Gold and silver have historically been two of the popular investments around. Long glamorised, the human obsession with valuable metallic elements is well documented. People have been investing in them for centuries, and for good reason. They are both valuable commodities that tend to hold their value over time. But are they right for you? That depends on your specific situation and financial goals. In this blog post, we will discuss the pros and cons of investing in gold and silver, so that you can make an informed decision about whether they are right for you!
What are gold and silver
Gold and silver are both precious metals that have a long history of being used as currency and store of value. Gold is often considered the more valuable of the two, but silver has its own advantages. While still possible to buy as solid bars, they can now be purchased incrementally, priced per ounce without the hassle of carrying (or protecting).
How have they been used as investments
Part of the popularity of gold and silver as investments is due to the fact that they are tangible assets - whilst still at the whim of market forces, much like real estate you can see and touch them, unlike the stocks of your favourite tech company. This has tended to mean that in times of market uncertainty, investors have flocked towards them. Rather than depend on subjective valuations, they want to invest in things that will still have intrinsic value even if everyone decides they are worthless. These sorts of assets are known as "counter-cyclical" - they (supposedly) move in the opposite direction to the market. The chart below shows gold's performance over the last 50 years relative to the stock market.
Source: Young Research & Publishing
Pros of investing in gold and silver
- They hold their value over time. One of the key reasons that people invest in gold and silver is that they hold their value over time. This is a valuable attribute, especially in uncertain times when the stock market might be crashing. If you invest in gold or silver, you can be assured that your investment will still have some value, even if the market takes a downturn.
- They are a hedge against inflation. Gold and silver are a hedge against inflation. This means that, as prices go up, the value of gold and silver will also go up, meaning that your investment will be protected. This is another valuable attribute in uncertain times.
- They are a good way of diversifying your portfolio - by investing in a range of asset classes, you can preserve returns while protecting downside.
Cons of investing in gold and silver
- They are vulnerable to market fluctuations. One downside of investing in gold and silver is that they are vulnerable to market fluctuations. This means that their value can go up or down, depending on the overall market conditions. So, if you invest in gold or silver and the market takes a downturn, you could lose money on your investment.
- They are not always liquid. Another downside of investing in gold and silver is that they can be difficult to liquidate. This means that it can be hard to sell them when you need to. So, if you need to cash out your investment quickly, you might not be able to do so.
- They are not income producing, and have value denoted by nothing other than their scarcity. This means that a strong return profile is by no means guaranteed, and some investors may prefer to invest in productive assets whose returns are more assured.
Ways of owning gold
One of the main differences nowadays from historical investments is that there are multiple ways in which you can hold and speculate on gold. If you have the money and inclination, you can still buy gold bars (although they're pretty heavy - a visit to the Bank of England will give you a chance to find this out for yourself https://www.bankofengland.co.uk/gold)
- Gold Futures
- Gold Coins
- Gold Companies
- Gold ETFs
- Gold Mutual Funds
- Gold Bullion
- Gold Jewelry
What about silver?
The principles are largely the same for silver, although the fact that it is less scarce means that supply is much larger, price is lower and so the fundamental properties that make gold an attractive investment are diminished. Whilst still acting as a counter-cyclical alternative asset, it probably exhibits tendencies closer to other non-precious metals whose value is also derived from their industrial utility.
The future of gold & silver
It's worth noting that in recent years, cryptocurrencies, particularly Bitcoin, have been heralded as "digital gold," purporting to exhibit the same characteristics. This theory has been able to hold credence during periods of strong economic performance but once this suffers, it turns out that cryptocurrencies are heavily correlated to equities, particularly tech stocks. This could well be because their valuations are not backed by anything tangible - even less so than stocks which can go off revenue multiples and other fundamentals. They can still be a way of diversifying your portfolio, but if you are looking for an asset class that will hold value during a recession, your attention is probably best directed elsewhere.
So, should you invest in gold and silver? It depends on your specific situation and financial goals. Gold and silver have historically been popular investments for good reason - they hold their value over time and are a hedge against inflation. However, they are also vulnerable to market fluctuations, so make sure you understand the risks before investing!