Most investing news is about stocks, the stock market, and the latest high-tech company to go public. But there are other investments people need to pay attention to, especially in these volatile economic times.
Precious metals -- especially silver and gold -- are traditional “safe haven” assets and all precious metals may be candidates for diversifying a portfolio.
While these metals are volatile, they’re not as volatile as crypto. That said, our readers may be interested to know that while silver is up 36% year-to-date and gold is up 22%, both have been eclipsed by the Bloomberg Galaxy Crypto Index (BGCI) which is up 64% year-to-date.
Investing vs. Day Trading
Before we continue it may be helpful to draw a distinction between investing for the long term and short-term trading, also known as day trading. The latter, which may include trades that last seconds, minutes, or days, is quite risky and requires skill and discipline to succeed at.
Day trading attracts those who seek to profit from the volatility exhibited by precious metals over short time intervals. By contrast, those who invest in these metals are typically looking to hold their investments over the long term, as a hedge against inflation or a means to diversify their portfolio.
Introduction to Precious Metals
Investing in precious metals -- especially gold and silver -- is a common way to diversify a portfolio. Many times when stock prices fall, precious metals will rise.
Some investors seek to use gold, for example, to hedge against losses in stock and bond holdings. Consider though that during serious market plunges gold may also decline as some players seek to sell off precious metals to cover margin calls.
When investing in precious metals, an investor can buy gold, silver, platinum, and palladium. Precious metals can be purchased in the following forms:
- Government-minted coins
- Collectible coins
- Rounds, which are coins produced by private mints
- Bars
- Exchange-traded funds that track the actual price of the precious metal
- Other funds and trusts that are 100% bullion-backed and whose shares sell via stock exchanges
- Mining stocks.
Precious Metal Price History
Gold and silver have long been viewed as real currency when compared with paper money. Both have also been viewed as a way to hedge against inflation.
This year silver is up 36% year-to-date (YTD) and gold is up 22%. While platinum is down 11% YTD its cousin palladium made solid gains. (Platinum and palladium are arguably harder to understand and invest in.)
Gold hit a peak in 1980, at the height of a long period of high inflation. (Note: all values cited in this article are expressed in current dollars.) As inflation (or inflation expectations) decreased, the price of gold also decreased.
Since then, gold has risen during good and bad economic times. Hitting a low of $383 in April of 2001. Gold continued to climb during the Great Recession of 2008-2010 when stocks tumbled. Even during the tough economic times of the COVID-19 pandemic, gold performed well while stocks once again fell. Earlier this year it hit a record at $2,000 per ounce
Silver, platinum, and palladium have experienced much the same price history as gold. But they are also used in various industries. When the economy booms, the need for these precious metals increases, which causes a rise in their prices.
Platinum and palladium are used in catalytic converters in cars to reduce pollution. With increased government regulations on emissions, the need for these metals has increased. Plus, the supply of palladium is not keeping up with demand, which means it could continue to increase in value for this reason alone.
Compared to Stocks
Between 2010 and the first quarter of 2020, the major stock indexes have outperformed gold as an investment. This is to be expected. The price of gold has also been more stable.
During the years of the Great Recession, gold outperformed the major stock market indices. During the first quarter of 2020, when the COVID-19 pandemic began, gold once again outperformed the stock market indices.
Compared to Real Estate
Owning a home is the most common form of real estate investing. Gold fluctuates more with housing prices than it does with stocks. In five of the last nine years, single-family homes rose in price more than gold did. But then again, there has been quite a boom in housing prices since 2012.
The price of gold went down from the start of 2012 through the end of 2015. It only began to rise in late 2018. At the same time, the median sale price for a single-family home saw increases of 5.9% and 6.9%.
Conversely, during the recent housing recession, gold outperformed single-family homes. Gold had an annual increase of 27% in both 2009 and 2010.
Summary
Gold and silver have performed well throughout the pandemic and are the most popular precious metals to add to a portfolio for diversification. Choosing gold (and sometimes silver) as a hedge against inflation is a traditional investing stance.
But it’s important to compare the performance of precious metals over the long haul to indices and even to other commodities.
Guest Post by: Commodity.com
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