Introduction to the World of Precious Metals
Recently, gold has frequently appeared in news headlines, attracting investors' attention. Naturally, anyone considering investing in gold will have numerous questions. It's important to know the main aspects before purchasing gold or silver.
Why Do Investors Pay Attention to Gold and Silver?
Many experts, including Ray Dalio, believe that in stable times, at least 10% of an investment portfolio should be allocated to precious metals like gold and silver. This is done for diversification, to strengthen the overall investment portfolio.
The stock market crash in March 2020 caused significant damage to many investors. At that time, pension accounts, built up over decades, incurred double-digit losses, subject to overall market dynamics.
Beyond stock market volatility, the value of the dollar is constantly declining. This means an inevitable loss of purchasing power for those who hold cash reserves in the bank.
Gold and silver, whose value has increased in recent years, can compensate for this loss. Investors use the inverse relationship between precious metals and the dollar to protect their portfolios. Thus, precious metals serve as a way to hedge against inflation and even enhance the stability of pension accounts.
- Diversification of the investment portfolio, recommended by many experts.
- Protection against stock market volatility and sudden drops.
- Compensation for the loss of purchasing power of cash due to the depreciation of the dollar.
- Hedge against inflation and enhancement of pension savings stability.
How Favorable is the Current Moment for Acquisition?
The current state of the economy sends strong signals for purchasing precious metals. The dollar is falling, and some experts predict that the currency's potential for decline is not yet exhausted, for valid reasons.
As of February, the US national debt was approximately 28 trillion dollars. Congress and the Federal Reserve have allocated trillions of dollars in aid due to the Covid-19 crisis. The dollar's position as the world's reserve currency could be jeopardized by the actions taken by the United States to support the economy.
According to the Bureau of Labor Statistics Consumer Price Index, prices are currently approximately 53% higher than average prices since 2000. In other words, 1 dollar in 2000 is equivalent to approximately 1.53 dollars today.
This means that a $100,000 investment in gold in 2000 has a purchasing power of about $535,000 today. At the same time, $100,000 kept as cash since 2000 can buy goods worth approximately $65,000 today.
| Investment in 2000 | Purchasing Power Today |
| $100,000 in Gold | Approximately $535,000 |
| $100,000 in Cash | Approximately $65,000 |
Given that the national debt has reached such high values, the question arises about the future ratio of the value of cash to gold over the next 5, 10, or 20 years.
What Returns Do Physical Gold and Silver Provide?
Precious metals primarily excel at preserving purchasing power. For example, in 1946, a Mercury silver dime was worth $0.10 according to its face value, and it could buy a loaf of bread.
Today, the same dime is valued at an average of $2.50, while a loaf of bread costs $2 or even more. This is a clear example of how physical gold and silver act as financial insurance against inflation, allowing one to 'lock in' a certain rate.
Furthermore, gold has outperformed the S&P index since 2000, showing an approximate growth of 514% versus 174% at the time of writing.
Physical Metals vs. 'Paper' Gold: What's the Difference?
There are two main methods of investing in gold: through 'paper' instruments and by acquiring physical precious metal.
'Paper' gold is generally intended to protect and diversify an investment portfolio, providing balance during times of market uncertainty. Physical gold, in turn, is designed to protect or 'anchor' purchasing power.
Compared to paper counterparts, physical gold gives investors the opportunity to own a tangible asset over which they always have full control.
- A 'promissory note' on the price of gold still remains paper.
- Mining company stocks and exchange-traded funds carry counterparty and systemic risk.
- By investing in a gold mining company's stock, an investor is dependent on the economic conditions in the country where the miner is located.
- Stocks do not imply ownership of gold: gold securities are linked to physical gold, but you do not have the right to exchange them for the actual metal.
- They do not provide the same protection against fiat currencies or other serious market threats as physical gold.
Disadvantages and Potential Risks of Investing in Physical Gold
As with any investment, there are certain disadvantages to consider when purchasing physical precious metals.
One drawback is the associated storage and insurance costs. Investments like stocks and bonds do not require such expenses. Storing physical gold and silver in a bank or vault requires a fee. Storing metals at home may require an initial investment in a safe for security, as well as additional insurance in case of theft or natural disasters.
The opportunity cost of investing in physical gold and silver instead of high-dividend securities can be considered another disadvantage. Physical precious metals will only yield a return upon their sale, unlike quarterly dividends received from some stocks.
When investors are ready to cash out their investments, they should consider transportation. Selling physical gold and silver may require delivering the metals to a reputable dealer. If the dealer from whom the purchase was made does not offer a buyback program, another company will have to be found.
Finally, investors should remember that there is always risk. Although historical trends can be used to track the dynamics of precious metals, there is no guarantee that investments will yield positive returns. Like any other investment, precious metals can fall in value. While history shows that this is one of the safest investments, a certain level of risk still exists. Investors should consider all these aspects before investing in gold.
