What’s more, physical precious metals can incur additional storage and insurance costs that aren’t apparent in a brokerage account.
Understand Why Gold and Silver Appeal During Stress
Gold and silver may catch people’s eye during periods of financial stress, but are they really portfolio saviors?
When it comes to diversifying your savings, it’s important to understand all of your investment options, including the role, if any, that gold and silver should play.
When confidence in financial institutions, currencies or the debt markets wavers, some investors look to gold and silver to protect their savings. After all, bullion isn’t tied to the promise of a company or institution the way stocks or bank accounts are.
Investors sometimes consider gold and silver to be portfolio diversifiers because they perceive precious metals as relatively insulated from correlated declines in traditional investments (en.wikipedia.org/wiki/Precious_metal).
While gold is typically considered to be a more established store of value, silver is also used industrially. As a result, silver can be even more volatile than gold, reacting not only to investor sentiment about the state of currencies and markets, but also to swings in the demand for goods produced by manufacturers.
Like other alternative investments, gold and silver don’t produce an income stream, may spike and slump unexpectedly and can be expensive to store and insure.
Precious metals aren’t guaranteed to act as a hedge against rising prices or falling stock prices. In fact, there are times when gold and silver don’t move much at all.
And their values can be impacted by a host of factors, including currency and interest rate movements, investor demand, mine supply, industrial demand and shifts in economic outlooks.
If you buy in after a run-up, for example, prices could retrace before you have the chance to address other, more pressing money matters.
Precious metals may not be your best option if your goal is to weather financial hardship. Skip bullion during a cash crisis if it would leave your emergency savings short.
Build an emergency fund, reduce high-interest debt, secure the right insurance coverage and invest for the long-term to shore up your finances.
Set a Clear Objective and Keep Exposure Modest
So should you include gold and silver in your investment mix? It depends on your reason for wanting to own precious metals. Some possible objectives include:
- Hedging against a weak currency or poor returns in your other asset classes
- Investing in a tangible asset as a long-term diversifier
- Protecting your portfolio during economic and/or market turmoil
- Storing a portion of your wealth outside of traditional investment and retirement accounts
- Profiting from changes in the price of gold and/or silver
The last item on the list could make sense for you, as long as you’re aware you’re taking on speculative risk. After all, buying precious metals when their prices are surging isn’t necessarily the same thing as seeking portfolio protection, and can make it harder to sit tight if their values reverse course.
If you do decide to own precious metals, consider keeping that portion of your portfolio modest, some investors limit it to 5%, so price swings don’t have a material impact on your financial picture.
Your ideal allocation depends on a number of factors, including your comfort level with volatility, sources of income, debt load, investment time horizon and emergency reserves.
Choose an Ownership Method and Count Every Cost
There are a host of ways to own or gain exposure to gold and silver, each with its own advantages and disadvantages. Owning coins and bars means you’ll take possession of your bullion, or make secure storage arrangements.
In either case, you need to be aware of practical matters, like insurance, security from theft, product authenticity, dealer markups/markdowns and the process for reselling your bullion.
You may pay more than spot when you buy your metal products. And you may receive less than spot when you sell, depending on the state of your bullion, how obscure the product is and other considerations.
Alternatively, you could invest in a security that either reflects precious metals prices or actually holds the underlying metal on behalf of investors.
These kinds of investment products are typically bought and sold more easily through investment accounts, and they sidestep some of the headaches that go along with owning actual gold and silver.
But they’re not for everyone and come with considerations of their own, including account-related risks, trading restrictions and management fees.
- How much am I paying above the current market value of the underlying bullion?
- Where will I keep the products, and how will they be insured?
- How quickly could I sell if I needed the cash?
- What kind of documentation will I receive to prove the provenance/authenticity of my investment?
- Are there tax implications I should consider if/when I sell?
Keep Fear From Driving the Allocation
The last thing you want to do is make an emotional, knee-jerk investment decision in response to scary headlines or economic anxiety.
Tangible assets may seem like a haven when you’re worried about the future, but don’t overlook the fact that you could overpay for the wrong products, and potentially over-allocate in precious metals.
Instead, try to think in advance about what role gold and silver investments could play in your portfolio, how much risk you’re willing to take on and how long you can stick with your investment. If you’re investing in precious metals for the long haul, try not to let short-term price fluctuations rattle you.
And remember that there’s a difference between being financially prepared and making a smart investment. Setting aside liquid savings, reassessing your spending and paying down expensive debt may do more to allay your fears than investing in gold and silver ever could.
Gold and silver can have a place in an investment strategy if you’re seeking a tangible way to diversify your assets, and you understand the potential pitfalls of precious metals ownership.
But don’t count on owning bullion to do the job of an emergency fund, an income strategy or a diversified investment portfolio, and brace yourself for the possibility of investing in precious metals during a sideways or bearish stretch.
Do yourself a favor and start by taking an honest look at your emergency savings, outstanding debt and liquidity needs before you decide on the type of bullion, or amount of your portfolio, that you want to own.
