Elements like gold and silver have held a certain special value in our minds and hearts since nearly the beginning of human history. There’s a reason prospectors rushed to California in 1849.
Although we’ve been off the gold standard for a while, precious metals can still play a part in diversifying your portfolio. We’ll take a look at the dynamics of adding some shine to a portfolio that’s mostly made up of green dollar bills.
Why Precious Metals?
There are a few major arguments for gold, silver and other precious metals in your investment portfolio. These include the fact that the value of the metals can help diversify your portfolio and act as an inflation hedge.
It’s a long-held investing principle that you’re better off if you diversify in your financial planning. After all, it makes sense not to put all your eggs in one basket. However, diversifying can go beyond putting your money in different funds and stocks. You might also consider putting your money in different classes of assets altogether.
Joe Yaffe of Gainesville Coins said that precious metals can play a big part in a diverse portfolio, just as stocks or real estate investments might. Gold, in particular, is still primarily used as an object of value, largely uncorrelated to the ups and downs associated with other markets.
“The vast majority of the world’s gold supply is held as a financial asset, primarily by central banks,” Yaffe said. “Unlike other metals, it rarely gets used up or destroyed. Even though gold is an input (without any suitable substitutes) in many electronics and other cutting-edge technologies, it’s only needed in very modest amounts for these purposes, so the effect is largely negligible. In a number of ways, gold is unlike any other commodity, so its fortunes are untethered to any particular industry or market.”
Other metals may have similar value when it comes to diversification. If a metal is used as a major component when manufacturing products, however, its value could be more subject to other existing market forces. Yaffe pointed to silver as one example of this. Silver is used in everything from dentistry and medicine to the semi-conductors and touchscreens that power much of today’s technology.
It can be helpful to take a look at these metals if you decide to invest in them as a different asset class. You can use them in tandem with any other stock, bond, real estate or other investments you may have.
Gold isn’t really tied to the market fortunes of any other good or service, but it does have a correlation to the U.S. dollar. Because gold has been seen throughout history as an object of value, it holds tremendous potential as an inflation hedge even in down markets.
The spot price, or the raw value of gold, is negatively correlated with the value of the U.S. dollar. When the dollar is less valuable (higher inflation), the monetary value of gold holdings goes up and vice versa.
Interest rates have gone up recently due to movements by the Federal Reserve, but Yaffe pointed out that the last time the Fed started raising interest rates, instead of losing in the short-term, the price of gold actually doubled.
The primary reason for this is that there’s a delay between the time the U.S. central bank raises these rates and when they actually have an impact on the economy.
“If rates are starting to go up, it’s typically because the central bank sees inflation picking up, which of course actually benefits gold,” said Yaffe.
It’s very difficult to time the market, but there’s a good chance that the value of precious metals won’t drop right away when interest rates rise. Unless you’re engaging in risky speculating, precious metals still hold certain benefits even when their value is low. Having precious metals allows you to have several different types of assets in order to protect against negative events that might have a greater effect on stocks or bonds, for example.
One of the arguments against investing in any precious metal is that it’s hard to liquidate. It may have value, but after all, we operate in a society where currency is still king. However, one thing to keep in mind is that you don’t have to keep all your treasure at home under the mattress. In this section, we’ll go over some investment options.
Precious Metals and Your Retirement
You have the option of putting these precious metals in a self-directed IRA. This has a couple of advantages. There’s the diversification and inflation angle mentioned above, but there’s also a second tax advantage.
When you go to sell your precious metals, you would normally pay a tax rate of 28% on any capital gains because they’re considered collectibles. However, if the value is withdrawn from an IRA, it’s taxed at ordinary income tax rates.
In order to keep it in an IRA, you’ll probably need to keep it in a recognized gold vault or depository. You would have to pay storage fees, but often these depositories are willing to buy the metal back from you at or near market rates. This makes it easier to liquidate your holdings.
Exchange-Traded Funds (ETFs)
Another option might be investing in ETFs available on the public stock exchanges that are backed by gold or silver and the like. They enable you to trade precious metals on the stock market in the same way you might trade Coca-Cola or Apple. You can have the liquidity offered by stocks while dipping your toe in the gold or silver market.
Storing Your Own Precious Metals
Finally, you do have the option of storing your gold or similar precious metals yourself, maybe at home or in a safe deposit box. The main thing to think about here is the ease of transport. There’s no shortage of buyers just about anywhere who will pay you around market value for your gold, but you have to be able to get it there. Small items like coins might work well in personal storage, but items that are heavy or awkward might be more difficult to store.
If you’re storing the gold in your own home, you might also have to consider how to insure against a loss. You may have to add a rider to your homeowners insurance policy.
A Note on Collectibles
There are two different types of price when it comes to the precious metals market. There’s the spot price, which is based on the value of the raw metal itself. However, depending on the item, it may also have a collectible value. Dana Samuelson is president of the Professional Numismatists Guild. A numismatist is someone who studies and collects rare coins.
Samuelson said it’s especially important to be educated and remain careful. You don’t want to sell your coin that hasn’t been in circulation since the Civil War for the spot value alone. If you think you have any collectibles, you should get them properly appraised by a professional.
Hopefully these tips will help give you a golden investing touch. Are you interested in other tips on investing in different types of assets? Check out our article on the basics of the stock market.
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