When you’re building an investment portfolio, you might initially focus on stocks. While investing in stocks is undeniably a traditional approach, one of the most important investing tips you can follow is to diversify. Along with having a mix of stocks from various industries, adding precious metals to the mix might be an attractive option for diversification. The question is, are precious metals a smart investment?
Ultimately, buying gold and silver — and even newer precious metals like cobalt — can be a wise move in some situations. Here’s what you need to know about investing in precious metals.
Pros and Cons of Investing in Precious Metals
As with all investments, there are benefits and drawbacks to investing in precious metals. One of the most notable advantages is that precious metals may act as a hedge. Generally speaking, precious metals are a way to secure and maintain some portfolio value during economic downturns that drive stock prices down. When the markets are tumbling, interest in precious metals rises. That’s because they’re historically less volatile. As a result, the value of precious metals may increase while stock prices fall. This provides a degree of protection to your portfolio.
Precious metals may also offset some of the impacts of inflation, making them a popular inflation hedge. However, silver is also more likely to be impacted by the global economy due to its wider use. Thus, gold is a stronger safeguard against global economic fluctuations. With physical precious metals, such as gold or silver bars, you also have a tangible asset. They’re value-dense, too, because they don’t take up much room.
When it comes to major drawbacks, investing in physical precious metals can be expensive. This can create a steep barrier to entry, depending on how much money you’ve allocated towards investing. Additionally, selling physical metals may trigger a capital gains tax. You also need a place to store these assets safely, and there may be some issues with liquidity. Finally, physical metals are not interest or income-producing.
When Investing in Precious Metals Is Wise
Generally, investing in precious metals is a smart move because it allows you to diversify. As a result, having some precious metals in your portfolio offers some protection against specific types of downturns.
Additionally, when the economy is strong, prices may be high — but they’re still generally competitive. As mentioned above, interest in these metals increases when economic challenges are taking place. By purchasing precious metals when stock prices are on the rise, you may spend less to secure them.
How to Invest in Precious Metals
Usually, you have a few options available for buying metals. First, you can purchase coins, bars or bullion from a range of sources, including coin dealers, some banks and through the American Precious Metals Exchange (APMEX). There are also certificates that provide the same value as physical precious metals without the storage issue.
Alternatively, you can invest in commodity ETFs through most brokerage accounts. Precious metal mining stocks can give you similar benefits but don’t involve the purchase of precious metals directly.
As with any other investment type, diversification can work in your favor. For the purpose of hedging and overall simplicity, starting with gold and silver is a good plan. However, you should also explore alternatives like platinum, palladium, copper and cobalt to determine the best fit for your portfolio.
Deciding How Much to Invest in Metals
Every person is different, so the exact amount you may want to invest in metals will vary. Examine your current portfolio, estimate the impact of inflation, explore historical market shifts, factor in your risk tolerance, and consider your need for ongoing returns to come up with a solid number.
Additionally, when in doubt, speak with a financial advisor. They can help you review your portfolio to determine an initial investment amount that makes sense for you.
