for example, you’re considering a gold mining company, the risk to consider is more than just the fact that it’s gold and the commensurate market risks with gold itself. It’s also about the company. Is management doing a good job? Is the company profitable? Are sales increasing? How about their earnings? Do they have too much debt? And so on. Mining stocks are covered in Chapter 7.