Even at the best of times, investing can be confusing and complicated. The space is littered with a long list of very technical sounding terms: Options, Puts and ETFs to name a few. Precious metals distinguish themselves by being very familiar; they’re also an ancient form of wealth creation, preservation and commerce. But when it comes to including precious metals like gold as part of your investments and overall wealth management, it gets very complicated very quickly.
In this post, we will go through a quick primer on the following:
While we focus on gold specifically, much of the following equally applies to other precious metals like silver and platinum. However, these other markets also have their own distinct traits, in the same way that not all equities in an industry sector perform identically.
Silver is generally more volatile than gold, due to its limited supply relative to gold. Silver is more affordable, but storage costs are higher and it has different demand from industry, especially in electronics. As you can see it's very easy to go down a rabbit hole when it comes to precious metals.
The simple answer is central banks and other government-related agencies. The US government is the single largest investor, with an estimated 5% of the total gold stocks in the world. Other than governments, organizations like the International Monetary Fund (IMF) are big players in the market; the IMF’s holding would place it around 3rd in the world, between Germany and Italy.
Any retail investor would come very far down the list individually, but collectively they account for 46% of all gold (mainly in the form of jewelry). Several Asian countries are well known for their cultural attachment to gold, including India and China. But other markets show a strong cultural attachment to the metal as well. In Germany, for example, investment in gold was driven by concerns about the Euro — today, more Germans own gold than bonds. Unlike India, where the predominant form is jewelry, Germans prefer gold coins.
There are strong and often opposing opinions on the use of precious metals in a well diversified portfolio. However, the most common reasons given for investing in gold and precious metals are:
Gold as a hedge against inflation: Gold has historically been considered as a hedge against inflation, because its price tends to rise when the cost of living increases. Historically, gold prices increase and the stock market falls during high-inflation years. For that reason, gold is seen as a way to store value during economic downturns and many buy gold when they believe that their local currency is losing value, as in the case of Germany mentioned above.
Not everyone agrees with this sentiment, however: “While research shows the value of gold remains constant over a very, very long period—like a millennium or two—it can’t really be counted on as a store of value over a more modest time period. It’s simply much too volatile.
Gold as a hedge against deflation: Deflation is defined as a period in which prices decrease, when business activity slows, and the economy is burdened by too much debt. During such times, the relative purchasing power of gold soared while other prices dropped because people chose to hoard cash, and many consider the safest place to hold cash is in gold and gold coins.
Portfolio diversification: Precious metals tend to move in price in the opposite direction to stocks and bonds. When stocks go down, gold tends to go up and visa versa. Here are some examples from Forbes:
Precious metals can therefore provide a useful diversification in an overall portfolio. However, as Forbes points out, volatility goes both ways:
Global store of value: The value of gold and other precious metals tends to increase in times of political, economic and social uncertainty and crisis. As an almost universal currency that is highly portable in small quantities, it’s easy to see why gold is referred to as the crisis commodity.
There are 2 primary ways to invest in gold and precious metals, each with their own pros and cons. These are:
On the whole, the more work involved in creating the product, the higher the cost above the spot price of the metal. So, for example, buying fractional gold (where the customer has a share of a store of gold) requires the least effort, while buying a bar (that needs to be minted and packaged) or a coin (that needs to be designed) or a special edition “collectors” coin (that requires unique design and marketing support) or jewelry will retain value above the spot price. The further removed the physical gold is from the base product, the harder it is to predict the performance relative to the spot price of gold. For example, your family heirloom may be priceless to you, but to a jeweller it may simply be priced by weight.
The second issue with physical gold is that it needs to be stored. To do that securely in a vault costs money; to keep it at home runs the high risk of loss from damage (coins value is often related to condition) or theft.
Fractional gold (as offered through Unifimoney) is a highly cost-efficient and low-barrier-to-entry way to trade in precious metals. We provide the option of either secure storage or physical delivery.
Individual company stocks: There are a wide range of mining companies listed and available for investment. These are easily researchable, but come with the risk inherent in any strategy that involves individual stock picks. For this reason, funds that are focused on precious metals provide a degree of diversification that is appealing to many investors.
Precious metal mutual funds and exchange traded funds: There are two key types of funds that invest in precious metals — those that invest in the underlying physical metal itself (see this link for a list of examples) and those that invest in mining stocks (see this link for a list of examples).
For the purposes of this article, we will ignore Futures Contracts, as these are typically of limited interest to retail investors.
There is general consensus that precious metals like gold and other alternative assets (including Bitcoin) play an important role in an overall diversified portfolio. Expert recommendations range from 1-3% all the way to 10% of overall invested funds.
Whether you end up as a committed gold bug or simply keep alternative assets as a potential diversification play, the path to learning about and investing in precious metals can be very easy. With Unifimoney, you can invest in fractional gold, silver and platinum for as little as $1 — as well as a broad range of individual equities and ETFs. Additionally, we will be adding whole bar and coin investing in the near future.
The above does NOT constitute an offer, solicitation of an offer, nor advice to buy or sell specific securities. The opinions listed above are not the opinions of Unifimoney Inc. or Unifimoney RIA, Inc. but represent the opinions of independent contributors. These contributors may or may not hold positions in the stocks discussed. Investors should always independently research any stocks listed and form their own opinions, while recognizing that any investments made may lose value, are not bank guaranteed and are not FDIC insured.
