Precious Metals

Investing in Gold and Silver14 min read

Jun 22, 2021 11 min
Gold and silver ingots

Investing in Gold and Silver14 min read

Reading Time: 11 minutes

Diversification is a road to success. So even if you have already mastered investing in bonds and stocks, it would be wise to have an allocation to precious metals like gold & silver as well. Investing in these metals brings about different and unique risks and opportunities.

Why have all of your savings invested in the stock market when you can minimize the risk with a good investment in precious metals?

If you keep on reading, you will get extensive info on how to invest in gold and silver, as well as all the pros and cons of various investing methods. In the end, you will be able to make an informed decision whether or not you should jump at this opportunity or let it pass.

So, let’s dive in!

Why Invest in Precious Metals?

Investing in precious metals, gold included, could be your safety net in case of market volatility, currency weakness, political instability, or economic collapse. Of course, all investments have their pros and cons.

Precious metals are physically rare but easily malleable, which is the very reason why they have been used as money throughout our history but that is not their sole advantage.

What are the benefits of precious metals?

  • They have no credit risk.
  • They retain their global purchasing power even in case of inflation or currency devaluation.
  • They do not correlate with stocks, bonds, or real estate to a great extent.

What are the downsides of investing in gold, silver, and other precious metals?

  • Precious metals, just like most commodities, provide no fast cash flow.
  • They can be pretty volatile.
  • The majority of precious metal miners end up losing a lot of money due to poor management.

Should you own precious metals or not?

Before we begin, we need to warn you that this question is surprisingly controversial. On one hand, people who distrust the global economic system would advise you to invest all your money into precious metals. However, many investors frown upon investing in gold, silver, and other precious metals and think no respectable portfolio should have such allocations.

The undeniable fact is that currently, gold is at all-time highs in most currencies. Besides, it would help if you think about all the bad things that happened in the past to other markets such as those in Argentina and Turkey.

What happened? In short: Their currencies plummeted & bond prices fell. Only those investors that held gold or assets denominated in foreign currencies made out of this chaos “alive & well.” It can happen in your economy too since it is a reoccurring thing around the globe and throughout our history.

The good news is that gold, silver, and other precious metals have a long history of rising in value when other financial assets take cover and wait for the storm to pass.

Gold is exceptionally resilient which is even better news. We have an example to back this claim too. Namely, during the Financial Meltdown of 2007 – 2009, the S&P 500 fell by more than 50% while the price of gold nearly doubled. People who had gold in their portfolios thus performed much better than other investors during this crisis.

As you can see, gold is an all-weather investment, but it is particularly handy during financial storms. What about now?

Considering that the stock market is trading near record highs as we speak, and the US federal debt keeps going up ($1 trillion per year), you can be pretty sure that yet another financial storm is near. Therefore, it would be wise to hold a position in precious metals and have something to cushion your fall.

How Much Gold and Silver Should You Hold?

There is no universal answer to this question. It all depends on your life circumstances, especially your age, whereabouts, ongoing investments, and your financial situation. In general, a wise person should always put at least 5% of their portfolio in precious metals, but no more than 10%.

Investing more than this in gold, silver, or other precious metals could mean that you will miss out on the growth historically offered by other asset classes. If, on the other hand, you choose not to invest at all, you are exposing yourself to risks your stocks and bonds might not be able to compensate for.

Experienced investors such as famous Shark Tank investor Kevin O’Leary does precisely as we advise you. For example, he holds 5% of his portfolio in gold bullions and gold ETFs. As soon as the value of gold increases, he sells some. When it drops, it is time for him to buy more gold. It is a long-term strategy and a wise investment.

gold investing

What are the Challenges of Precious Metals Investing?

This section will deal with two key challenges of investing in precious metals. First and foremost, you need to know that direct investment in any commodity, gold and silver included, does not produce the same cash flow as running a profitable business.

With commodities, you have to sit and wait in the hope that the price will go up. Silver and gold will hold their value even in case of inflation, but they will not do much more than that.

Precious metals will not produce income for you over time. So your only hope of generating an income is to find someone to pay you more than you did in the future.

The second challenge has to do with the transaction costs of precious metals investing. Namely, when buying physical gold, you usually have a company in the middle that profits as well. This is because they buy the gold at wholesale price, grade it and then sell it at a retail price.

You also need to deal with eventual shipping, long-term storage, and security costs. The risk of theft or loss is another thing to worry about. You can avoid at least some of these concerns by investing in an ETF that holds precious metals. For a certain cost, they will deal with security and other administrative costs of managing your position.

In short, precious metal investing is bound to start with a loss due to the expenses you have to cover upfront. Plus, there is no immediate cash flow – only hope that gold prices will go up in the future.

Therefore, the best strategy is to hold a diverse mix of direct gold and silver exposure – meaning both physical bullion and selected exchange-traded funds and precious metal miners or streaming/royalty companies. The companies will pay you dividends that should just about cover the expenses of holding the ETFs and physical gold & silver bullion. In this way, your portfolio will be self-sustainable.

The PROS & CONS of Holding Precious Metals

Trade in precious metals on the stock exchange

As we have already established, you can hold precious metals in the physical form, exchange-traded funds, and miners and streaming/royalty companies. Each method has its advantages and disadvantages, so let’s see what they are.

Physical Gold and Silver

Buying coins or bullions is the oldest method of investing in precious metals. It is also the simplest and the safest method. You go to a reputable vendor, buy what you need (bullion, bars, jewelry), and keep your valuables in a safe place.

The question is: Where should you keep your commodities to make sure they are 100% safe?

Owning some precious metal like gold safely hidden at your home is a good investment for an uncertain future. The hard assets can help you get by in case of a disaster.

Sometimes when natural catastrophes or major economic crises occur, not even banks or electronic payment networks can provide people with cash. For example, during the 2015 economic crisis in Greece, people were limited to withdrawals of only 60 euros per day, and getting a decent amount of cash was almost impossible.

Similarly, people in Puerto Rico were unable to use credit cards after the devastating hurricane in 2017. They had to use cash for everything they needed, even though they had a hard time acquiring it. Physical cash or gold & silver coins were pretty handy in both of these examples.

On the other hand, holding large amounts at home is not a good idea since that would require security measures you can hardly meet. Paying a storage fee is, therefore, a must, and insurance is highly recommended – the only problem is that both could eat away at your investment.

Exchange-traded funds (ETF)

You can invest in precious metals like gold & silver by buying one or more exchange-traded funds (ETF). These funds are very liquid and allow for a hassle-free trading process. The only problem is that ETFs are a bit expensive, but the good news is that the prices seem to be going down recently.

The ETFs can be purchased in two ways:

  • Through investment brokers
  • Through the sponsoring fund family.

Technically speaking, when you purchase ETFs, you do not have direct ownership of the precious metals. Instead, you own the shares in the fund that owns the actual metals.

Therefore, you do not have to worry about storage when holding gold & silver bullion through an ETF. On the other hand, if the financial system collapses, you cannot cash in that easily as when you own the actual bullion.

Miners/ Mining Stocks

You have a vast choice of different gold and silver mining companies to invest in. Their main advantage is in producing cash flow and paying dividends.

On the other hand, miners are levered against gold, and their stock prices can go up or down 5 to 10 times even if the price of gold merely doubles. Unfortunately, it can go the other way around, too.

When the price of gold drops, the gold miners start losing money very quickly, their debt rises, and they hit rock bottom share price. When you invest in physicals gold, you can wait for the price to go up again and avoid losses. Mining companies are not that lucky; they often go bankrupt before the prices recover.

Moreover, mining companies have been poorly managed throughout history. As a result, their costs were often not kept under control, nor have the spikes in gold prices been put to good use.

It would be best if you were careful with mining stocks, even though there are some mining companies that do know how to create shareholder value. Today, many gold mining stocks are lower than they were in the ’90s, and we thus recommend you to stay away from them and find better ways to invest.

Royalty/Streaming Companies

It is advisable to look into the streaming/royalty companies which do not operate the mines but rather finance them. It usually goes like this: a company provides the cash needed to develop a mine, and in exchange, it earns the exclusive right to buy a certain amount of gold and silver far below the market price. Alternatively, a company can make a deal to receive a percentage of the output.

Gold and silver miners prefer streaming/royalty deals to issuing a normal debt because obligations are then levered to the price of the metal they are mining. Their debt goes up and down with the price of the metal and their profits, and thus there is less risk.

gold and silver mutual funds

What about Gold Mutual Funds?

Investing in mutual funds is one of the best ways of investing in gold. Most of these funds provide indirect exposure; they often provide and great diversity.

The mutual fund managers actively buy and sell stock in various companies and try to invest in the gold mining companies with the greatest future potential. These managers are usually industry professionals who know which companies to buy and which to stay away from.

Even though investment in a gold mutual fund is not a guarantee of success, it does provide you with a better chance of taking advantage of gains in this sector when they occur. It will not take a lot of your time or effort either since the only decision you will have to make is when to buy or sell your stocks.

Gold vs. Silver

American Gold Eagle vs. Silver Eagle

For centuries, the value ratio of gold to silver was 20:1. It means that one ounce of gold was worth twenty ounces of silver. Nowadays, this ratio has expanded to about 90:1, and one ounce of gold is worth a whooping ninety ounces of silver.

The U.S dollar price of silver ounce might have increased in the last two decades, but its value relative to gold has done quite the opposite. The monetary value of this metal is thus not as nearly entrenched as in the distant past when it was used as money.

Besides, major central banks all over the world hold enormous amounts of gold only. Yet, it does not mean you should not invest in silver at all.

This metal is now mostly used for industrial purposes, not monetary, and that might lead to even further decline relative to gold. Even though it is a more functional metal than gold, silver is too correlated with equities and cannot offer any portfolio protection. In case of recession, the industrial demand for this precious metal plummets, and so does its price. The same goes for platinum and palladium since they are both used in industry as well.

On the brighter note, silver is more volatile than gold, making it an ideal commodity for opportunistic investors that sell options in silver ETFs or miners.

What Is the Best Time to Invest in Gold and Silver?

Time is money :Old coins and clock.

It is a general rule that you should buy an asset or commodity when it is:

  • undervalued
  • in a prolonged holding pattern

Neither gold nor silver are undervalued at this moment. The markets for these precious metals have been quiet for a decade or so, ever since gold hit its maximum price of $1,900+ in August 2011.

On the other hand, the current market does not seem very stable, and it is expected that precious metals will react to turmoil too.

Some of the contributing factors are:

  • Tensions in the world (between the U.S., Russia, China, North Korea, and Iran)
  • Increasing federal budget deficit
  • Cumulative national debt
  • Rising auto loan delinquencies
  • Weakening of the consumer financial stability
  • Unresolved student loan debt issues
  • Enormous healthcare costs that could bankrupt millions of households.

There are still no solutions to these problems offered by anyone, and that adds fuel to the fire. It would thus be in your interest to take a small position in gold or silver (or both!) and protect your personal finance. Such investments are most likely an intelligent strategy that might not bring you wealth and tons of money but could cushion your fall if the market falls apart or a disaster hits.

What Should Retirees Do?

Gold as an investment

Investors are being confronted with a big problem these days. It can all be summed up in three simple words: low-interest rates. If you are retired or will soon be, and you are searching for a long-term investment, you too are greatly affected by this trend.

In order to overcome difficulties, you can apply one of the two following strategies:

  • withdraw principal to cover for your living expenses and accept the risk that you could potentially outlive your money
  • invest in stocks and hope for great returns rather than losing a substantial amount of investment capital

With the future as uncertain as it is, it would be best to invest a portion of your portfolio in commodities such as gold and silver. Such an investment will guard you once you are retired in case that inflation kicks in or the financial market collapses.  You can do this by doing what is called a 401k to Gold IRA Rollover.

Final Words

Stacks of silver and gold coins growing: Business growth

Investments in a commodity such as gold bars or silver bullion might not bring you enormous wealth. Still, in a market as unstable as it currently is, it is good to have as many different options as possible. A diversification strategy is a way to go!

It means that you can continue investing in stocks and bonds, but you should also buy gold and silver. Precious metals are a partially uncorrelated asset class that will provide you with unique risks and opportunities. As such, they are more than suitable to aid the success of your portfolio diversification strategy.

If you have carefully read our recommendations, you know that there are numerous ways to invest in gold and silver, from buying physical metals in the form of jewelry, bars, and bullion, to investments in the mining industry, precious metal exchange-traded fund, and streaming/royalty companies. You should choose the best method depending on your personal goals and preferences.

We personally recommend investments in ETFs and streaming/royalty companies. No matter what method you choose in the end, you should put at least 5% of your portfolio in precious metals. Do not go above 10%, though, or you might miss out on making a good profit from favorable stock and bond interest rates.

Finally, history has taught us that it is always a good idea to have some gold or silver tucked away for emergencies. Gold or silver jewelry, bars, or coins can easily be turned into cash when you need it. After all, there is not much use of long-term investments nor your real estate when natural disasters or major economic crises come knocking on your door.

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