Buying Gold or Silver? Thoughts on Diversification, Stacking & Investing in Precious Metals

Gold-Silver

As the global stock markets inch further towards uncharted waters, the emergence of a new asset class has been all the rage between investors: precious metals.

Introduction

For the average person, the mere thought of investing can grind one’s ears. Their minds automatically go to either buying property or pieces of companies on the stock market, which are all valid points of perception. Stock market investing has been a staple in wealth building over the years. 

But for some savvy investors, they’d know that the stock market is a battle between the bears and the bulls – with one of them fluctuating significantly and causing more risk with each transaction. To counterbalance that risk, investors then turn to safe-haven investments as their reliable sources of value.

One of the most common ways to hedge against stock market risk is investing in precious metals. The most popular investments of this type are, of course, silver and gold. Gold and silver have been recognized as valuable metals and have been coveted for a long time. Even today, precious metals have their place in a savvy investor’s portfolio. 

There are many ways to buy into precious metals like gold, silver, and platinum, and a host of good reasons why you should give in to the treasure hunt. So if you’re just getting started out in precious metals, read on to learn more about how they work and how you can invest in them.

Gold

Let’s start with The Big Boss: gold. This precious metal is wholly unique for its durability (wherein it doesn’t rust or erode), malleability, and ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, but we know it principally as a base for jewellery and as a form of currency. Gold is typically regarded as a “safe haven” asset in times of uncertainty because it is less volatile than other investments like stocks. The metal also moves inversely to the U.S. dollar, meaning that when the greenback moves lower, gold moves higher.

The value of gold is determined by the market 24 hours a day, seven days a week. Gold trades predominantly as a function of sentiment—its price is less affected by the laws of supply and demand. This is because the new mine supply is vastly outweighed by the sheer size of above-ground, hoarded gold. To put it simply, when hoarders feel like selling, the price drops. When they want to buy, a new supply is quickly absorbed and gold prices are driven higher.

When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought out as a safe store of value. War and political upheaval have also sent people into a gold-hoarding mode, where an entire lifetime’s worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter, or safe passage to a less dangerous destination.

Silver

While gold tends to get most of the glory in the investing world — from time to time, the financial spotlight falls on silver. When it does, it shoots up in price, even outperforming its yellow-metal cousin in the market. Like gold and other natural resources, silver is classified as a commodity — a publicly traded, tangible asset. Tangible assets’ prices generally move in the opposite direction from stocks and bonds. 

Because of this, many investors turn towards commodities like silver when the stock market has a poor outlook or in times of economic recession or political turmoil. Since it’s impacted by different influences, silver can be a good way to diversify and counterbalance your portfolio vis-a-vis equities or other paper securities. 

Silver also acts as an inflation hedge. As a physical asset, silver has intrinsic worth, unlike the dollar or other currencies. Silver holds its value long term and fares well when interest rates are low — and fixed-income investments aren’t earning much.

It’s important to remember that silver and gold aren’t companies. They don’t generate profits and have no earnings, book, or sales to value. Instead gold and silver investors have looked at the gold-silver ratio to help value these precious metals. This ratio compares the price of gold to the price of silver based on the idea that their historical valuations follow predictable patterns.

Conclusion

Precious metals provide a useful and effective means of diversifying a portfolio. The trick to achieving success with them is to know your goals and risk profile before jumping in. The volatility of precious metals can be harnessed to accumulate wealth. Left unchecked, it can also lead to ruin.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.