Is your portfolio prepared for today’s investing environment? The economy today is radically different from the financial landscape of just a few years ago. Inflation is higher than it’s been in decades, interest rates have climbed rapidly, and employment numbers continue to climb higher even as recession fears grow.
Even just a few years ago, a growth-oriented portfolio could have been very aggressive as stock markets were rapidly gaining value and interest rates were as low as they could go. Stock markets have always been seen as one of the best ways to grow your money quickly, even though stocks come with some of the highest risks and volatility. Stock prices can become very unpredictable, with extreme ups and downs as investor sentiment becomes warier.
For most investors, the answer isn’t to take money in and out of their portfolio. Predicting asset prices is almost impossible, even for experts. Instead, a diversified, balanced portfolio can help you keep your savings invested even in tougher, less predictable economic circumstances.
A diversified portfolio invests in more than just stocks. One way that you can diversify your investments and prepare yourself for a tougher economic environment is by creating a precious metals portfolio.
What Is a Precious Metals Portfolio?
A precious metals portfolio is part of your savings committed to gold, silver, and potentially other precious metals. These assets are commodities and function somewhat differently than securities (stocks and bonds). They provide a counter-cyclical defensive strategy to your portfolio that helps protect your savings during recessions and periods of uncertainty.
There are a number of ways you can invest in precious metals:
- Physical bullion
- Exchange-Traded Funds
- Mining stocks
If you are looking to take advantage of the full defensive benefits of precious metals, buying gold bars, coins, and other physical precious metal products are often the best option.
ETFs come with counter-party risks and management fees. You don’t actually own physical precious metals yourself, but rather a fund that invests in the metal. In addition, mining stocks do not necessarily reflect the price of precious metals, as they also face challenges such as the rising cost of finding and extracting precious metals and the growing costs of expansion, regulation, and exploration.
What Are the Benefits of a Precious Metals Portfolio?
Precious metals often provide a defensive strategy for your savings. Historically, the price of gold and other precious metals has been unaffected by stock crashes or opposite that of stocks. Prices rise during recessions and times of high uncertainty and fall when stock markets are rapidly rising. There are several reasons people like gold and other precious metals as an element of their portfolio.
#1 Hedge Against Inflation
Persistent inflation makes now the perfect time to learn about precious metal investing. That’s because precious metals are regularly used by investors as a hedge against high inflation. Inflation is the loss of a currency’s value, meaning it can buy less in terms of goods and services. High inflation makes it increasingly expensive to keep cash reserves, and investors need another safe haven asset.
Although experts largely agree that inflation is trending downward, there’s also an expectation that inflation won’t be going back down to historical lows, either. Consumers can expect higher prices to remain the norm for the foreseeable future, and that’s a great reason to invest in an inflationary hedge.
#2 Limited Supply
Precious metals have very real physical supply limitations. There is only so much of them on the Earth that can be extracted, and as more and more is mined, it becomes increasingly difficult and expensive to develop new sources.
There are three main sources of supply for precious metals: mining, recycling, and supply released from vaults, such as when central banks sell off stores of gold bullion.
#3 Negative Correlation with Stocks
Historically, gold has had a negative correlation with stocks and other securities. Gold and other precious metals have historically performed better when stock markets are in decline. Even as recently as 2022, gold prices outperformed the S&P 500.
Gold does not usually have the growth potential that stocks can provide, but during downturns, it provides a backstop that will help protect your savings.
How to Build Your Precious Metals Portfolio
Building a precious metals portfolio is not always the same as investing in other investments, especially if you’re buying bars and coins. These tips for investing in gold and silver will help you build your precious metals portfolio in a way that will help you generate better returns on your investments.
#1 Buy in Volume
Saving on premiums can help you generate higher returns when it’s time to sell a position in your precious metals portfolio. The easiest way to cut down on the premiums you pay is to buy in higher volumes. This means coming up with a clear vision for how much you want to put into precious metals and buying or selling at once.
#2 Start with Silver
Buying in volume can be a lot to ask if you’re buying gold. The price of gold is very high compared to silver, and silver may be a better metal for beginner investors.
The downside to buying silver coins and bars is that the premiums can be higher than gold. The lower price of silver means that bullion dealers have to mark up the prices higher. Nevertheless, you can start to save on premiums by buying higher quantities.
#3 Allocate Based on Your Finances
You may want to change your precious metals portfolio allocation with time as you build it. At a certain point, you may realize you’re running out of storage room if you’re buying a lot of silver. That’s a good sign that it’s time to convert some of your silver into gold.
Some investors also explore alternatives such as platinum to further diversify their precious metals portfolio.
How Much of Your Portfolio Should Be in Precious Metals?
Your financial situation, goals, and macroeconomic trends are all factors to consider when you’re deciding how much of your portfolio to allocate to precious metals. There is a balance to be found between precious metals and other assets. On one hand, financial experts do not recommend allocating too much to a precious metals portfolio because you could be missing out on the potential returns of stocks. On the other hand, a precious metals portfolio still requires a significant commitment if you want to take full advantage of the benefits of bullion.
You can get a wide range of answers, but financial experts suggest allocating anywhere from 5% to 20% of your portfolio to precious metals, and 10-15% is the most frequently cited suggestion. In times of stability and growth on the market, you may want to reduce your position to capitalize on stocks, while market volatility, inflation, and recessions may lead you to increase your position in gold and silver.
Frequently Asked Questions About Precious Metals Portfolios
Adding precious metals to your portfolio can be a major step as an investor. Precious metals often do not get the same kind of attention that securities do, but they can play a very useful role in any portfolio. The more you know about bullion before you invest, the more confidently you can make decisions about your savings.
Where should you buy gold and silver?
The most reliable place to buy precious metals is your local bullion dealer. Bullion dealers provide a wide range of bullion products that you can compare based on price, premium, weight, design, and manufacturer. A bullion dealer can also answer all your questions about specific products and how to store and maintain bullion.
When should you buy precious metals?
It helps to be prepared with your investments. Chasing price trends can lead to poor investment decisions, so you want to avoid adjusting your portfolio too frequently. Following a rush can lead to paying elevated prices due to a fear of missing out.
The best time to buy precious metals is when it works for you. You may want to compare current prices with recent trends if you have time to wait, but there is never a guarantee that prices will go up or down on any given day.
What kind of precious metal should you buy?
There are many different kinds of precious metal and bullion products available in the world today. Globally, there are mints such as the US Mint, Royal Canadian Mint, Perth Mint (Australia), Royal Mint (UK), and other sovereign mints in South Africa, China, Mexico, and more that produce investment-grade coins and bars. There are also private refiners that produce bars and rounds, with some of the leaders including Valcambi, PAMP Suisse, Johnson Matthey, and others.
How to sell your precious metals?
While long-term investing is usually the most effective way to build wealth, every asset needs to be sold if it’s going to pay off. Fortunately for bullion investors, most reliable bullion dealers don’t just sell gold and silver, but they also buy it.
The key to selling your gold and silver is finding a dealer that offers the best prices compared to spot. Usually, bullion investors will have to sell for under spot as bullion dealers need to create a margin for themselves. That margin shrinks with volume, so you can earn more by selling more gold at once. Don’t hesitate to get quotes from multiple bullion dealers for the best possible offer.
If you’re not sure when to sell your bullion, consider your own financial goals in concert with the market. The best time to sell gold is when the current price will deliver an acceptable profit and when you are ready to rebalance your portfolio.
Precious metals can be an invaluable addition to your portfolio. If you’re looking for a way to diversify your portfolio, add a hedge against inflation and market volatility, and invest in assets that have historically performed well during tougher economic times, a precious metals portfolio can help. Talk to your local bullion dealer for tips on buying precious metals, including gold and silver bars and coins.