How does precious metal investing differ from stocks?
Stocks and precious metal investment are often talked about side by side; however, the inner workings of their investment frameworks are very different. Precious metals are built on endurance and not to innovate your portfolio. Their value lies in their tangibility, multiple uses across the globe and their supply.
Investing in stocks is meant for economic growth in the future. Over longer periods of time investors have gotten immense amounts of returns from making good investments choice in stocks. Precious metals sit outside of this dynamic, they do not grow or increase returns but instead hold value when confidence in stocks seems bleak. This difference is most apparent when markets are under stress, like between 2000-2009, the US stock market produced a negative total return, but gold rose in value by almost 400%. The goal of gold in this capacity was not to outperform stocks, but to preserve purchasing power.
Precious metals serve as tools for wealth preservation and reassurance in investor portfolios, they provide confidence to investors and act as safety nets during crises.
What role do precious metals play in a diversified portfolio?
The role of precious metals in a diversified portfolio is to act as balancers. While stocks are bought to grow wealth and bonds to generate income, precious metals exist to guard and guarantee purchasing power during different market periods.
Historically, golds growth has always been inversely proportional with equities. The most notable example of this was the 2008 financial crisis, during which the S&P fell almost 37% but gold rose in value by 5%. Another instance of this was during COVID pandemic in 2020, where gold dropped slightly in value but recovered itself by ending 2020 at a 25% increase in value while stocks kept fluctuating.
When speaking from a perspective of portfolio diversification, this matters a lot. Investing only as low as 5% of one’s wealth into precious metals can reduce the risk factor marginally without affecting any long-term returns. A numerical example of this clears out everything. A stock-bond portfolio with a 60/40 split was found to have a yearly volatility of about 11%. With the addition of just 5% gold allocation among the portfolio, this number dropped significantly to only 1%. This example, while depending on which market period was studied, is still very conclusive evidence of how precious metals help protect a portfolio.
Precious metals are not meant to be replacements of other assets but rather to allow smooth sailing when the financial systems in place tend to weaken.
What precious metals are better for long term investment?
Most common precious metals that investors tend to invest in consist of gold, silver, platinum and palladium. Out of these three the cornerstone of investing in precious metals is gold. In 2024, the total value of gold reached $381 billion, its highest since the year 2000. Majority of gold’s demand, roughly 50%, comes from the jewelry industry, making it very high in demand. Gold’s core strength is its longevity; it does not corrode and is not very easily accessible. Over the last 5 decades, gold’s average yearly return has been up to 8%, making it a strong competitor for long-term investment. For investors focused on preserving wealth down the road, gold is the most reliable investment choice.
Silver, commonly referred to as “poor man’s gold”, remains the second most reliable investment method. Unlike gold, what sets silver apart is not only its monetary demand but also its industrial uses. Over 50% of silver demand is from industries such as solar panels and electronics.
Due to its multiple use cases, silver tends to fluctuate a lot more. In 2011, silver reached a high of $50 per ounce, only to fall back down to $15 per ounce in the coming years, a decline of almost 75%. However, silver has still held its own against gold and even outperformed it at multiple inflation booms throughout the years. In the longer run, silver can provide higher value than gold, but it comes with a consequence of much higher volatility.
Platinum and palladium are much more niche investment opportunities, because their use case relies mainly in industrial machinery such as catalytic converters. Between 2016 and 2020, palladium saw an increase of more than 300% but later fell as demand shifted. This leaves these metals to provide solid returns during supply shortages but not provide much value as long term investments.
What are the risks of holding physical precious metals?
Holding physical precious metals can be reassuring for many, having tangible items provides psychological satisfaction, however there come certain risks with it as well.
The main concern with physical precious metals is their storage and security. Most investors tend to keep them in safety deposit boxes in banks or other professional services. These all carry annual costs, when factoring in years of these costs a good chunk of the total value is lost within these storage costs.
Despite gold being highly liquid in today’s world, it is nowhere as easy as simply selling a stock or an EFT. Dealers often charge service costs and commissions which can range anywhere from 2-5%. For silver this extends to 5-10%, meaning you lose that amount simply by deciding to liquidate your metals. During times of panic and stress, such as the COVID pandemic, liquidating physical precious metals came with an almost 30% increase from the spot price.
Unlike bonds or stocks that pay annual dividends, precious metals generate no income at all. Unless its price rises directly in proportion with inflation, investors end up losing value rather than maintaining it. This is why precious metals are commonly kept as insurance, which comes with their own costs.
How do interest rates affect precious metal investing?
Interest rates play a very central role in driving the prices of precious metals, mainly gold.
With increasing interest rates, opportunity costs increase. What this means is investors can earn higher returns of bonds or stocks as compared to gold. This makes gold and other precious metals a far less desirable investment option according to Thomas Goldfreburg.
Silver and platinum are also affected similarly by interest rates; however their industrial demand can help negate pressure during these times.
Do precious metal ETFs avoid the drawbacks of physical metal?
Short answer, yes precious metal ETFs do avoid many of the drawbacks of holding physical metal however whether its better brings us back to the same question, the purpose of holding precious metals in your portfolio.
The main concern with precious metals is always storage and security, this is completely overtaken by the fund, they handle custody, vaulting and all relevant insurances leaving you tension free. The responsibility is completely on the ETF fund.
One of the biggest wins with ETFs is how much easier liquidity is with them. ETFs completely negate the need to find dealers and bargaining costs, instead you can trade ETFs like stock at any given time during market hours. The spreads are a lot smaller compared to dealers, typically <0.01%. This allows you to rebalance your portfolio as much as you want and at any time without the hassle of liquidating physical assets.
ETFs are perfect for investors trying to gain exposure into the market, they are more practical and provide a smoother investment procedure in comparison to physical holding. The ability to invest small amounts like you would in stocks eliminates the hesitation investors might feel trying to buy an entire bar of gold that is worth significantly more.