Since ancient times, gold and silver have been considered to be of immense value. To this day, thousands of investors keep a large portion of their wealth in metal holdings. The question is: with more investment opportunities available now than ever before, are precious metals still attractive enough to play a major role in your portfolio? Consider the following and decide for yourself.
What Exactly Are Precious Metals?
The term “precious metals” immediately brings to mind gold and silver, however precious metals also include platinum, palladium, rhodium and more. There are numerous ways to buy these metals and store your money (or earned value) in them. There are securities available for each, such as funds that closely track the price of a given metal or stock in a mining company. The other common mode of investment is purchasing the physical metal for delivery, usually in coins or bullion. Bullion usually refers to the gold metal bars you often see in heist movies.
Precious metals are used for many modern industrial purposes —electronics, chemistry, energy applications and medical equipment to name a few — so there is more to the inherent value than the fact that they’re shiny. However, more often than not, the metals’ market prices are determined by their function as a store of value rather than industrial material.
Hedging Against Disaster
For many people, the first financial fact that comes to mind for many regarding metals is that, over the course of recorded history, gold and silver have outlasted every other currency as a store of value. If a major disaster strikes, owning shares in a fund won’t do you much good because you won’t have access to your accounts (if they still exist). Thus, people purchase physical metals so they’ll have something concrete to trade with in the event of a disaster that causes total economic collapse.
It’s worth noting that physical metals can be a hassle to keep on hand. They must be safely stored, so you should pay for a security deposit box or invest in a home security system. It’s also true that the larger the value of the bullion, the more difficult it is to quickly liquidate it.
Gold as an Investment
Because they’re frequently viewed as a hedge against failing currencies, economies or governments, the movements of precious metals’ prices don’t track with the rest of the market. In fact, they sometimes show a negative correlation. A great example is the price of gold following the housing market crash of 2008. From the beginning of 2009 to the end of 2010, gold jumped from about $870 an ounce to $1,420 an ounce — a massive 63% increase.
However, that same volatility can make metals a less than stellar investment. If the market is doing well, you can expect any large investment in metals to yield a low or negative return. Putting a large amount of money into metals can only be viewed as a speculative play, not a reasonable move for steady, reliable portfolio growth.
How Much Is Worth Your While?
Because metals have a near zero or even negative correlation with the market, they can contribute to an already well-diversified portfolio. You can’t reasonably expect an investment in metals to appreciate more than the stock market or corporate bonds, but holding a small fraction of your wealth (say, 36%) in metals isn’t a bad idea. It could prove to be the silver lining in an otherwise cloudy economic forecast.