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Should You Invest in Gold, Silver or Precious Metals?

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Should you invest in gold?

Gold prices have been skyrocketing as of late, which makes many people wonder if they should have gold and other precious metals in their investment portfolio. Adding some precious metals to your portfolio might not be a bad idea as gold and other precious metals can offer portfolio diversification and potentially act as a hedge against inflation. But how do you buy gold and other precious metals for your portfolio?

How to Invest in Gold, Silver or Precious Medals

Invest in gold, silver, or precious metals

Should you invest in gold, silver, or precious metals?

If you have considered investing in gold, silver, and other precious metals, then you should understand the different ways you can invest in these instruments. Here are some ways you can either directly or indirectly invest in gold, silver, and other precious metals:

  • Buy physical gold, silver, or precious metals (you can buy it and store it yourself, or you can buy “stored assets,” which is where a company manages and protects your assets)
  • Mutual funds or ETFs that specialize in gold and precious metals
  • Gold and precious metals futures
  • Stock in a mining company
  • Gold or silver coins
  • Jewelry

Pros and cons of different gold and precious metals investments

There are pros and cons to each of these choices. For example, I would feel comfortable storing a couple hundred dollars worth of gold or silver at my home. But anything beyond that would make me nervous, so I would need to use a safety deposit box to store my precious metals. Having a third party store and protect the gold would be a much better option for me. Just be sure to do your research if you elect to have a 3rd party store your precious metals to ensure they have adequate security and you can easily cash in your assets if necessary. Tangible assets are less liquid than some of the other ways you can invest in gold and other precious metals, but they are also the easiest to value because their value is based on the intrinsic value of the metal and usually isn’t based on other factors.

Precious metals stocks and ETFs can be a great solution for liquidity because they can be bought and sold on a standard stock exchange. Many precious metals funds and ETFs already represent a diversified selection of precious metals, which makes it easier to buy a diversified group of precious metals without spending a fortune.

Gold and precious metals futures are a risky bet for the average investor and are similar to stock options trading. Buying futures gives you a contract to buy or sell precious metals at a certain price in a particular time frame. You need to understand the gold and precious metals market and feel confident in predicting price increases and decreases in order to profitably trade precious metals futures.

Mining stocks are often a high risk, high reward proposition. Mining stock valuations tend to be more volatile than the metal prices and can reflect many factors including the price of gold, cost to produce the gold, past results, a healthy dose of speculation regarding future gold prices, and other factors. This probably isn’t a good option for the average investor, but could yield good results if you understand the market and are willing to do the research.

Gold coins are a popular investment option and can have value in two ways – the intrinsic value of the gold, and the collectibility of the coin. Sometimes one is more valuable than the other. For example, some gold coins are strictly worth their melt weight, while others will almost always exceed their melt value because they are rare and collectible. Some gold and silver coins also have a strong historical value, especially if they were recovered from a shipwreck or other historical incident – a great example of shipwreck gold is from the salvage of Nuestra Señora de Atocha. These coins and ingots are worth far more than their melt weight due to the historical significance of the coins, bars, and jewelry.

Jewelry is another investment option, but I recommend a little research before buying “any old gold chain” and calling it an investment. Most gold you buy at a retail shop is worth equal to or less than its melt weight, meaning it isn’t really an investment. Some jewelry, however, can be a great investment, especially if it is historic or was produced by a famous jeweler. Do your research and understand the market before committing a lot of money to jewelry as an investment.

How much of your portfolio should be in gold or precious metals?

I’ve read different “expert opinions” on having gold and precious metals in an investment portfolio, with some experts saying to leave it out completely, and others recommending moving almost all of your portfolio into gold and other precious metals. I won’t claim to be an expert, but I think a small amount of gold, silver, and other precious metals can be a decent play for the average investor. However, I wouldn’t invest too much of my portfolio in it. Find a percentage of risk you are willing to take and allocate a percentage of your portfolio to precious metals. Just be sure to include these investments in your asset allocation plan and rebalance your portfolio as necessary.

Also keep in mind that gold and other precious metals are considered to be collectibles by the IRS. This is important, because gold and collectibles are taxed at a higher rate than long term capital gains taxes you might find with other investments.

Photo credit: BullionVault


Published or updated March 15, 2013.
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{ 4 comments… read them below or add one }

1 LoveBeingRetired

Good overview and explanation of options available. One thing to add to the coin option is to be sure you are investing in QUALITY coins – the higher the grade the better when it comes to resale and getting your investment back. My brother invests a lot in coins and learned early in the game that the old, worn coins are difficult to sell where as the uncirculated and high-quality coins maintain and increase their value and are very desirable.

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2 Davis

I have purchased quite a bit of silver – mainly because its easy to buy and store. I don’t really see it as an investment, but more of a safety net to protect against currency fluctuations.

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3 Spence

Great advice. Considering that I think we’re heading toward some inflation, Gold was an investment that I’ve been considering. Thanks again.

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4 ua

Do you happen to know any sites that give an overview of Gold ETFs and Stocks. I am having a hard time finding them.
Someone referred me to a site but I dont really understand how it works.
thanks!

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