Most investors recognize the importance of precious metals in a balanced portfolio.
In my experience, the majority of people who don’t care much about gold, silver and platinum consider them boring, low-return sectors.
Quite the opposite: gold and silver have delivered a total return of 9.75% since the turn of the century, comparable to the S&P 500. Over the past 50 years, which covers the investment horizon of most people reading this article, gold has delivered 8% and the S&P 500 has delivered 11.47%, but with much more volatility.
Precious metals tend to be inversely correlated. When one asset goes up, the other often goes down. That doesn’t happen all the time, as it has this year, but it happens often enough that it can be considered a hedge. So far this year, gold is up 19.5% while the S&P 500 is up 18%.
Most investors buy gold/precious metals for two reasons.
1. Anti-inflation measures.
2. Protection from a weak dollar and global tensions.
The most common question investors ask is how to buy precious metals. There are a few different ways to do this.
Gold/Silver Coins: Coins of various denominations are available from dealers at a premium to the current (spot) dollar price. Coins such as the American Eagle, South African Krugerrand, and Canadian Maple Leaf have an advantage over other options in that they are considered currency and legal tender. Bullion, on the other hand, is less liquid because it must be weighed and assayed before being sold. Exchange-Traded Funds: The largest gold exchange-traded fund trades under the symbol GLD. SPDR Gold Shares tracks the spot price of gold bullion daily. You can also participate in precious metals by buying actual mining stocks. Mining stocks often outperform the metal, but that’s not always the case. If you buy shares in a mining company rather than the metal itself, other factors can complicate your returns. How well is the company performing? What are the reserves? Are they profitable? Gold bullion/coins are an asset that will stand the test of time. Gold mining stocks are not.
My advice when considering holding precious metals is to think about what your ultimate objective is. As you will see, gold/silver are good diversifiers compared to stocks, bonds, real estate, oil/gas, etc. Buying gold coins and storing them in a safe place is a sound approach, but at $1,600 per ounce it can be a pretty expensive cash outlay. Exchange traded funds are simple, easy to use, highly liquid, and perfectly fine to hold in a retirement account. With that convenience comes greater price volatility.
As with any investment, understand your assets, do your research, and understand the importance of diversification.
John Rush Vann Jr., d/b/a Vann Investment, is a registered representative of Rhodes Securities Inc. and an investment advisor representative of Rhodes Investment Advisors Inc. Investing in securities involves risk of loss.
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