Investor Safe Havens in an Economic Downturn: Gold, Silver & Precious Metals
While the stock market gets most of the headlines, precious metals like gold and silver still play an important role in many investors’ portfolios. However, lumping gold, silver and other precious metals into a single asset class can muddy the picture.
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Gold and silver in particular have their own unique characteristics that make them distinct investments, despite them both being “precious metals.” If you’re going to jump into this type of investment, it pays to take the time to learn how gold and silver act in particular economic environments, what their historical performance has been, and what pros and cons each of these investments has. Read on to learn more.
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Precious Metals Are a Tangible Asset
One of the strongest arguments for owning gold, silver or other precious metals is that they are a tangible asset. While you can buy or sell stocks all day on the open market, those transactions are electronic in nature. Unless you buy a stock directly from a company and pay the transfer agent a fee, you’ll never actually hold a stock certificate in your hand. And even if you do, it’s just a piece of paper that has no intrinsic value.
Gold and silver, on the other hand, have weight and beauty and physical heft. Proponents argue that they are a “real” form of money, as opposed to financial assets like stocks or even the U.S. dollar. Even if the economy tanks — or especially if it does — your physical precious metals may have more purchasing power than other assets. As financial services firm UBS tells it, “As they exist physically, they have an intrinsic or material value.”
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Gold and Silver Are 2 Distinct Investments
Precious metals investors often own both gold and silver. However, they don’t always trade in lockstep, even though they are both precious metals.
Silver, for example, is more volatile in price and more tied to the global economy. This makes sense, because according to the World Silver Survey, 50% of all silver is used in high technology and heavy industry. This includes everyday products ranging from smartphones and tablets to automobiles and solar-panel cells.
While gold has its industrial uses, they are more limited than with silver. But this actually makes the gold less correlated to the stock market, as it is less sensitive to the economy. This in turn can make gold a good investment if you’re looking to protect your portfolio from an economic downturn, according to Morgan Stanley.
Caveats To Investing in Precious Metals
While gold, silver and other precious metals certainly have their strengths, there are some definite caveats you’ll have to understand if you want to own them.
For example, the price of gold can be negatively affected by external factors ranging from political and financial crises to changes in monetary policy to expectations of rising inflation, according to UBS. There are other drawbacks to consider as well.
They Don’t Pay Dividends or Interest
Unlike bonds and many stocks, precious metals don’t pay any dividends or interest. This means that the only way to profit from holding them is to hope that their price rises. Gold and silver prices therefore tend to suffer when interest rates are high, as there are many other alternatives that put cash directly into investors’ pockets.
You’ll Pay Fees Buying and Selling
If you buy precious metals via an ETF or mutual fund, you may be able to use a broker that charges no commissions. However, if you want to own actual gold or silver bullion, you’ll have to pay a markup on the price of gold when you buy it so the dealer can make a profit.
The same is true when you sell it. Either way, buying or selling, it’s highly unlikely you will ever execute a transaction at the actual current market price.
You May Have To Pay Storage Fees
If you don’t want to keep your precious metals in your own home, you’ll have to pay someone to store them for you. While storage fees aren’t exorbitant — OneGold charges $120 to store $100,000 in gold, for example — they are still a fee that takes money out of your investment whether it goes up or down in price.
Long-Term Returns Are Iffy
According to an analysis by Securian Asset Management, gold had an average annual return since 1970 of 7.7%. While this doesn’t keep pace with the S&P 500’s return of 10.43% per year over the same time period, it’s still a respectable performance.
However, over the long run, both gold and silver have posted returns just barely topping the rate of inflation. According to Robert R. Johnson, professor of finance at Creighton University’s Heider College of Business, gold returned just 4.87% per year from 1925-2020, and silver returned 3.46% annually over the same time period, Meanwhile, inflation ran at a 2.9% annual rate over those 95 years.
Also important to note is that the price of gold often moves in fits and spurts. In 1987, gold closed at a price of $486.50 per ounce, but it didn’t break that price again until 2005, 18 years later.
This is one of the reasons why advisors like Ivory Johnson, a CFP and founder of Delancey Wealth Management, only recommend gold as a short-term investment. According to Johnson, “Gold is not a long-term investment. It’s not something you just put in the portfolio and keep it there.”
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This article originally appeared on GOBankingRates.com: Investor Safe Havens in an Economic Downturn: Gold, Silver & Precious Metals
