What is the best kind of precious metal to invest in?
What is the best kind of precious metals to invest in?
Although panning for gold was a common practice during the California Gold Rush, nowadays it is mined from the ground. While gold can be found by itself, it's far more commonly found along with other metals, including silver and copper. Thus, a miner may actually produce gold as a by-product of its other mining efforts.
Dear Mulling Over, The idea behind investing in precious metals is that it protects your portfolio against inflation. Historically, people look to commodities like gold in times of economic turmoil.
Coins and bars are strictly for those who have a place to put them like a safety deposit box or safe. Certainly, for those who are expecting the worst, bullion is the only option, but for investors with a time horizon, bullion is illiquid and downright bothersome to hold.
About 85-90% of gold production finds its way into jewelry and bullion, and only 10-15% finds its way into industrial and technological use. This makes it inherently more like a currency than a commodity- its use does not really decline during recessions, and instead tends to increase in price during those times as fear and uncertainty are on the rise.
Imagine yourself sitting in a stream swirling water in a pan, desperately hoping to see a small yellow glint of gold and dreaming of striking it rich. America has come a long way since the early 1850s, but gold still holds a prominent place in our global economy today. Here's a comprehensive introduction to gold, from why it's valuable and how we obtain it to how to invest in it, the risks and benefits of each approach, and advice on where beginners should start.
The amount of money it takes to mine an ounce of gold has increased dramatically over the last decade. Energy and labor prices have affected the cost significantly. Exploring for new deposits in difficult locations, securing permits amidst legitimate fears of environmental damage, and setting up mining infrastructure is a long and expensive process. And as the easier gold locations get mined out, the ones that are left are harder and more expensive.
Then you have to store the gold you've purchased. That could mean renting a safe deposit box from the local bank, where you could end up paying an ongoing cost for storage. Selling, meanwhile, can be difficult since you have to bring your gold to a dealer, who may offer you a price that's below the current spot price.
In addition, gold miners are historically not well managed. They don’t keep costs under control, and so they tend to miss out on the most profitable spikes in gold prices. They often make poorly-timed acquisitions when precious metals are highly priced, which turns into a value trap when the prices fall back down to normal. As a group they have low insider ownership and CEOs that are paid very high compared to the size of their companies.
Most proponents of metal investing don't tout the return, though. Again, the idea is to hedge against inflation. But Get Rich Slowly founder J.D. Roth adds that it might make just as much sense to hedge against inflation by investing in real estate or treasury inflation protected securities.
If you expect savings accounts and government bonds to give strong real returns, then the price of gold might be in for a rough time for a while. On the other hand if you think real returns from savings accounts and safe bonds won’t be great, then gold might be a good place to allocate some money.
However, it’s also nice to get some income from the position. That’s why my strategy for gold and silver investing is to hold a diverse mix of direct gold and silver exposure (via physical bullion and select ETFs), as well as precious metal streaming/royalty companies and select miners. The dividends from the companies pay for the expense ratios of the ETFs and physical holdings, so that the portfolio has a self-sustaining precious metal hedge.