Precious metals have long been used as a “store of value.” Their relative scarcity, societal appeal, and use in industrial processes create a demand that tends to prop up their value. Historically, gold and silver were used as standards for currency and provided a physical equivalent to the paper money we know today. As a result, these metals have had a reliable value and have been used as an alternative investment and a hedge against inflation. The question remains, though: Are these precious metals quality investments in the long term?
At One Day In July, we believe that asset class diversification is one of your best tools for protecting your returns while managing risk. Gold and other precious metals can be a part of that diversification, but nuances among this asset class (gold vs. silver vs. platinum) should be considered. For example, the price of silver is heavily influenced by industrial demand while gold prices can be affected by market sentiment and inflation rates1. Understanding these differences can allow an investor to use precious metals to diversify their portfolio, which may ultimately be their best attribute. If you seriously consider investing in these metals, consider a gold or silver ETF (exchange-traded fund). They share similar investment properties to their physical namesakes without the storage and liquidity concerns (more on that below).
Over the past 30 years, gold and silver have underperformed both the Dow Jones and the S&P 500, and it’s not even close. Increase the number of years on this chart, and the gap gets bigger. The steady, almost sideways pattern with gold and silver speaks to the “store of value” idea, but in terms of long-term gains, it falls behind both markets.
(Image courtesy of Longtermtrends: https://www.longtermtrends.net/stocks-vs-gold-comparison/, please note that the charts for the S&P500 and Dow Jones do not include dividends)
Some investors like to hold physical metals, but this presents its own challenges. One must think of where they are going to store these assets and whether that storage will impact insurance costs. Now that you have a pile of metal, what will you do with it in the event you want to liquidate it or use it? Liquidating could be very hard, and you may have to accept a discounted spot price to convert this to cash. If your idea is to hold these metals in the event of a global economic collapse, then consider that a market would need to be created to conduct transactions with these metals effectively. That could be a stretch.
While you have assets tied up in these metals, you miss out on other investments. In the long term, this could significantly impact portfolio returns.
At One Day In July, we do not proactively invest our clients’ assets in silver or gold ETFs. We believe that the opportunity cost is too high and that we can find stores of value (US Treasuries, for example) that provide less volatility and more long-term security. That being said, some investors have an affinity for these metals, and we will work with you to manage your exposure in a long-term investment plan.
1. Rowling, R. (2023, October 26). Gold vs Silver Price. Kinesis. Retrieved March 17, 2024, from https://kinesis.money/blog/gold/silver-versus-gold-price/
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