Investing in Precious Metals vs. Stocks: Pros & Cons

gold versus stocks

The decision about which assets to invest in can be a highly contentious one. While it’s ultimately a personal decision for each individual investor, reading through the financial media you’ll find numerous cheerleaders for one asset class or another. And perhaps no debate over investments is as contentious as precious metals vs. stocks.

Americans probably have more exposure to stocks than to any other investment asset, thanks to workplace 401(k) plans. And most financial advisors and brokers probably have more experience analyzing, buying, and selling stocks than any other financial asset. With such a large market and user base, the proponents of stock investing can easily drown out proponents of other alternative investment assets.

Proponents of investing in precious metals may not be as numerous, but what they lack in numbers they more than make up for in conviction. You’ll occasionally see some people so enamored with precious metals that they’ll make wild claims, like that gold will be worth hundreds of thousands of dollars within a decade. While that’s certainly possible, the sequence of events that would have to transpire for that to happen is highly unlikely.

Because of those grandiose claims, some people tend to ignore the reasons to invest in precious metals vs. stocks, even if the stock proponents have their own fair share of people preaching that the Dow Jones will hit 100,000. But those investors would be doing themselves a disservice by reflexively spurning a prime investment asset.

When it comes to precious metals vs. stocks, there are good arguments to be made for both assets. But each has its disadvantages as well. Here are some of the pros and cons you’ll want to think about when deciding to invest in precious metals vs. stocks.

Investing in Stocks: Pros vs. Cons

The primary reason most people choose to invest in stocks is for their growth potential. Whether they’re active investors looking for the next Microsoft or Apple, passive investors merely looking to match the performance of stock indices such as the Dow Jones Industrial Average, the S&P 500, or the Russell 3000, or dividend investors looking for annual dividend income, there’s something for everyone.

Companies all over the globe, from large to small, in every industry, issue stocks that investors can purchase. And if they choose the right stocks, they can make pretty significant gains.

With thousands of stocks out there available to purchase, the decision about which ones to purchase can be daunting. That’s where a good financial advisor can be helpful, to advise you on which stocks might be the best for your investment goals. But with such diversity of growth potential, dividend payments, geographic exposure, and industry, you can craft your stock investments to reflect just the type of investment strategy you want.

Many proponents of stock investing, such as Warren Buffett, will highlight the long-term average growth rate of stock markets, or cite figures showing how $10,000 invested in 1945 would be worth millions today. What they gloss over, however, is the fact that many of those gains are highly concentrated. In fact, since the end of World War II, the two biggest stock market bull markets, from 1954-1966 and 1982-2000, have been responsible for the overwhelming majority of stock market gains. Investment gains outside those time periods would have been significantly smaller.

Stock markets also have the same disadvantages that any other risky asset has, namely that with the potential for great gains comes the potential for great losses. Stock market crashes have occurred regularly throughout history, with the Great Depression, the dotcom bubble, and the Great Recession all handing investors significant losses. And with the current stock market atmosphere increasingly divorced from economic fundamentals, the risk of a coming stock market crash cannot be overestimated.

The Pros & Cons of Investing in Precious Metals

When people think of precious metals investing, they naturally think of gold first. One of gold’s most attractive and enduring features is its ability to maintain its value over time. Whereas a $20 bill from the 1920s is still only worth $20, a $20 gold coin from that era is now worth over $1,800. That ability to maintain value in the face of inflation is why gold is one of the top assets investors choose when they want to preserve their wealth.

But gold isn’t just a static asset. It can make pretty significant gains, even during times of market weakness. In the aftermath of the 2008 financial crisis, for instance, gold tripled in price. And many investors are now banking on gold to perform similarly during the next financial crisis.

Silver is another popular precious metal to invest in, although its long-term performance isn’t quite as spectacular as gold’s. While it also maintains its value over the long term, where it excels is in shorter-term price gains. The silver price tends to rise at the same time the gold price does, but in percentage terms it often rises more. For instance, while gold tripled in price after the 2008 crisis, silver quadrupled.

The disadvantage to investing in gold and silver can be one of timing. There are periods in which prices of precious metals can be somewhat stagnant, and any gains lag those of stock markets. Investors may be tempted to look at that and second guess their decision to invest in precious metals. But they would be forgetting that one of the primary reasons for investing in precious metals vs. stocks is to hedge against unforeseen stock market drops.

Additionally, you need to remember that you’re never going to have 100% of your investments in either precious metals or stocks, but rather have a mixture of both, so that any losses in the one will be outweighed by gains in the other.

Precious Metals vs. Stocks: Price Performance

Many people automatically assume that stocks perform better than gold over the long term. Part of that is because that’s what has been drilled into their heads by financial media for decades. Another reason is that gold’s “performance” was artificially suppressed by the government from 1933 to 1974, when it was illegal for US citizens to own more than a token amount of gold.

Many US investors tried to own gold in overseas accounts, but the US government even took steps to crack down on that. It wasn’t until 1975 that US investors could once again freely own gold. So when you hear someone like Warren Buffett talk about how stock markets have outperformed gold since World War II, remember that for the first three decades of that period you would have risked going to jail if you had tried to invest in gold.

With That in Mind, What Is the Actual Performance of Gold Versus Stocks?

Let’s first take a look at the time period after August 15, 1971. That was the day that President Nixon decided to close the gold window, thus severing the last official link between the dollar and gold. From 1933 to 1971, foreign governments were still allowed to come to the US Treasury’s “gold window” and exchange their dollars for gold. As the US government printed more money during the 1950s and 1960s, the value of the dollar weakened. That benefited US exports and harmed manufacturers elsewhere, particularly in Europe.

Europeans got wise to what was going on, and European governments, especially France, began to come to the gold window in increasing numbers to redeem their dollars for gold. Financial markets knew what was going on too, and the market price of gold began to diverge from its official $35 per ounce valuation. There were a series of attempts to keep the market price of gold in check, but those ultimately proved unsuccessful, leading to Nixon’s closure of the gold window.

On the day after Nixon closed the gold window, gold’s official valuation was $35 an ounce. But it was trading at $43 an ounce in London. Meanwhile, the S&P 500 closed at 98.76 points and the Dow Jones Industrial Average closed at 888.95 points. At the time of writing today, gold was valued at $1799.50 per ounce, the S&P 500 was at 3138.13 points, and the Dow Jones was at 25,696.22 points.

Comparing those gains at gold’s official valuation of $35 an ounce in 1971, gold has averaged an annualized 8.4% gain per year. And when comparing it to gold’s London trading price of $43 an ounce, gold has averaged a 7.9% annualized gain per year. The S&P 500, by contrast, has averaged 7.3% annualized gains, while the Dow Jones has averaged 7.1% during that same time period. That’s a pretty clear victory for gold.

The story gets even better for gold when you look at its performance this century. On the first trading day of 2001, gold finished at $268 an ounce, while the S&P 500 was at 1335.63 points and the Dow Jones was at 10,646.15 points. Stock markets were already falling from their dotcom bubble highs, so you would think their growth rates from that point on would be strong. Not so.

Gold’s performance since that time has resulted in an average of 10.3% annualized gains, while the S&P 500 has averaged 4.5% and the Dow Jones has averaged 4.6%. That’s pretty astounding performance from gold, which has more than doubled the performance of stock markets this century. Knowing the numbers now, don’t you wish you could go back in time and invest in gold?

What’s Best for Your Portfolio?

The choice of investing in precious metals vs. stocks is ultimately a personal one that you’ll have to make depending on your investing goals. While we’ve seen that gold can outperform stocks over the long run, there are certainly periods of time during which stocks can outperform gold.

The bull market of 1982-2000 was one of those times, as was the stock market run of 2016-2018. With judicious planning and a little bit of lucky timing, investors can adjust their investment portfolios to take advantage of the gains that can be made from investing in both stocks and gold.

Remember that portfolio diversification is important, so that no matter how well either precious metals or stocks are performing, you don’t want to have the entirety of your investments in either one of those assets. Adjusting your percentage of precious metals vs. stocks to take advantage of growth opportunities is a strategy that many investors decide on. You’ll want to consult with your financial advisor to determine how best to achieve that with your investments.

If you’ve thought about precious metals vs. stocks and want to pursue an investment in gold and silver, contact the experts at Goldco. They’ll be able to explain all the available options to invest in precious metals, such as a gold IRA, and help you through the precious metals investment process. Don’t let unfamiliarity with precious metals vs. stocks be a barrier to your investing – learn more from Goldco today.

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