Investing in Gold and Silver
First Published date: 29. August, 2022Last Updated: 27. February, 2023Fact-checked by Adrian Müller
There’s a reason why historical stories to modern pulp fiction revolve around people fighting to obtain Gold. This rare metal has proven to be a secure form of wealth. War, inflation, political instability, nothing affects it much. As a result, holding more Gold has always meant having more power and riches.
Meanwhile, Silver has always been the second-best thing to Gold. It has been slightly cheaper but had greater non-investment utilities than its more expensive counterpart. With the demand for Silver increasing in modern technology, its prices fluctuate differently than Gold. Therefore, Silver is an excellent option to diversify your precious metal portfolio.
There are several methods to invest in Gold and Silver. You can buy coins and bars of these metals outright. Or, you may use a passive investment instrument to profit from the Gold or Silver price spikes. Indeed, these investments will protect your wealth in times of financial and political instability. However, there’s a price to pay. Find out in the following discussion.
Table of Content
Why Do Investors Put Money In Gold and Silver?
One of the main reasons people invest in Gold or Silver is to preserve wealth. The number of dollars that give you a Gold bar will lose its purchasing power over the next 100 years because of inflation.
However, the gold bar will retain its value and maintain the same purchasing power. Let’s understand why investors prefer Gold or Silver as security.
Historical Appeal
The appeal of Gold and Silver as a form of wealth has much to do with history. If you could meet your ancestors from one thousand years ago, chances are high that they would need to understand a lot about modern currency and investment techniques. But Gold and Silver are something they will find very relatable. The same is likely true if you travel 1000 years into the future.
The establishment of Gold as a currency happened in 560 BC. However, people have appreciated and fought over the metal long before that. Ancient merchants used Gold and Silver coins as they helped them conduct business globally. Only some understand the value of your local currencies. But people in every region of the world appreciate Gold and Silver.
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Powers Financial Organizations
Gold and Silver were universal languages throughout history. It was something everyone agreed upon. As a result, these forms of currency kept growing in popularity. When the American Dollar and the British Pound emerged, they were directly backed by these precious metals.
In other words, the early dollar and pound were merely representations of the Gold and Silver the banks held. Although the governments have dismissed the Gold standard for backing up their currency for years, the precious metals still contribute significantly to their power.
For instance, all the major financial organizations of the world (central banks, international funds) collectively hold one-fifth of the earth’s refined Gold. In addition, the central banks begin adding to their gold reserves whenever they see signs of a financial disaster. So, the financial organization’s confidence in precious metals also reinforces the investors’ faith.
Gold and Silver have survived Recessions
Over the past thousand years, many kings and nations have perished, but the value of Gold and Silver has stayed more or less the same. This immediately tells you about the competency of these metals as long-term investments. Besides ancient history, Gold and Silver have also performed well more recently.
One of the major economic disasters in U.S. history is the stagflation of the 1970s. During this decade, the S&P 500 index only increased by twenty-two percent. Meanwhile, Gold increased in value by 1700% (850%, considering the general price doubling).
This meant gold investors still made a profit in the ten years of recession or preserved their wealth throughout the decade. Meanwhile, stock investors suffered losses.
Again, Gold behaved similarly during the financial market crash of 2007-2010. The S&P index fell by twenty-one percent, while the overall market declined by a disastrous 50%. In comparison, the price of Gold rose from $640 in 2007’s January to $1120 in the first month of 2010. That’s a 75 investment increase during an extreme recession.
Although Silver didn’t increase in price at the same pace as Gold, it didn’t perform negatively. Since 1970, Silver has provided a 1700% cumulative return to its investors.
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Should You Invest In Gold and Silver?
From the above discussion, it’s clear that Gold and Silver have been protecting people’s wealth for thousands of years. But does that mean you should convert most of your assets to these precious metals? Consider the following arguments before making a decision.
Inflation-resistant vs. Illiquidity
The government can print paper money at will, meaning there can be an unlimited supply of paper money. This reduces the scarcity of money and makes it vulnerable to inflation. On the other hand, the amount of Gold and Silver on the earth is finite. This secures the scarcity of these commodities and makes them resistant to inflation.
However, Gold or Silver doesn’t possess the same liquidity as paper money. The approved currency for day-to-day business is fiat and not precious metals.
For example, if you have a piece of Gold in your pocket, you cannot walk into a restaurant and order a meal. You must first convert it into real money – only then can you make a purchase.
The average shop or restaurant doesn’t have the necessary authority and means of evaluating your piece. Even if some shopkeeper accepts the trade, you cannot consider it a standard transaction.
Physical-value vs. Storage Challenges
Paper money doesn’t have any intrinsic or physical value. It’s just a piece of paper. It also damages and wears out easily. Thankfully, this isn’t true for Gold and Silver, which made them popular historically in the first place. The metals are resistant to natural forces like corrosion and rust. They have important applications in technology and jewelry. Lastly, they look beautiful.
However, the physical value of precious metals makes storing them challenging. You must store your Gold and Silver bars and coins in a highly secured storage unit, such as a safety deposit box in a bank vault. Keeping a significant amount of Gold or Silver at home puts you at risk of robbery and theft. Also, losing a gold coin is far more upsetting than losing a normal coin.
In contrast, when you invest in financial assets, your ownership exists as an immutable record. There is no danger of it getting stolen or lost.
Long-term Investment vs. Cash Flow
In stable, peaceful times, an investment in Gold or Silver doesn’t generate much income for you. It just sits there, preserving your investment. During this, you will be paying for storage and security. Additionally, when you buy investment-grade Gold, the selling company makes a profit on the retail price. Plus, there are shipping fees.
In other words, you pay more than what the Gold you bought is worth. This means not only does your investment not grow like other financial assets (stocks and bonds), but you also start with a loss. Not to mention, a small investment in Gold or Silver is expensive. For example, the standard Gold American Eagle coins are priced at 1800-2100$.
The Verdict
The intelligent thing to do is allocate five to ten percent of your portfolio to precious metals. Invest the rest in other forms of financial assets and build profitable businesses. When a gold bubble occurs, i.e., there is a significant increase in the price, sell some of your metal to make a profit. Later, when the price declines, repurchase some more Gold.
Following this strategy helps you preserve your wealth through precious metals. At the same time, you would take advantage of the opportunity of growing your wealth with other fast-returning assets. Let’s see some of the best methods for investing in Gold and Silver.
How To Invest In Gold And Silver?
In ancient times, governments hoarded Gold and Silver in whatever physical forms they could find. Most empires were built on looting the former ones, so the royal vaults were stashed with non-uniform collections of precious metals. That had changed much since the introduction of Gold and Silver as currency. In modern times, you can even buy gold-based financial assets.
Gold or Silver Coins
Gold and silver coins are legal forms of money. A sovereign government supports a sovereign mint to strike these coins. These coins have a monetary face value. The name of the government, a state symbol, and the date of issuing will also be present on the coin. A batch’s Gold or Silver coins will all have the same specifications.
The Gold or Silver American Eagle coin is the perfect example. These are the official Gold and Silver coins of the USA. The U.S. Mint started producing these coins in 1986. The Silver coins are 99.9% silver. In comparison, the Gold coins are 91.67% gold, and the rest are Silver and copper. Both coins come in the standard one-ounce size. But gold coins also have half, quarter, and tenth-ounce variations.
You don’t get the pound-for-pound worth of the metal with a government mint coin. This is because their value isn’t based on purity but instead dictated by the government.
For instance, at the time of writing, one-ounce Gold costs 1869 dollars. Meanwhile, the current asking price of one ounce of Gold American Eagle coins is 1992 dollars. It is worth noting that the coin is not one ounce of 100% Gold. One of the causes of the higher price is that the minting charges are also included.
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Gold and Silver coins have lesser monetary face value than their actual worth in metal. For instance, a one-ounce American Eagle Gold coin has a face value of only $50. Comparably, Silver coins have a one-dollar face value. However, its asking price is 31.63 dollars. This diminished face value is to keep the coins out of circulation.
One of the biggest advantages of gold or silver coins is that they are legal tenders. So, you will have less difficulty carrying them across international borders than carrying them as bullion. The associated government status also helps with taxes and tariffs.
Gold and Silver Exchange Traded Funds
Gold ETFs are your best option if you don’t want to hold physical gold assets but still want to benefit from their price rises. SPDR, iShares, and Aberdeen are well-known Gold and Silver trusts. These ETFs possess various gold-backed derivative contracts. Some of them track the prices of physical bullion. Meanwhile, others track the price of Gold mine stocks.
Investing in gold ETFs is much cheaper than buying gold or silver coins. There is no hassle of storage, security, or shipment cost. They also offer more liquidity than physical Gold and Silver assets.
Furthermore, Gold ETFs are a smart way to diversify your portfolio. Usually, Gold and dollar prices follow opposite trends. The dollar backs your usual financial assets. So, when the dollar falls, those assets suffer. Investing in some Gold ETFs can help keep your portfolio balanced during economic disasters.
Gold Mine Stocks
As you can buy stocks of other companies, you can do the same for businesses that mine Gold. You will need a brokerage account to conduct the trades.
Newmont Corp, Barrick Gold, and Franco-Nevada are big names in the U.S. Gold mine business. This passive investment instrument saves you the hassle of buying physical Gold.
However, funds are much safer than individual stocks. Gold stocks will do well when the price of the metal rises. But like any other stock, the company’s performance also matters. This is why Gold stocks are only suitable for investors who have some insight into the Gold mining business.
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79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
79% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Conclusion
Investments in Gold and Silver have survived the worst times in history. Undoubtedly, they are an excellent way to preserve wealth during financial catastrophes. But as a beginner investor, you must play your hand wisely.
Getting some basic education on how the investment game works will help. You can also join our forums to participate in mind-enriching discussions.
About the author – D. Schmidt
I’m a German stock trader who has lived around the world. I travel extensively and believe that my experiences give me a unique perspective on global markets. I love trading! It’s always exciting to see what happens next. My goal is to help people understand the game so they too can enjoy it to the fullest. In this blog, I will share some tips and tricks that helped me along the way.
