Investing in Precious Metals

Gold and silver are referred to as precious metals because they have a high value per unit weight. This might seem self-evident. But why are they valued so highly, and does that mean they are a good investment for you?

This subject can be more fraught with differing opinions than one might think. Different people have different thoughts on the subject. To modern enthusiasts it is practically an article of faith that gold has intrinsic value. Governments come and go, the argument goes, but gold endures as a store of value. It always has been and always will be.

In this vein of thinking, every society is run by some sort of elites, whether they be called priests, kings, oligarchs or corporate CEOs. Periodic revolutions change this temporarily, but some favored group eventually emerges to take over. That cycle has been repeated endlessly for the last 5,000 years, that we know of, and that’s just since the invention of writing. Whatever kind of elites are in place, they always want to distinguish themselves from the 99%. Gold ornamentation is one important way to do that, since gold is beautiful, durable, doesn’t tarnish and is relatively rare. In fact, it is true that about a third of the gold mined becomes jewelry.

And of course, gold has been used as money for largely the same reasons. To this day, most governments hold large stores of gold, although the value of their money is no longer based on it. With that kind of demand assured in perpetuity, you can’t go wrong with gold. Right?

Well, at the other end of the spectrum are people who don’t get why gold should be endowed with the almost mystical powers that the gold bugs assume. Yes, it is useful as an industrial metal and as material for jewelry, they would say. However, the question they ask is, what separates it from any other durable commodity? At the far end of that line of thinking would be the economist John Maynard Keynes and his disciples (which include a large percentage of modern economists), who regarded gold as a barbarous relic. They believed governments to be the proper controllers of money, and that those governments should not be constrained by something so inconvenient as the limited supply of gold. Without its status as money, gold is just a bauble and nothing to get excited about or to treasure, they’d say. These days, cryptocurrencies add another dimension to the subject, creating yet another possible source of gold’s obsolescence as money.

Who is right? Might as well ask which religion is right. There is no resolution of the question likely, and no one’s mind is likely to change.

In the meantime (which is forever), gold is an asset that does have a high and widely fluctuating value. What makes it worthy of consideration as an investment, even for someone who doesn’t treasure it, is that these fluctuations are not in synch with the fluctuations in other investment assets. Dividing up your money between different asset classes is a way to protect your overall net worth from catastrophes in any one market.

Below is a chart that illustrates why that is important:


In the above chart, three exchange-traded funds are shown. The one representing gold is the light green line. The red line is the ETF for Standard & Poor’s 500 index (the stock market). The blue line is the ETF for long-term U.S. Treasury bonds.

Over the 14-year period shown, gold and the stock market ended up having about the same total return – about 184% vs 190%. Treasuries returned a cumulative 115%, a bit less than stocks or gold.

But the routes through which these cumulative returns were arrived at were very different. Gold came in at just about a tie with stocks over the fourteen years. But that includes a five-year period (2011-2016) when gold dropped 50%. Stocks had their own 50% drop too. That was in 2008-9. In both these cases (and many others going back to the 1970s) the prices of these assets went in opposite directions.

And that difference in timing is the point. There was rarely a time when all three of these assets were dropping simultaneously. The virtue of gold as an investment is precisely that its price cycles don’t line up with the stock market’s, or the bond market’s, or for that matter the real estate market’s. That is likely to remain true no matter what anyone believes about the reason for gold’s value.

The gold market, as well as all of the rest of these markets, can and will crash from time to time. But most likely not at the same time. And that makes gold an investment worth considering for anyone, as part of a diversified portfolio.

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