Gold and Silver: Investing in Precious Metals

Have you ever considered purchasing precious metals like gold or silver to diversify your investment portfolio? While gold and silver can provide many benefits, I do not recommend holding a huge portion of your portfolio in precious metals. Gold and silver typically hold their value when the stock market is doing poorly. Investors tend to follow a herd mentality and panic at the wrong time, causing them to sell when their stock is low. It is typically at times like these that investors shift their assets to less volatile options like gold and silver. Thus, if you are holding gold or silver prior to one of these stock market downturns, then you are likely to see growth.

How much of my portfolio should be in precious metals?

While the amount you invest in precious metals will vary based on your level of risk and long-term investment goals, I generally recommend 5%-10% as a reasonable amount. This level of investment allows you to take advantage of diversification and hedge your bets during an economic downturn while not being too heavily invested in a single sector.

How do I buy gold and silver?

There are two primary methods that you can utilize to purchase precious metals. The first method is an exchange-traded fund (ETF). The second method is physically purchasing the gold or silver. Both methods have some advantages and disadvantages, which you will need to consider prior to investing.

Precious Metals Exchange-Traded Fund (ETF)

With an ETF, you do not physically possess the gold or silver. Rather, you are trading shares of the fund, similar to trading stock. The difference is that rather than investing in a business, you are investing in gold or silver. The fund will have a secure location where the precious metals are stored, such as a vault. The advantage of holding a precious metals ETF is that you can quickly buy and sell. It is much easier to make a transaction on the computer than it is to sell physical gold and silver. Another advantage is that you do not have to worry about storing or safeguarding the precious metals. The downside is that the precious metals are only as secure as the underlying holder keeps them. Additionally, if you are purchasing gold or silver in the event that the economy goes under and currency is devalued, then an ETF is not the best choice.

Holding Physical Gold or Silver

Buying physical gold or silver is a great option if you want to possess the actual precious metals and have access to them at any point. However, if you have precious metals, you also must be concerned with the security of the gold and silver. You can store it in a bank safety deposit box, but you then have to pay a monthly fee for the box. Additionally, you will not have immediate access to the box, as it will only be accessible during normal banking hours. If there is a natural disaster or financial crisis, your ability to get to the gold or silver when you need it may be impossible. Alternatively, you can choose to safeguard the gold and silver yourself. One common option is a safe, but all safes are not created equal. Some safes offer great fire or flood protection, but the anti-theft protection (e.g. a robber physically breaking in) is not the best. Thus, you must consider the factors that are most important and choose a safe accordingly. Another consideration is where to put the safe. The most secure location is one that is not visible. Almost all safes can be broken into if the intruder has enough time to try to open it. However, if the safe cannot be located, then the risk of theft is greatly diminished. There are a lot of creative solutions for where to place safes, such as under stairwells, behind furniture or décor, or even inside custom build furniture. Choose your safe’s location carefully.

While having direct access to your gold or silver is great, safeguarding it can be a challenge. Another potential challenge is liquidating it, if you ever choose to sell. You will be required to take the precious metals to a broker whom you trust, which requires it to be transported. Depending on the amount of precious metals, the weight can be considerable.

How to Purchase Physical Gold and Silver

If you decide to purchase physical gold and silver, you will pay the spot price (the current price for the metal) plus a premium. The amount of the premium will depend on the vendor you are purchasing from, the quantity being purchased, and the purchase method (bank wire, credit card, etc.). You will want to find a reliable vendor that offers competitive mark-ups, such as JM Bullion or Provident Metals. Remember, a low price does not matter if the seller is not trustworthy. Typically, you will get the best prices by purchasing larger quantities and paying with a bank wire or cash. Smaller quantities are subject to higher mark-ups, and payment with a credit card will typically incur a fee.

Once you make the purchase, the vendor will then mail the gold or silver to your address. You can expect that a signature will be required for delivery. Once the gold or silver arrives, I always recommend taking a few steps to validate its authenticity. You will want to have a magnet, caliper, and a highly-accurate scale that can measure to a tenth (0.1) of a gram. The first thing to check is whether the metal you received is magnetic. Neither gold nor silver is magnetic, so if the magnet sticks, you have a definite problem. Next, you should weigh the precious metals. Gold and silver are sold in troy ounces, which weight more than a typical ounce. An ounce is 28.35 grams; However, a TROY OUNCE is 31.1 grams, so if you purchased one-ounce coins or rounds, then each one should weight 31.1 grams. If you purchased a 5-ounce bar or a fractional round, such as a 0.5 ounce round, then you will have to calculate the weight in grams based on the number of troy ounces. The final way to validate the authenticity of the coin is measuring it; however, this is the most difficult of the three validation techniques, because it varies based on the type of coin. One of the most prestigious silver coins is the American Silver Eagle, which has a diameter of 40.6mm. If you choose to buy a generic 1-ounce silver coin (often referred to as a “round”), then the diameter will vary based on the manufacturer and the thickness of the coin. A thicker coin will have a smaller diameter.

Conclusion

Precious metals are a great way to diversify your portfolio. While they have a place in an investment portfolio, you should not place too large a portion of your portfolio in any one investment. In the case of precious metals 5%-10% is a reasonable amount to invest. When buying gold and silver, you can purchase it through an ETF or buy the physical metals. An ETF is more liquid, as you can trade it similar to stock, but you will not have access to the actual precious metals. In contrast, holding physical gold or silver will allow you to access the precious metals whenever you want, but you must consider how to safely store them. Additionally, it requires more effort to buy and sell physical precious metals. Consider your main reason for purchasing precious metals. If you simply want to diversify your portfolio, an ETF may be appropriate. In contrast, if you expect you will need to access the physical precious metals, then buying them directly is a better choice.