For thousands of years gold and silver were the main means of storing wealth, but in more modern times very few investors include these and other precious metals in their investment portfolios. That’s beginning to change, with a number of factors driving a revival interest in the shiny stuff.
Why buy precious metals?
There are several reasons to consider, including:
- Gold, and to a lesser extent silver, has produced strong returns over the last decade. This is attracting interest from investors disappointed by the low returns on offer from traditional ‘low risk’ investments such as government bonds.
- Low global interest rates have driven up debt levels causing concern about the economic outlook. Gold is a traditional ‘safe haven’ investment. It can provide a degree of insurance against falls in shares or property, and may lower the overall level of risk in a portfolio.
- Inflation might be the least of our worries at the moment, but when it returns, precious metals are more likely to hold real value compared with cash and other investments that lack intrinsic value.
Buying and holding
While it’s possible to front up to a bullion dealer (Australia has several), buy a gold bar and stash it in your home safe, there are other options such as:
- Buy into a pool of physical gold or silver managed by a bullion dealer.
- Buy physical bars or coins and have them stored by the bullion dealer. Dealers carry insurance covering the full value of the metal, with buying and selling done via online accounts.
- Buy units in an exchange-traded fund (ETF). As of 2016 there were four Australian-based gold ETFs, all of which buy and store physical gold to back investors’ holdings. One hedges the price in US dollars, introducing a currency component into performance. Some overseas gold ETFs don’t hold physical metal, and instead trade in derivatives such as options and futures contracts to track the price of gold.
Investors can also gain exposure to gold by buying shares in gold mining companies or an ETF that invests in these companies. However, not all companies are purely gold miners, and their value is not solely dependent on the gold price.
Food for thought
While gold and silver might be considered ‘safe havens’, investors need to be aware of several points:
- Precious metals don’t provide any income. Rather, there is a cost for storage, insurance and, in the case of ETFs, management fees.
- Some ETFs allow units to be redeemed for physical gold. This may be comfort if there is a major economic collapse.
- Prices can be volatile. While some advocates point to gold’s great performance since 2005, it peaked at A$1,833 per ounce in August 2011 then fell by more than 23% in value to A$1,396 in November 2014 before recovering again. Patience is also required. Investors buying gold in November 1987 had to wait for 18 years to realise a gain. The chart below shows how gold and silver tracked in the 42 years 1975-2017.
Based on monthly data. Source: The Perth Mint
- Gold and silver perform quite differently due to different drivers of demand. Half of the world’s silver production is used by industry whereas most gold is destined for investment, jewellery and decorative uses.
Reasons backed by research
There are good reasons why gold and silver might be given a place in an investment portfolio, but investors need to be clear about why they are choosing precious metals and what they are intending to achieve.
As with any investment, it’s important to do your research and understand both the potential benefits and risks before investing. Get in touch to see if this might be a suitable strategy for you.
Note: Past performance is not an indicator of future returns.
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