With recent events in the economy, more and more Americans are feeling nervous about the well-being of their investments. There’s an eerie feeling that we’re about to see a repeat of the 2008 financial crisis, but possibly on an even larger scale. And that is prompting a flight to safety.
Safe haven assets can take many forms, with cash and US Treasuries traditionally playing a role as generally accepted safe assets. But with inflation still at over 8% and showing no signs of coming down anytime soon, investors are looking for safe haven assets that can also serve as an inflation hedge. And that’s why so many are now taking a look at precious metals.
Gold and silver have traditionally served as both safe haven assets and inflation hedges, and given their performance both during the 1970s stagflation and in the aftermath of the 2008 financial crisis, they’re getting a second look today.
Benefits of Investing in Precious Metals
There are numerous benefits to investing in precious metals, but there are four primary ones that stand out.
Diversify Your Portfolio
First and foremost, precious metals help to diversify your investments. Many investors stick to conventional financial assets such as stocks and bonds, and consider a mix of various financial assets to be sufficient diversification. But if all of your assets are dependent on the health of Wall Street to perform well, you’re not really diversified.
Gold and silver are often considered countercyclical assets in that they tend to perform well when financial assets aren’t performing well. So by diversifying your portfolio with gold and silver, you position yourself to help mitigate losses during financial downturns.
Many investors who hold assets in tax-advantaged accounts such as a 401(k) or IRA may not realize that they can diversify those holdings into gold or silver. Many 401(k) plans don’t offer any sort of exposure to precious metals or commodities, and many brokerages that offer IRAs stick to conventional financial investments.
But with a gold IRA or silver IRA, you can buy gold and silver and benefit from the same tax advantages as any other IRA account. And with tax-free transfers or rollovers from your existing 401(k), 403(b), TSP, IRA, or similar retirement accounts into a gold IRA or silver IRA, you can easily diversify your retirement savings with gold or silver.
Hedge Against Inflation
Gold and silver have also served as hedges against inflation for centuries, and for good reason. Paper currencies have come and gone over the years, but gold and silver remain. No matter how worthless a paper currency becomes, gold and silver always retain value because of their universal appeal as a safe haven asset.
Gold and silver tend to maintain their value over the long run, and retain their purchasing power even when currencies lose theirs. While the US dollar has lost 87% of its value since 1971, gold has gained over 4,800%.
Protect Against Loss
Because of the countercyclical nature of gold and silver, they tend to gain in value at times when markets are falling. During the 2008 financial crisis, for instance, gold gained 25% while markets lost over 50%. And in the aftermath of the crisis gold ended up gaining 267% and silver gained over 540%, while markets struggled to regain their pre-crisis footing.
Investors who had the foresight to invest in gold and silver before the crisis could have seen fewer losses than those who remained in markets. For instance, a portfolio that invested 30% in gold and 70% in markets could have seen losses of just over 30% by March of 2009, versus losses of well over 50% for those who remained 100% in markets.
That mixed gold portfolio would also have recovered quicker, and even this year would have been neck and neck with one that was 100% in markets. Many investors are banking that gold and silver could see that same type of performance during the coming recession.
It’s important to remember that having a well-diversified portfolio that includes gold and silver doesn’t mean that you won’t lose money. It just means that you could end up reducing your overall losses and possibly speeding up your recovery from loss.
Store of Value
Gold and silver have served as the ultimate store of value for millennia. Gold has always been synonymous with wealth, and even central banks retain ownership of gold because they realize that gold is the ultimate form of money.
One thing is certain, that gold and silver will never go bankrupt like companies that issue stocks and bonds. They will never become so worthless that it takes wheelbarrows full to buy groceries.
Advantages of Gold vs. Silver
One of the questions that confronts precious metals investors, particularly first-time investors, is whether they should buy silver or gold. Here are a few of the advantages gold has versus silver.
Gold’s ability to act as a safe haven and an inflation hedge is well known. And anytime precious metals are mentioned, gold is the first metal that comes to mind.
That reputation is well earned, and so it’s not surprising that gold gets all the attention. Add to it the fact that gold coins never circulated that much in commerce and you have a rarity effect that adds to gold’s mystique.
Many of the best known bullion coins are also gold coins, such as the South African Krugerrand, the American Gold Eagle, the Canadian Maple Leaf, or the UK Sovereign. Gold has that ability to attract attention that silver doesn’t.
Compact Store of Wealth
Gold is also an incredibly compact store of wealth. $50,000 worth of gold can fit in your pocket. And hundreds of thousands of dollars worth of gold can fit in a purse.
Try that with silver. $50,000 worth of silver would require over 2,500 ounces, which might fit inside a duffel bag or suitcase but would weigh over 80 pounds.
That’s why the international gold standard became the norm for commercial transactions, because large sums of wealth could be transported and transferred far easier with gold than with silver.
Finally, gold has an advantage versus silver in that its price is generally more stable, both on the upside and downside. Gold’s primary uses are for jewelry and investment, and that demand tends to be relatively stable. If you’re looking for long-term price stability, gold may have the edge.
Advantages of Silver vs. Gold
Just because gold has some advantages doesn’t mean that silver doesn’t have any. After all, there’s a reason that silver remains a popular investment metal. Here are some of the advantages silver has over gold.
The silver price is significantly lower than the gold price, which is psychologically beneficial to many investors. Even if you’re buying $100,000 worth of precious metals, you’ll get more physical “stuff” when you buy silver than when you buy gold.
In fact, right now you could get more than 80 times as much silver as gold, assuming you’re able to buy at spot prices. Some people just like to have the feel of having a lot of coins, and 20 large silver coins certainly can make you feel like you own something of value, versus one small gold coin that’s not much larger than a quarter.
Use in Everyday Transactions
Because silver’s value is lower, it always was the preferred metal for everyday transactions at point of sale. Older Americans may still remember when silver coins circulated as money.
If the US monetary system breaks down, there’s a chance that gold and silver could reassert their role as monetary metals. And many investors buy silver specifically to have on hand in case they need to be able to use precious metals in everyday commerce.
Silver coins are available in numerous different sizes, and are perfectly suited for smaller transactions than gold. And that “just in case” scenario is one that many investors are preparing for.
Potential for Greater Upside
Silver also has the potential for greater upside gains than gold, which is one reason some investors prefer silver to gold. In the aftermath of the 2008 financial crisis, for instance, silver’s gains were more than double those of gold, with silver increasing in price over 540%, while gold was up only 267%.
These kinds of price moves are often overlooked, and certainly aren’t appreciated by a great many investors, but they’re an example of how silver can really catch up to gold during periods of high precious metals demand, such as during and after recessions.
Other Considerations for Gold vs. Silver
There are a few other considerations that should be taken into account when deciding on gold or silver.
Industrial vs. Investment Demand
The first relates to the sources of demand for gold and silver. As we said before, gold’s primary demand comes from jewelry and investment. There is some industrial demand for gold, but it isn’t a primary factor in gold demand.
Silver, by contrast, is in greater demand from industry. Solar panels, for instance, are quickly becoming a primary source of silver demand, as photovoltaic cells require silver to function. Industrial demand normally makes up roughly half of silver demand, with the rest coming from jewelry, silverware, and investment.
When silver demand from investors picks up, that really boosts overall demand for silver and helps to drive up the price. We could see the silver price pick up in the coming years if the recession being forecast becomes severe, or if inflation becomes worse or becomes firmly entrenched.
Gold-Silver Price Ratio
Gold and silver prices fluctuate in relationship to one another, with the historical relationship being roughly between 15:1 and 16:1, meaning that one ounce of gold would buy 15-16 ounces of silver.
In recent years that relationship has fluctuated, with the ratio varying between about 10:1 and 120:1 over the past 50 years. And in the past five years that ratio has varied between 65:1 and 112:1.
This fluctuating relationship means that at times silver is overvalued relative to gold, and at other times gold is overvalued relative to silver. Some investors who buy gold and silver on a continual basis will look at the gold-silver price ratio and assess which metal they think is overvalued, then buy the undervalued metal in the hope that it will appreciate in price.
Is Gold or Silver Right for You?
The decision on whether to buy gold or silver is a personal choice that is dependent on your unique financial situation. For some people, gold may better satisfy their investment needs. For others, silver is the better choice. And for still others, it makes more sense to get both.
Both silver and gold offer the possibility of asset protection, wealth preservation, and portfolio diversification. Both can make great gains during times when markets are down and the economy is struggling. And both have been treasured by Americans looking to safeguard their savings for decades.
Goldco is a leader in the precious metals industry, and has surpassed $1 billion in precious metals placements in its history. Thousands of our customers have bought gold and silver from us, and we continue to serve many more customers who come to us every day looking to protect their hard-earned wealth with gold and silver. If you’re looking to protect your assets with precious metals, give Goldco’s experts a call today.