During uncertain economic times, shifting a portion of your savings or investments into precious metals provides security because they are among a handful of financial assets that do not rely on an issuer’s promise to pay.
Stocks, bonds, annuities, and other paper assets derive their value from the issuer’s ability to pay you. Otherwise, they have no more value than the paper they are printed on.
That is not the case with precious metals. They are tangible assets with inherent value. Gold and silver will always have demand because they are precious and rare. They are precious and rare because of how they got to Earth.
Origins of Precious Metals on Earth
Gold comes from the explosion after two dead stars collide into each other. Gold is ejected during this explosion and floats around in space until captured in the gravity of a planet. All the gold on Earth came as a result of the golden stardust falling on our planet when it was forming.
Silver originates from a similar process, but only requires the explosion of a star (known as a supernova). That explains why there is much more silver in the Earth’s crust than gold. The frequency of supernovae is much higher than the collision of two dead stars.
Reasons for Investing in Precious Metals
Because precious metals have inherent value and are incredibly rare, they offer investors refuge from default risk and provide a buffer against extreme market movements or collapse.
They have always shown to be an excellent hedge against inflation. When prices for every day goods go up, the value of currency typically goes down. However, gold has historically shown to weather inflation well. Gold’s value, compared to the real goods and services it can buy, has remained relatively stable. In contrast, the purchasing power of currencies has declined due to the impact of rising prices.
Metals are in a different market than stocks and bonds and therefore react differently to events that impact stocks and bonds. In a lot of cases, they react opposite to paper assets on the same market conditions. Because of this, they can provide the diversification a balanced portfolio requires.
Precious metals are often used as an effective hedge against the weakening and strengthening of the US dollar. If the dollar appreciates, gold drops, while a fall in the dollar produces a rise in the gold price.
While this may be true of other assets, precious metals have proved among the most effective in protecting against dollar weakness.
Risk factors that may affect the price of metals are different in nature from those that affect other assets, providing a more predictable value. This makes metals significantly less volatile than most commodities and many other equities.
In this respect, it tends to behave more like a currency. Including less volatile assets in a portfolio will reduce risk factors and improve expected returns.
Metals are also extremely liquid. There are buyers all over the world, so you will not have any trouble selling it should you wish to do so.
Investors buy metals as a contingency against economic, political or social issues. These can include market deterioration, growing national debt, currency failure, inflation or war. Just like other commodities, gold is subject to speculation.
Investing in Precious Metals Explained here:
Metals Buying and Selling
Precious metals are sold as bullion by weight and buyers usually pay the spot price plus a premium. The spot price of a metal is the amount of money it takes to buy one ounce of physical metal. It is a reflection of real-time prices as set by banks, traders, brokers and other market platforms. Precious metals prices move in response to the changing balance between supply and demand.
The defining attribute of bullion is that it is valued by its mass and purity rather than by a face value as money. Typically, metal bullion is cast into ingots and bars or minted into coins.
Gold, silver, platinum and palladium are the market dominating precious metals. Mints produce bullion coins to contain a specific weight and purity of a precious metal.
Many nations mint bullion coins. The Mints apply nominal face value to the coins, which is far below the actual value of the bullion. For example, Canada mints a one ounce gold Maple Leaf bullion coin at a face value of $50. The true value of the coin is the spot price of gold, which is always well above $50. For this reason, bullion coins are almost never used as actual currency.
Precious Metals for Your IRA
There is a type of IRA called a simple IRA that gives you a lot of freedom in the type of asset you invest in and hold with your retirement savings. Assets include real estate, precious metals, and even business loans.
If you are one that would rather not put your money into stocks or mutual funds that are outside of your control, then a simple IRA is definitely for you. Anyone can set up a simple IRA and fund it. Then, you just instruct the IRA custodian what you wish to invest in and they take care of the rest.
If you have an IRA or 401k already set up with money in it, you can also roll it over into a simple IRA. The only requirement is the money in the account must be liquid. That means it can’t be held in stocks or mutual funds. Those must be sold and the cash put into the account. This cash is then transferred to the simple IRA custodian for redistribution into those assets you do want, like gold and silver.
One final thought on having gold and silver in your IRA. You cannot personally hold the metals. The IRS requires that a depository hold the metals.
The Downside of Precious Metals
If your goal is to make a quick profit from your investment, then precious metals are not for you. Because of their inherent value as a hard asset, they are long-term investments. A good investment strategy is to hold part of your long-term savings in precious metals.
A lot of investors don’t want to invest in metals because of a fear of missing revenue opportunities. Precious metals are an investment that does not generate revenue. This reason is often cited for not balancing a portfolio with precious metals. Investors want to use their money to make more money.
However, a program exists that will pay you a monthly cash dividend to lease your physical silver. For a long time, big banks have leased their metals as a way to generate revenue from their physical precious metals holdings. So they lease the metals to smaller banks for a fee. This creates cash flow.
Now individual investors have the option of holding a position in physical silver and generating revenue without losing their position by leasing their metal to a special program. This program is called the Silver Lease Program and enrollment is now open.