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Gold and Silver as Investments

In the early 2000s, as part of a broader commodity bull market, gold and silver prices began to appreciate higher. And for some time—with volatility along the way—investors were well rewarded, with gold reaching nearly $2,000 an ounce in 20111.  However, since hitting highs in early 2011, gold and silver prices have fallen more than 30% and 60%, respectively.2

Overview of Gold & Silver as Investments

When many investors consider investing in gold and silver they think their investments will be safe and secure. Yet the reality is quite different—real growth has come only in short but significant spurts, with enormous busts typically following. The occasional short term run provides investors a lure that gold can add to their retirement wealth. But the lure frequently proves false—the booms are historically fleeting relative to "bust" periods.

Since leaving the gold standard and trading freely since 1973, gold as an investment has largely underperformed both stocks and bonds over time3. And an investor that purchased gold in the late '70s would have waited nearly 25 years for his gold to have a positive return at all.4  For this reason, we advise investors to limit precious metals to a responsible (i.e. small) allocation—if any—in an otherwise well-diversified portfolio.

Does How You Invest in Precious Metals Matter?

There are a number of ways that one can invest in precious metals, and many investors state a preference for one form of ownership over another. Yet in reality, there's little difference in our opinion. 

One method  is to simply purchase gold or silver coins, while another method is  use exchange-traded funds (ETFs) to buy these metals. Some investors suggest an investment in physical gold is somehow preferable to ETFs. Yet in reality, the underlying asset of the ETF and the actual holding of gold hinge on price movement of the same underlying asset. The ETF form can be easier to buy and sell.

Do Gold & Silver Really Shine Against More Traditional Investments?

Gold's performance over the last four decades pales in comparison to S&P 500 total returns.5  In addition, gold underperformed US Treasuries over the same span.6  In exchange for these lower returns, investors have received more volatility over that time (as measured by standard deviation).7  A more volatile asset with historically lower long-run returns just doesn't make a lot of sense for long-term investors. 

Stocks,Bonds and Gold 


 The Bottom Line

Gold and silver are lackluster investments relative to other similarly liquid options. Given the long-term risk/return tradeoff isn't in investors' favor with precious metals, an investment in gold or silver boils down to timing booms and busts. Now, as with any other investment, putting funds into one particular financial vehicle over other depends on the goals of the overall portfolio and determining the most efficient tools for accomplishing them. It's just that it's hard to find a place for a consistent allocation to gold or silver. It's a timing tool, and one that's notoriously tricky.

Stocking up on too much of one investment can have serious consequences if the market for that investment turns against you, especially one so volatile and fickle as gold. So while gold and silver may be tempting during a "hot" growth periods, it's important to keep excitement about these investments in check. Allocating too much of one's overall portfolio towards commodities can be potentially problematic.

 

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1 Thomson Reuters
2 ibid
3 Global Financial Data, Inc. as of 8/15/2013
4 ibid
5 ibid
6 ibid
7 ibid
 

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