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How (and Why) to Invest in Precious Metals

Investing for your future is vital, but the investment landscape can easily become confusing and overwhelming. With literally tens of thousands of investment options, how is one to narrow them down and construct an ideal portfolio?

While equities, bonds and real estate typically make up the backbone of most modern portfolios, alternative asset classes like precious metals are also popular. Precious metals serve a unique role in the modern portfolio, and are largely uncorrelated to other asset classes. But is investing in precious metals worthwhile? Are gold and silver a good investment?

 

Investing in precious metals

 

Disclaimer: This page is intended for informational purposes only. It should not be considered as financial or investment advice. You should speak to a certified financial professional to determine the best investment mix for your specific situation.

Intro to Precious Metals

Precious metals are naturally occurring metallic chemical elements that are rare, and therefore quite valuable. The most commonly traded precious metals are gold (Au), silver (Ag), and platinum (Pt).

These metals have been used as a store of value and even a currency for thousands of years. Today, their value is composed of a combination of their usefulness in industry, their popularity in jewelry, and demand from investment managers and individuals.

From an investment standpoint, precious metals are often added to a balanced portfolio in order to improve diversification. They are also thought of as somewhat of an insurance policy against economic collapse, currency devaluation, hyperinflation, and other financial crises.

How to Invest in Precious Metals

Wondering how to get started investing in precious metals? There are basically three routes you can take:

  1. Buy physical precious metal bullion from a trusted dealer like Bellevue Rare Coins
  2. Invest in precious metal ETFs that track specific metals
  3. Invest in precious metal mining stocks or ETFs (not recommended typically)

We recommend avoiding mining stocks because they are historically mismanaged, and tend to underperform the price of the actual metal they mine! Although day traders may profit from the wild swings of the precious metal miners, we do not recommend mining stocks for buy-and-hold investors.

So, that really leaves two options: physical precious metals bullion and coins, and “paper” precious metal through ETFs.

Physical Precious Metals

investing in physical precious metalsIf you go the physical route, we recommend stopping into Bellevue Rare Coins (or contacting us) to get some in-person help. We have locations in Bellevue, Seattle, Tacoma, Lynnwood and Issaquah, Washington.

Interested in more info about specific metals? See our guides below.

Physical PMs are available in bullion coins, bullion bars, collectible coins, and even jewelry. Gold, silver, platinum, and even palladium are all widely available in physical, investment-grade products. All serve a similar purpose – to give you exposure to the precious metal market with something you can physically hold and trade. There are pros and cons to this approach, outlined below.

 

Benefits of Physical Precious Metals

  • A hard asset that you can hold in your hand
  • No ongoing management fees
  • Useful in emergencies
  • Fun to collect
  • Easily tradable
  • Immune to disruptions in the financial system

 

Downsides of Physical Precious Metals

  • You must store them safely and securely
  • Some products carry a premium over spot price

“Paper” Precious Metals

You can also choose to invest in precious metal on paper, without actually getting physical bullion yourself. You can do this through precious metal trusts, which trade as ETFs on the stock market. The most popular are GLD (which tracks gold) and SLV (silver), although there are several others.

These trusts hold physical precious metals in secured vaults, and sell shares in their ETFs that represent – on paper – these precious metal holdings. They make money by charging an expense ratio (GLD has an expense ratio of 0.40%, or $40 per year on a $10,000 investment). When you purchase these ETFs, you technically own the equivalent of precious metal bullion, but you can’t actually take physical possession of it.

 

Benefits of Precious Metal ETFs

  • Highly liquid
  • No storage issues
  • Can buy almost any dollar amount
  • Easy for regular monthly investments

 

Downsides of Precious Metal ETFs

  • Expense ratios can eat into your returns, and are charged every year regardless of performance
  • You do not physically own the metals
  • In the case of an economic or financial system crisis, ETFs will not serve the same purpose as physical PMs

In the end, the choice between physical precious metal vs ETFs is yours to make. However, even if you go the paper route, we still think it’s prudent to hold at least some physical metals in your home or safe deposit box.

 

Investing in Precious Metals for Retirement

Considering an investment in precious metals for your retirement savings? If so, there are some unique tax considerations to be aware of. As bullion is taxed differently than most other investment classes, we recommend speaking to a tax adviser to develop a strategy.

The best way to invest in precious metals for retirement is through a precious metal IRA program, otherwise known as a self-directed IRA. These programs allow you to invest in physical bullion, while enjoying beneficial tax treatment inside of a IRA account.

Click here to learn more about the self-directed precious metal IRA program!

Benefits of Precious Metals Investment

Investing in alternative asset classes like precious metals can certainly have some notable benefits. Here are some things to consider:

 

Diversification

Diversification is a vital part of a successful investment portfolio. To quote an old adage, you don’t want to put all your eggs in one basket. While many investment advisers state that a mix of stocks and bonds is sufficient, others posit that adding a small percentage of precious metals may be beneficial. The data largely backs this up, although there is no predicting the future.

The chart below shows the performance of gold (in red) vs the S&P500 index (in blue) since 2005. As you can see, the price of gold and the price of the broad equity index often moved in opposite directions. And during this time frame, gold actually outperformed the S&P500 (although this is not typical).

Source: Google Finance

 

A Hard Asset

If you invest in physical gold, platinum, silver or other precious metals, you will now own a hard asset. This is an asset that you can hold in your hand, trade readily, transport quickly, and use as a physical store of wealth for generations to come.

This tangibility appeals to many. Some investors think of precious metals as an insurance policy against financial collapse or another modern crises. Others just prefer to own some physical assets outside of the financial system.

 

Inflation Hedge

Precious metals may help hedge against the risk of inflation and hyperinflation. Over the very long term, gold prices have kept pace with inflation rates (although the relationship is less clear in shorter time frames).

Additionally, precious metals can store value and preserve buying power during times of hyperinflation. Take the recent crisis in Venezuela, where inflation rates recently exceeded 1,000,000%. Owning some physical gold during the Venezuelan crisis would have preserved buying power when it was needed most, while cash became nearly worthless.

 

Globally Recognized

Precious metals are globally recognized, and globally valuable. They maintain their buying power across the world, and their prices move freely of moves in local currencies. They have no credit or default risk, since they are not backed by any particular entity or government.

In extreme cases, this global value could prove quite beneficial in the case of a currency devaluation or other financial crisis.

 

A Safe Haven Asset

Gold, and to a lesser extent silver and platinum, are seen as “safe haven” assets. This refers to their tendency to be a popular option for investors during times of economic uncertainty. When prices of equities crash, investors often flock to gold, cash, and treasuries. In some cases, this causes the price of gold to surge while the prices for other asset classes fall.

This serves two roles for the precious metal investor: It creates opportunities for great returns during certain time periods, and it further improves diversification. With a balanced portfolio including precious metals, a financial crisis or stock market crash might be slightly less painful, as gains from precious metal investment may balance out losses from equities.

Downsides of Precious Metal Investment

On the other hand, precious metals do have some negative aspects that should be understood. Here are some things to keep in mind for beginners.

 

Volatility

Precious metals are a volatile bunch. Their prices can swing significantly, and there’s not always a clear reason as to why. Investor sentiment can weigh heavily on the price of precious metals, so oftentimes when equities are surging, precious metals slump. Below are some charts to demonstrate the volatility of precious metals.

The price history of silver, source: SilverPrice.org

The price history of gold, source: GoldPrice.org

No Cash Flow/Dividends

Precious metals are not income-producing assets. Unlike stocks and bonds, precious metals do not issue dividends or interest payments. Thus, their returns are based solely on price appreciation.

This is part of the reason that most investment advisors that are pro-gold don’t recommend holding a huge percentage of your portfolio in the precious metals asset class. A common recommendation is 5-10% of your overall portfolio, although some like the Permanent Portfolio call for an allocation to gold as high as 25%.

Are Precious Metals a Good Investment?

An age-old question for an age-old investment class. The question is also a controversial one, with many experts on both sides of the argument.

In general, we believe that precious metals make for a valuable addition to a well-balanced portfolio of stocks, bonds, and real estate.

Over the long run, gold and other PMs tend to serve as valuable inflation hedges, and they generally do a great job of preserving wealth. Returns are typically lower than more aggressive asset classes like equities, but many people hold gold not for the higher returns, but for the diversification aspect.

Of course, choosing a portfolio composition is a highly personal choice and depends on your situation, risk tolerance and goals. If you’re unsure, we recommend speaking with a fee-only, fiduciary financial adviser who can help you personalize an investment plan to meet your needs.