Many investors are seeking strategies to brace for future uncertainty as we approach a post-pandemic era. Investing in precious metals such as gold and silver may be a solution for some.
If you've been considering putting part of your money into alternative investments, such as holding a piece of your portfolio in counter-cyclical assets, gold and silver are worth looking into.
Both metals may provide a hedge to varying degrees in the event of a prospective economic and/or financial slump, as well as during prolonged periods of rising inflation. Understanding the differences in how the two metals are utilized, as well as their economic sensitivity and technical qualities, will assist you in deciding which metal is best for your portfolio.
Investing in gold and silver may be simple, enjoyable, and lucrative. Anyone may learn how to buy gold and silver as a kind of physical wealth management storage. Gold and silver are both beautiful and sound long-term investments since they keep their value. However, the process of purchasing, selling, and holding gold and silver, like any other activity, has complexities that must be understood. You will be a more informed investor if you have a foundation of knowledge about gold market movements, different ways to buy gold and silver, the values of gold and silver coins, and so on.
Gold is more accessible to the average investor than other commodities since bullion (the real yellow metal, in coin or bar form) can be purchased through a precious metals dealer or, in some situations, a bank or brokerage.
Bullion bars come in a variety of sizes, from a quarter-ounce wafer to a 400-ounce brick, but most new investors choose coins. These are modern issues, not vintage numismatic coins, and are valued based on their gold content plus a premium. Most buyers adhere to the most commonly circulated gold coins, such as the South African Krugerrand, the American Eagle, and the Canadian Maple Leaf, for optimal liquidity. Whatever method you choose, be sure you're buying from a reliable vendor, whether in person or online. Gold coins must be kept in a secure location, such as a house safe or a bank safe deposit box. Make sure they're covered as well.
Gold jewelry also allows gold investors to enjoy the pleasure of wearing their investments. To increase the total worth and look of the jewelry, gold is frequently combined with other precious metals jewels. Pieces are frequently passed down as family heirlooms, adding emotive worth beyond the piece's intrinsic value. If you're looking for a long-term investment, jewelry isn't always the ideal choice because the retail price is usually far more than the real value. This is related to the quality of the work and the price markup. Before purchasing jewelry, always check the purity of the gold to ensure that you aren't paying for 18 karats when you only receive a 14-karat item.
Most homeowner insurance policies include jewelry, which is advantageous if it is lost or stolen.
Over the last 5,000 years, nations, kingdoms, and empires have come and gone, and their currencies have vanished with them. Throughout it all, though, gold has served as a medium of commerce and a store of wealth management. Silver has served as a substitute for precious metal over the years, earning the moniker "poor man's gold" due to its cheaper price.
Conventions govern the use of modern paper and electronic currency. Governments declare them to be money, and citizens accept them as such. However, they have no intrinsic value in and of themselves.
Physical commodities such as gold and silver, on the other hand, are represented by these metals. They're valuable not only because of their rarity but also because they're useful. Both are employed in jewelry making and for some industrial applications, for example.
Silver has a moderately weak positive correlation to stocks, bonds, and commodities, making it a good portfolio diversifier. Gold, on the other hand, is thought to be a more potent diversifier. It's always been uncorrelated with stocks and has very low correlations with other main asset classes, and for good reason: Because gold's industrial uses are relatively limited, it is less affected by economic downturns than silver and industrial base metals.
In this section, we'll concentrate on gold because it's the more well-documented of the two precious metals.
Gold does not provide interest or dividends, and it is not an all-weather investment, according to the main arguments against it as an investment (does not perform consistently in all types of market environments).
These are valid issues, but they overlook what may be the more important argument. Gold is an asset that, for the most part, performs best when the economy and financial markets are at their worst. As a result, gold is a real counter-cyclical investment, as it is sometimes the only asset that performs well when other assets do not.
Since World War II, the United States has gone through two periods of acute crisis, and gold has comfortably beaten the financial markets in both.
Much has been written about how stocks have outperformed gold in recent decades. And there's plenty of proof that this was true throughout some very particular historical periods. However, if we go back to 1970 and compare the price of gold to the level of the S& P 500, we observe an unexpected trend: gold has at least kept pace with the S& P 500 since 1970.
Whether you look at acute crisis periods, the last 50 years, or the last 5,000 years, gold has consistently performed well. This not only supports its reputation as a long-term store of value but also emphasizes its significance as one of the few true counter-cyclical assets available to investors.
Despite the chorus of skeptics, this presents a compelling case for keeping at least a small allocation in gold and silver in your portfolio.
Silver is one of the most widely traded precious metals on the market, and it is popular with investors. The metal benefits from several fundamental reasons, including a combination of low supply and high demand. Furthermore, amid increased demand for practically all commodities, inflation concerns, and a recovering global economy, silver is attracting a lot of attention.
During inflationary eras, silver and other hard assets are typically considered ideal stores of value, and silver's dual character as both a precious and an industrial metal makes it distinctive. Solar panels, electric vehicles, LED lighting, medical gadgets, and other products employ the metal in addition to gold coins and jewelry.
The silver case isn't quite as strong as it is for gold. Though it has done well during times of crisis, it has consistently underperformed gold and stocks over the long haul. Since 1970, the gold has returned about 1700 percent, climbing from slightly over $1 per ounce to around $18 today. Although this is a positive result, it is still less than half of the returns on either gold stocks or gold.
Heavy industry and high technology consume half of all silver, which includes smartphones, tablets, automotive electrical systems, solar-panel cells, and a variety of other products and applications. As a result, silver is more susceptible to economic fluctuations than gold, which has limited applications outside of gold jewelry and investment. When economies grow, demand for silver tends to rise.
When U.S. inflation has risen in the past, both gold and silver have performed well, because growing costs of goods and services often correlate with a weaker currency. Because both metals are priced in US dollars when the dollar declines in value, gold, and silver tend to rise as the cost of purchasing them in other currencies decreases. With rising inflation and a declining currency, silver tends to climb more than gold due to greater industrial demand.
On any given day, the volatility of silver prices might be two to three times that of gold. While traders may benefit, controlling portfolio risk can be difficult with such volatility. Nicholas Thompson, who manages Morgan Stanley's physical precious metals portfolio for Wealth Management customers, says, "That volatility can translate to larger short-term gains, but it often carries the risk of greater downside."
Silver is far less expensive than gold, making it more accessible to individual investors. Silver may be a better investment choice for those who are just starting to construct their portfolios due to its lower cost.
Bullion coins may be the most appealing aspect of investing in silver. With gold's current price, purchasing a single one-ounce gold bullion coin may be out of reach for small investors. If you simply have a limited amount of money to invest, silver bullion coins, which are now available for less than 1% of the price of gold bullion coins, maybe a better option.
Before investing in silver, do your research and determine your risk tolerance, just as you would with any other investment.
Because both precious metals serve similar roles in an investment portfolio and their values tend to move in lockstep, gold and silver are frequently contrasted. Gold, on the other hand, has generally been more expensive than silver. A pound of gold costs about $1,880, whereas a pound of silver costs about $24.
The amount of silver buried in the earth's crust outnumbers the supply of gold. When you combine that with strong gold demand, gold becomes a rarer and thus more valuable asset than silver. Silver, on the other hand, may appear to be a more economical precious metal option for investors.
There are a few things you should know before investing in silver to prevent jeopardizing the profitability of your portfolio. Before you add silver to your portfolio, it's critical to understand the risks you'll be taking. Before investing in silver, there are a few things to think about:
Silver is an excellent method to diversify your portfolio and protect yourself from losses. It is, nevertheless, susceptible to the rule of supply and demand, which can result in unexpected, severe price swings.
You pay the current price plus a premium when you buy silver. It's a good idea to compare broker-dealer premiums to make sure you're getting the best bargain.
The risk of fraud exists in all forms of investing. Avoid any broker who promises guaranteed returns, sends you spam mail or calls or claims to be able to make a lot of money with little risk.
Silver and precious metals are frequently bought on margin, which increases your maximum possible losses. Because you're borrowing money to buy more of the item, and you're paying interest rates on the borrowed money, this can be quite dangerous.
Certain industries, such as technology, may substitute alternative materials for silver in their products. This would reduce silver demand and, as a result, its price.
Let's look at some of the specific methods you can invest in gold and silver now that we've established why you should.
This has been the primary method of acquiring gold and silver for millennia. Even today, some investors prefer bullion as a strategy to store an asset that will maintain or increase in value in the event of a financial system collapse.
Gold and silver bullion have the advantage of being "cash and carry assets," at least if you take physical possession of the metals.
You can purchase bullion in the shape of coins or bars. The American Eagle, Canadian Maple Leaf, and South African Krugerrand are the most popular gold bullion coins. Each coin has one ounce of gold, but half an ounce, quarter ounce, and 1/10 ounce coins may also be produced. If you acquire these coins via a coin dealer or an online exchange, you'll normally pay a markup of 5% to 10% over the bullion value.
Pre-1965 U.S. coins, including silver dollars, half dollars, quarters, and dimes, are regularly manufactured silver bullion coins. However, since many have been melted down, supply has become increasingly difficult.
Commemorative silver bullion coins are available, however, they come with a hefty premium over the metal price. Silver coins are more commonly seen in numismatic collections. These are mostly coins from past centuries with prices far above their metal value. This is owing to the coins' popularity among collectors and the fact that they are becoming increasingly scarce.
Numismatic coins can sell for several times their metal worth, indicating that their major value is based on numismatics rather than the price of silver.
Gold or silver bars can also be purchased. The sizes of the bottles range from one to 400 ounces. Bars have a smaller markup and are a better method to buy a large quantity of either metal.
Coin merchants in your area sell gold and silver coins. However, they may have restricted stock and demand greater markups than usual. Local businesses are also more likely to specialize in numismatic coins rather than bullion. You also need to be careful with the reputation of a local coin dealer. To find out whether there have been any complaints, check references with the Better Business Bureau, your local or state department of consumer affairs, or numerous online sites.
You may also buy gold coins and bars online from a variety of huge retailers. These are companies that have physical locations but sell bullion all over the world.
If you desire to sell your gold or silver bullion, you can do so at the same coin store or online dealer where you purchased it, or at a different one. They function as bullion exchanges, buying and selling metals. However, you might be able to sell your bullion online through sites like eBay and Craigslist. Just make sure you get paid before sending the metals out.
Take physical ownership of the item. This is the point at which you obtain personal possession of the bullion. You'll need to keep it in a secure location where it won't be damaged by fire or other tragedy. However, you might want to consider adding a rider to your home's insurance policy to give additional coverage in the event of a loss.
Storage with the bullion exchange where you purchased it. The majority of internet exchanges will also store your bullion. However, there will be a cost associated with doing so. Others who don't have storage facilities may be able to refer you to someone who does.
IRAs are individual retirement accounts. Some self-directed IRAs allow you to keep bullion coins in your account. Gold Eagles from the United States are one example. It's a specialized procedure, so you'll need to locate an IRA custodian who specializes in it. Also, keep in mind that you can't keep numismatic coins in an IRA.
ETFs have grown in popularity as a means for investors to obtain exposure to gold and silver without needing to store real assets. Shares can be purchased and held in a typical brokerage account. The fund's operator is in charge of charging an expense ratio and handling the charges of holding a physical supply of gold or silver. Investing in an ETF, on the other hand, does not grant investors access to the underlying metals. Furthermore, some precious-metal ETFs are taxed as collectibles, so they are not eligible for lower long-term capital gains rates.
Some gold miners/investors prefer to invest in gold mining companies. This is because gold mining stocks have higher leverage than gold bullion. For example, if the price of gold rises 20%, the value of gold mining companies could rise 50% or more. This is due to the higher profit potential that comes with rising bullion demand.
However, gold mining stocks have a few drawbacks. First and foremost, these are equities, not bullion. Investing in gold mining equities, in other words, is not the same as investing in gold. They are subject to all of the economic dynamics that affect all other companies since they are gold mining companies. Government regulation, credit liquidity, interest rates, labor availability, and even trade concerns are all examples of this.
Second, the mining industry is highly speculative in general. The cost of capital is significant, and converting proved reserves into operational mines might take years. Meanwhile, bullion prices may decline, putting mining businesses in a precarious position.
Third, much of the world's gold mining takes place in politically unstable areas. The local government may shut down or nationalize a gold mining company's mines. Invasion or civil warfare may also occur.
Gold stocks are highly speculative, not suitable for the typical investor, and do not replace bullion in your portfolio.
You can invest in gold mutual funds instead of individual firms if you enjoy the profit potential of gold mining equities but don't want to acquire individual corporations. A fund allows you to invest in the stock of a variety of gold mining firms, reducing the risk of owning only one or two, as well as the expense of owning several.
VanEck Vectors Gold Miners ETF (GDX) and Fidelity Select Gold Portfolio are two examples of such funds (FSAGX).
Gold mutual funds, like gold ETFs, can be bought, held, and sold through major financial brokerages.
However, whether you want to invest directly in gold mining equities or through gold ETFs, it's advisable to keep your gold holdings to a single-digit percentage of your overall portfolio. That way, you'll have just enough exposure to the sector if it goes off, but very little risk if it doesn't.
Learning how to invest in gold and silver is difficult because there are numerous disadvantages to investing in any commodity directly.
To begin with, commodities, including precious metals, do not generate cash flows in the same way that a successful firm or even an interest-paying bond does. Instead, they just sit there, hoping for a price increase. Gold and silver are good at retaining their value against inflation in the long run, but they don't do much for you on their own.
Second, there are transaction fees when investing in precious metals. When you acquire actual gold, there is a profit-making corporation in the midst. They purchase it at wholesale prices, refine it into fine investment-grade gold, and then resell it at retail. There are potential transportation charges, as well as security and storage costs, as well as the possibility of theft or loss. If you invest in a precious metals ETF instead, you'll pay an expense ratio, which covers security and all of the fund's administrative costs, as well as the metal it holds.
So, not only does traditional precious metal investing fail to generate cash flows, relying solely on the metal's price appreciation, but it also starts at a loss due to the related expenses.
Physical precious metals have a place in your net worth as a long-term investment, and I have a substantial physical bullion allocation. Some investors use it as a hedge against catastrophic risks, such as a country's economy collapsing, or against inflation or currency depreciation.
However, it's also wonderful to be able to make some money from the job. That's why my gold and silver investment approach includes holding a varied mix of direct gold and silver exposure (through actual bullion and certain ETFs), precious metal streaming/royalty firms, and select gold miners. The expense ratios of the ETFs and physical holdings are paid for by the dividends from the firms, ensuring that the portfolio has a self-sustaining precious metal hedge.