The year is 560 BC…
… and you’re in Lydia about to purchase something with a gold coin using solid Gold as currency. Jump in your Delorean and go forward in time to 1848 where over 300,000 people migrated to California and you decided to start panning for Gold. Now you’re tired of wading in the river and panning for gold so you jump back in and head to 2003 where the first gold-backed ETF is created and you decide to invest. The common thing for those three time periods (other than a sweet ride in a time traveling Delorean) is the precious metal that has been used as wealth preservation, inflation hedging, crisis protection, and portfolio diversification – GOLD!
Now there are other metals that people invest in, but Gold and Silver are probably the most well known. For a very long time, I realized there was a commodity market (Gold is also a currency), but I never really invested. For one reason, I had my cash elsewhere and two really didn’t do research on it. Now with inflation coming back down a little and reading so much on how Silver is so suppressed it might be time to learn a bit more about this stuff.
The Gold Conversation
From 1971 to 2022, Gold is only showing an average annual return of 7.8% where US stocks give a meaty 10.2% on your cash in the same time frame. While the Gold return does beat out leaving your cash under your mattress, the return is not the only reason to invest a small portion of your Net Worth in precious metals.
1) Hedge against inflation: In simplest terms, a hedge against inflation is something that holds its value or goes up in value even when the currency is losing value. Gold and Silver are good hedges since the value of an ounce of Gold or Silver will go up with inflation. Some say the metals (Gold specifically) are hedges only in the long-term so you would need to buckle in to see the value as an inflation hedge.
2) Portfolio Diversification and Wealth Preservation: Over time Gold has historically held its value meaning you preserve your wealth for the long term. This also means that it has a low correlation with traditional investments like stocks. By diversifying you’re preserving your wealth and hedging your bets.
3) Crisis protection: Gold (and other metals) have been known as a store of value. Specifically Gold. Some are also still used as currency/can be used as currency so in times of unrest or complete collapse these metals could be used to barter. If you’ve thought about prepping for the end of the world you’ve come across an article on this.
What about the downside?
Like any investment there are some negatives. I don’t see these as overly painful and to send you running in the other direction, but these are something to keep in mind.
1) Volatility – While correlation to the stock market is low it doesn’t mean these assets don’t have some volatility. They’ve been on a price ride as well (I mean take a look at Silver prices over the last year.
2) Additional Expense – This is particularly important if you have physical metals because you’ll need to spend extra money on secure places to put this. Maybe even additional insurance to cover it. There are other ways to invest, but even those have additional costs.
3) No Cash Flow – I didn’t really think of this, but it’s obviously true. Your Gold coins aren’t creating little baby Gold coins. You’re not seeing cash flow from this investment and that’s typically a no go for me. With that said it is a hedge and something to continue to battle against inflation with an average annual return of 8%. You’re still winning just not as much. This is probably why some experts say keep a smaller portion of your Net Worth in metals (ranges from 5% to 20%).
So do I need to go panning for Gold?
Fortunately, we’ve come a long way since the Gold Rush of 1848. There are numerous ways to invest in Gold and other metals. Some put the metals right in your hand others are all digital proof like an ETF (when you don’t actually own the Gold).
1) Commodity Exchange-Traded Funds: We’ve heard ETF before. Easy, liquid way of buying and selling precious metals. Big con here? You don’t have a claim to the physical commodity.
2) Common Stocks and Mutual Funds: This is something like a metal miner you can invest in that’s correlated to the metal spot prices. Again no claim to the physical commodity and now it’s tied to a business (which can be good and bad).
3) Futures and Options: Just like stocks, you can bet on metals. Some massive profits and losses can be made here.
4) Bullion: This is the the physical Gold and Silver. For those with no long term horizon its illiquid and hard to hold (remember you have to keep it secure). For those looking at the end of the world this really is the only option. Fun fact – Bullion comes from the Anglo-Norman term for melting-house where metal was refined. Even earlier from the French word bouillon or “boiling.”
5) Certificates: This offers all the benefits of owning gold except without the hassle of storage. With that said, if it comes down to a bartering situation all you have here is paper.
As with anything – do your research! apmex.com and sdbullion.com have some excellent resources. Yankee Stacking also has an excellent YouTube channel highlighting his whole process of stacking coins and bars!