The beauty and brilliance of gold and silver aren’t just for jewelry, but they also have a place as a solid long-term investment. Since 2000, gold has outperformed the S&P 500 in total return, and silver is just short of that number. That’s a surprising statistic for many who view gold as an outdated investment vehicle that doesn’t have a place in the modern portfolio. Precious metals are a sound investment choice for many people who are looking for a way to protect their wealth and hedge their bets against downturns.
Exploring the Benefits
For investors who have hit retirement age, shifting some assets to precious metals can provide greater peace of mind because their purchasing power is safeguarded. For example, decades ago when a one-ounce gold coin had a $20 face value, that money could purchase an entire man’s wardrobe of a dress shirt, shoes and pants. Today that same gold coin is worth about $1,300 and could purchase the same complete wardrobe, plus some. The value of the gold affords the investor some buying power protection that is at short-term risk with stocks or bonds.
Financial planners, investment advisers and finance magazine columnists all recommend diversification of investor’s portfolios. The level of diversification is typically presented as a curved line, with the recommendation for younger people to have more aggressive investment mixes. And then on the other end of the curve we have older people that should consider leaning more conservative and have a mix of investments that act as a “hedge.” Gold is a very solid hedge play because it performs well in uncertain times and against declines in currencies such as the U.S. dollar.
Fitting the Gold and Silver Mold
Precious metals are what’s known as “uncorrelated assets.” Stocks and bonds are tied to the U.S. dollar, but gold and silver aren’t correlated. It moves inversely to nearly every other investment, and therefore is an ideal insurance for a portfolio.
The inclusion of precious metals in a portfolio is dependent on the investor’s risk tolerance and their age. A 23-year-old with a solid job and a 401k should consider sticking to the stock market for the bulk of their investments and likely doesn’t need to lean as heavily on precious metals. They have 40 years to ride out any bear markets, and can adjust their risk tolerance and investment mix every couple of years. Precious metals are also likely not as necessary for active traders who are shorting during downturns and moving in and out of markets in search of profits.
But, when that younger person turns 45 or 50, then precious metals should definitely be considered. Now they need to protect the gains they’ve accumulated and start thinking about protecting their wealth through retirement. During the 2008 stock market correction, some people lost 50 percent of their investments. If they had around 30 percent of that money in gold or silver, then they would have hedged their losses and seen instead some offsetting gains. There was also opportunity at the time for younger people to move some assets into gold and silver as a way to capitalize on pricing gains as the economy entered a lengthy recessionary period.
Buying the Right Metals
It’s vital for investors to purchase actual bullion, not collectibles. When someone buys an expensive rare gold coin they’re functioning as a coin collector, not a gold investor. The value of the coin isn’t just tied to the “spot price” of gold or silver, but also the demand for the coin. If this person wants to sell the collectible, then they need a willing and able buyer. The more rare and expensive the item, the harder it is to find such a buyer. Buying gold and silver jewelry is also not an investment strategy. The items do of course have a price that’s tied to the current spot prices, but there’s again the problem of supply and demand.
Silver or Gold?
The best approach is to consider both. Each precious metal offers sound long-term price gains. Silver is historically more volatile than gold, and for investors who are taking physical possession, $10,000 of silver will require a lot more actual space than gold. Silver is also more frequently used in industrial settings than gold, and the modern adult likely uses silver-containing products multiple times a day. Consider mixing in both metals to offer further protection from fluctuations.
Buying bullion gold or silver is straightforward when purchased through a reputable and secure company. Investors can ask for the metals to be sent directly to their residence or have them held in a secure facility. Retirement planning investing is best done through a self-directed IRA that allows a company to function as a custodian for precious metals. These IRAs function the same as those offered by Fidelity or Vanguard, with the difference being they’re funded with actual physical products. You can roll over some or all of an existing IRA or 401k into a self-directed IRA, and the distribution rules and ages are the same. The buyer can even make an appointment to view their specific metals at the facility.
Pick a Winner – What to Look for In a Precious Metal Investment Firm
The first step for finding a reputable precious metals company is to review BBB and other agency ratings. Check the number of complaints against the company, including those that were resolved. Two companies might both have strong ratings, but if one has 50 resolved complaints and the other only has four, then you have a sense of which one to choose.
Unfortunately, there are some precious metal firms that use ‘scare tactics.’ They might overstate the current economic situation, by for example stating that economic collapse is imminent, or a war will begin in a few months. There’s always a chance for market volatility, but investors shouldn’t feel pressured into making snap decisions because a gold dealer tells them the “sky is falling.”
Selling gold and silver is a business with pretty low barriers to entry. This allows unscrupulous companies into the market. Avoid these companies by finding a well-reviewed firm that understands precious metals, offers secure storage facilities, and a customer-centric approach. Investing in gold or silver must be an informed choice that isn’t influenced by a shady company trying to make a buck, but instead makes sense for the person’s age and investing goals.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.