How To Invest In Gold And Silver Stocks

How To Invest In Gold And Silver Stocks

The most straightforward approach to investing in gold and silver is to purchase one or more exchange-traded funds (ETFs).

The main advantage is that they are incredibly liquid, allowing you to buy and sell them from your brokerage account. This enables simple portfolio rebalancing and a cost-effective and hassle-free buying/selling process.

The Function of Gold and Silver in a Portfolio

Simply said, precious metals are a hedge against market volatility, political upheaval, currency weakening, and economic collapse.

Gold and silver have been used as currency for thousands of years due to their chemical uniqueness, physical rarity, and ease of malleability. While they might be volatile, they have traditionally proven to be excellent long-term asset storage vehicles.

Benefits

Precious metals have no credit risk, maintain their worldwide purchasing value over time despite inflation or currency depreciation, and are not highly associated with stocks, bonds, or real estate.

Downsides

Commodities, especially precious metals, produce no cash flows and can be highly volatile. Most precious metal miners have a history of bad management and significant financial losses.

Given all of this, the question of whether investors should purchase gold and silver is surprisingly contentious.

On the one hand, some despise the global financial system and invest nearly exclusively in precious metals. On the other hand, many mainstream portfolios have no exposure to precious metals, with some investors arguing that no reputable portfolio should include any gold or silver allocation at all.

This website is read by investors from all around the globe. Many of them don’t have to wonder why gold and silver are considered important assets to own. I have readers from Greece, Argentina, Turkey, Nigeria, and almost every country. Aside from the US dollar, most currencies have reached all-time highs for gold.

I believe that investors in certain countries, such as the United States, get too comfortable. They believe that many of the negative events that occur in other markets cannot occur on their own, even though the United States has experienced similar events in the past.

This website is read by investors from all around the world. Many of them don’t have to ponder why gold and silver are valuable items to own. I have readers from Greece, Argentina, Turkey, Nigeria, and nearly every country. Aside from the US dollar, most currencies have hit all-time highs in gold.

I feel that investors in some nations, such as the United States, become overly comfortable. They feel that many of the terrible events that occur in other markets cannot happen on their own, although the United States has already suffered similar disasters.

How much gold and silver should you have?

That is up to you and your circumstances. How old are you? Where do you dwell in the world? What is your overall financial status like?

I believe that 5% of a portfolio should be allocated to precious metals, with the possibility of increasing to 10% in some instances. If you invest too much, you risk missing out on the higher growth rates previously offered by other asset groups. However, having no allocation exposes you to risks that stocks and bonds cannot always mitigate.’

  • Famous Shark Tank investor Kevin O’Leary invests 5% of his wealth in gold bullion and gold ETFs. When the price of gold rises significantly, he sells some. When the price drops, he buys more.
  • Hedge fund billionaire Ray Dalio also suggests holding a 5-10% allocation to gold as part of an “all-weather” strategy, which is a portfolio that performs well in a wide range of economic scenarios.

I believe that both of these examples are acceptable and that a minor allocation to precious metals within a portfolio that otherwise consists mostly of stocks, bonds, and real estate is appropriate for many people.

Two Key Challenges with Precious Metals Investing

Learning how to invest in gold and silver is difficult because there are numerous disadvantages to doing it directly.

First and foremost, commodities, including precious metals, do not generate cash flows in the same way that a prosperous firm or an interest-paying bond does. Instead, they sit there, hoping for a price increase. Gold and silver are good at retaining their value against inflation over time, but they don’t accomplish much else.

Second, there are transaction fees involved with precious metals investing. When you purchase actual gold, a corporation in the middle makes a profit. They purchase it at wholesale costs, refine it into fine investment-grade gold, and sell it at retail prices.

Shipping expenses may apply, as may security and storage costs, as well as the possibility of theft or loss. If you invest in a precious metals ETF, you will pay an expense ratio that covers security and all administrative costs associated with operating the fund and its metal holdings.

So, not only does traditional precious metal investing not generate cash flows and instead rely solely on the metal’s price appreciation, but investors begin at a loss due to associated expenses along the way.

Physical precious metals can undoubtedly have a place in your net worth as a long-term investment, and I maintain a significant physical bullion allocation. Some investors use it to hedge against catastrophic risks, such as a national economic collapse, as well as inflation or currency depreciation.

However, it is also beneficial to have some revenue from the position. That is why my gold and silver investment approach includes a broad mix of direct exposure (via real bullion and certain ETFs), precious metal streaming/royalty companies, and select miners. The dividends from the companies cover the expense ratios of the ETFs and actual assets, giving the portfolio a self-sustaining precious metal hedge.

The remainder of this tutorial examines the advantages and disadvantages of owning precious metals in the form of 1) real gold and silver, 2) ETFs and options, and 3) miners and streaming/royalty firms, as well as how to approach gold and silver value.

Compare Top Investment Platforms

Platform  Type  Account Minimum Fees
Merrill Edge Online Broker $0 $0.00 per stock trade. Options trade $0 per leg plus $0.65 per contract
E*TRADE Online Broker $0 No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading volume.
Betterment Robo-Advisor $0, %10 to start investing 0.25% (annual) for investing plan or a $4/month fee for balances under 20K, 0.40% (annual) for the premium plan
Wealthfront Robo-Advisor $500 for investment accounts, $1 for cash accounts, $0 for financial planning 0.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers. 0.42%–0.46% for 529 plans
Empower Robo-Advisor $100,00 0.49% to 0.89%

How to buy gold and silver

Here are some popular ways to invest in gold and silver today:

Save for retirement with a gold or silver IRA

A gold IRA (individual retirement account) or a silver IRA can help you invest in precious metals for retirement. These self-directed IRAs allow you to keep actual gold, silver, or other assets in an account that is eligible for the tax benefits of a traditional IRA.

Because not all financial institutions provide gold or silver IRAs, you may need to open a new account even if you already have one; however, you do not need to open separate accounts if you wish to buy both types of metals. Another alternative is to invest in assets such as gold ETFs through your traditional IRA rather than physical gold.

Specialized IRAs may incur higher fees than conventional IRAs. You may incur one-time account creation costs, annual administration fees, and even separate storage fees for the custodian who holds your gold bullion. However, fees for gold and silver IRAs can vary depending on a variety of criteria.

Before you invest, keep in mind that precious metals are dangerous as you approach retirement. Although gold investing can benefit investors of all ages, it may be preferable for younger ones.

Consider speaking with a gold professional if you need additional information or have any queries regarding gold IRAs.

Buy into gold or silver ETFs

If you are already familiar with traditional investing, one of the simplest methods to purchase gold or silver is through exchange-traded funds (ETFs). Gold and silver ETFs trade much like ordinary stocks through your stock brokerage.

The ETF provider often owns physical gold or silver bullion, and the value of those precious metals is reflected in the ETF share price. This strategy also saves you the expense of storing actual gold yourself. The ETF provider may impose a nominal annual management fee for the fund. Gold ETF costs typically range between 0.20 and 0.40 percent of assets, although silver ETF fees may be significantly higher.

Consider individual gold or silver mining stocks

Another way to invest in gold or silver without purchasing gold bars and coins is through shares in mining firms. This is primarily an indirect investment. In theory, as the price of precious metals rises, so would the worth of the corporations that mine them. However, stock prices can be influenced by a variety of other factors, depending on how these organizations function.

You can acquire shares in certain mining businesses in the same way you would trade technology stocks. Alternatively, you might purchase an ETF that invests in several gold or silver mining firms. Mining ETF fees may be slightly higher than those for bullion ETFs.

Stick with physical gold or silver

Purchasing real gold or silver bullion is another way to invest in these commodities. This comprises gold and silver bars and coins. Bars and coins may contain designs or images that make them collectible.

Some companies offer actual gold and silver online and deliver the metal to you. However, this may cost more than other methods of purchasing precious metals. Some actual stores buy and sell gold and silver, although they frequently charge a premium. Physical gold and silver purchase prices may be much greater than the commodity’s current trading price, sometimes known as the spot price.

After purchase, you must determine how to safely keep the bullion. Depending on the amount purchased, this might be as easy as a safe in your home or require additional fees for safekeeping at a bank.

Method 1: Physical Gold and Silver Coins or Bullion

Purchasing real coins or bars is the most traditional means of investing in gold and silver.

The physical technique has the advantage of being the safest and least complex way to invest in gold and silver. You purchase some from a reliable dealer and keep it in a safe location.

However, it quickly becomes more sophisticated than that. Where do you keep it, and how do you ensure its safety?

I believe it is a good idea to keep some gold coins at home (along with an envelope containing a small amount of cash). Physical bullion is a good way to hold value away from the grid.

We’ve all seen locations devastated by economic or natural disasters where it’s beneficial to have some physical assets on hand. During a crisis, banks or electronic payment networks cannot always supply the necessary funds.

I’m not referring to zombie apocalypses here; rather, a typical major economic difficulty or natural disaster.

During Greece’s economic crisis in 2015, a bank run led to a limit of 60 euros per day for withdrawals. You’d have to wait in long lines only to get a small quantity of money.

When Puerto Rico was devastated by a hurricane in 2017 and the entire island lost power, businesses were unable to accept credit cards, and cash was required for everything. But many banks were closed, and others were limiting withdrawals to $100 per day. Again, there were long lineups at banks and a few operational ATMs.

That is why keeping some actual cash and gold/silver coins on hand for emergencies is a good idea.

However, once you reach large sums, it is not safe to store physical gold and silver at home. If you need more space, you should store it offsite in a secure location. This comes with frequent costs, which deplete your money. Historically, gold and silver prices have risen more faster than storage expenses, but the process can be turbulent.

Bitcoin is another asset type that is becoming increasingly popular for this purpose because it operates outside of the traditional financial system.

Method #2: Gold and Silver ETFs and Options

The most straightforward approach to investing in gold and silver is to purchase one or more exchange-traded funds (ETFs).

The main advantage is that they are incredibly liquid, allowing you to buy and sell them from your brokerage account. This enables simple portfolio rebalancing and a cost-effective and hassle-free buying/selling process.

Historically, these were relatively pricey, but they are becoming more affordable. Here are the main choices:

Gold: 

  • SPDR Gold Trust (GLD), Expense Ratio: 0.40%
  • iShares Gold Trust (IAU), Expense Ratio: 0.25%
  • SPDR Gold MiniShares Trust (GLDM), Expense Ratio: 0.18%
  • Aberdeen Physical Gold Shares ETF (SGOL), expense Ratio 0.17%
  • Sprott Physical Gold Trust (PHYS), Expense Ratio 0.46%
  • Perth Mint Physical Gold ETF (AAAU), Expense Ratio 0.18%

Silver: 

  • iShares Silver Trust (SLV), Expense Ratio: 0.50%
  • Aberdeen Physical Silver Shares ETF (SIVR), Expense Ratio: 0.30%
  • Sprott Physical Silver Trust (PSLV), Expense Ratio 0.67%

As ETFs become more prevalent, they tend to become less expensive.

The SPDR Gold Trust (GLD) ETF, for example, was created in 2004 and is relatively pricey. Then, in 2005, the iShares version debuted, which was slightly less expensive. Far later, in 2018, SPDR introduced its GLDM ETF, which is even cheaper.

If there is one negative, it is that they lack the “catastrophe insurance” aura that genuine bullion does. The majority of these ETFs are not redeemable for gold or silver, and you do not physically hold them. So if there is a zombie apocalypse and markets fall black, you are out of luck.

The only exceptions are the Sprott fund collection and the Perth Mint gold fund. These funds hold their metals solely in physically allotted bullion and are redeemable for gold and silver. These are safer to purchase and hold.

Some of the more liquid ETFs, such as GLD and SLV, can be used to generate revenue by selling options on them.

Here’s a little explanation of how to achieve that:
  1. Find an ETF that holds your desired metal, such as the iShares Silver Trust (SLV) or the SPDR Gold Trust (GLD), and that has a liquid options market.

2. Sell cash-secured put options on shares of that ETF at a strike price lower than the current market price.

3. If the put options expire without being executed, retain the option premium gains and resell the puts.

4. If the put options are exercised and you now possess shares of the ETF, sell covered call options at a higher strike price than what you paid for the shares, but above the current market price.

5. Continue selling covered calls until the options are exercised and the stock is sold.
Start afresh, selling cash-secured put options at a strike price lower than the current market price.

6. Continue selling covered calls until the options are exercised and the stock is sold.
Start afresh, selling cash-secured put options at a strike price lower than the current market price.

I refer to it as option weaving. You move in and out of the same stocks by selling puts and calls, earning option premiums at each stage. This method naturally leads to a pattern of buying low and selling high, while also earning option income.

When you sell an option on a stock or an ETF, you give someone the right, but not the responsibility, to purchase or sell the shares from/to you (depending on whether it’s a call or a put) at a specific price and time frame. In exchange for that, the option buyer pays you a cash premium upfront. If you’re not familiar with this, look at my guides:

  • Cash-Secured Puts Guide
  • Covered Calls Guide

Compare Top Investment Platforms

Platform  Type  Account Minimum Fees
Merrill Edge Online Broker $0 $0.00 per stock trade. Options trade $0 per leg plus $0.65 per contract
E*TRADE Online Broker $0 No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading volume.
Betterment Robo-Advisor $0, %10 to start investing 0.25% (annual) for investing plan or a $4/month fee for balances under 20K, 0.40% (annual) for the premium plan
Wealthfront Robo-Advisor $500 for investment accounts, $1 for cash accounts, $0 for financial planning 0.25% for most accounts, no trading commission or fees for withdrawals, minimums, or transfers. 0.42%–0.46% for 529 plans
Empower Robo-Advisor $100,00 0.49% to 0.89%

Method 3: Miners, Royalty/Streaming Companies

There are several gold and silver mining firms to invest in. You can also invest in a few ETFs that track a portfolio of miners.

The advantage of miners is that they can theoretically avoid many of the problems associated with precious metals investing. Miners generate cash flows and frequently pay dividends, whereas precious metals do not and are expensive to operate.

However, gold miners are leveraged against gold. In extreme circumstances, the price of gold may double or halve over several years (from, say, $800 per ounce to $1,600 per ounce, or vice versa), while gold miner stock values could rise or fall 5-10 times.

Assume a gold miner has a free cash flow break-even point of $1,000 per ounce; when gold exceeds that level, it enjoys positive free cash flow. In layman’s words, if the current price of gold is $1,100/ounce, the gold miner earns around $100/ounce in profitable free cash flow per year for each ounce mined.

If the price of gold rises to $1,500/ounce and the gold miner’s expenses remain constant, they suddenly generate $500/ounce in lucrative free cash flow.

Their earnings increased 400% although the price of gold rose just 36%. If gold falls to $800 per ounce, the gold miner gets into the red, loses money quickly, accumulates debt, and collapses to a rock-bottom share price.

If you are an investor in gold, you can wait out any price declines.

Gold miners, on the other hand, are concerned that if gold remains low-priced for an extended period, they will go bankrupt before the price of gold recovers. If demand collapses, gold might fall below all-in-sustaining costs (AISC) for years, given annual output only accounts for around 2% of the present gold supply.

In other words, the market can remain irrational for longer than miners can be solvent.

Furthermore, gold miners have a long history of poor management. They do not keep costs under control, thus they miss out on the most profitable increases in gold prices. They frequently make poorly timed acquisitions when precious metals are highly priced, resulting in a value trap when values return to normal. As a category, they have limited insider ownership and CEOs who are compensated exceptionally well for the size of their firms.

As a result, the gold mining industry as a whole has had absurdly poor performance relative to the metal they’re mining.

While few standout businesses, such as Randgold Resources, understand how to build shareholder value, the great majority of gold mining equities are simply bad. Many gold mining equities are trading at lower levels than they were in the 1990s.

I occasionally dabble in a specific gold or silver miner (including selling options to profit from volatility), but I generally avoid this industry.

Gold and Silver Royalty/Streaming Companies

When it comes to precious metals companies, I prefer to focus on gold and silver streaming/royalty corporations. If you’re seeking ways to invest in gold and silver, these companies are worth considering.

Rather than operating mines, streaming/royalty corporations finance them. They contribute funds upfront to construct a mine, and in exchange, once the mine is operational, they can buy a set amount of gold and silver at significantly lower market rates, or receive a portion of the output.

Essentially, a streaming/royalty corporation manages a portfolio of existing streams while constantly making fresh investments to obtain future streams.

Gold and silver miners prefer streaming/royalty transactions because if they issue traditional debt, they are stuck with it regardless of the price of gold or silver. However, by accepting money in exchange for a streaming/royalty agreement, their streaming/royalty obligation is tied to the price of the metal they are mining. In other words, their loans fluctuate along with the price of the metal and their profits, making it less risky for them.

Streaming/royalty firms are a less hazardous and leveraged alternative for investors to profit from gold than actual miners. In addition, unlike miners, streaming/royalty corporations have typically outpaced gold prices. Here’s an example of Royal Gold’s performance, which isn’t even the best:

They’ve also paid dividends the entire time, so their overall return is greater than represented.

There are just a few publicly traded precious metal royalty and streaming firms.

On the one hand, there are the main three established ones:

  • Franco-Nevada
  • Royal Gold
  • Wheaton Precious Metals

These three are the oldest, with sizable portfolios of current streams/royalties.

On the other hand, there are numerous up-and-coming players:

  • Osisko Gold Royalties
  • Sandstorm Gold
  • Metalla Royalty and Streaming
  • Maverix Metals

These companies are younger and have a greater percentage of possible future streams under development. They are riskier, but if their investments succeed, their potential upside is significant.

Best Online Brokers

Company  Account Minimum  Fees
Fidelity Investments  $0 No commission for stock/ETF trades. Options are $0.50-$0.65 per contract, depending on trading volume.
Interactive Brokers $0 No commission for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing.
Charles Schwab $0 $0 for stock/ETF trades, $0.65 per contract for options.

Gold Investing 101- Uses and Valuation

Now that we’ve examined the various ways in which investors might invest in gold and silver, let’s look at how to value them.

Gold has been used as currency in various parts of the world for thousands of years.

Unlike most metals, it is resistant to oxidation and corrosion, allowing it to maintain its worth over millennia. It is incredibly flexible, conducts electricity well, and is visually appealing.

Approximately 85-90% of gold production is used to make jewelry and bullion, with only 10-15% going into industrial and technological applications. This makes it more like a currency than a commodity; its use does not drop during recessions, but rather increases in price as fear and uncertainty rise.

Still, a tiny amount of gold is employed for a wide range of useful purposes. For example, as an electronics engineer in the past, I’ve utilized gold contacts for high-performance cables and I/O systems, thanks to the combination of high conductivity and good corrosion resistance.

Valuing Gold

The issue of what drives the price of gold or how to value it is a philosophical and economic topic of contention among experts, with no surefire explanation.

Its price at any given time is determined partly by public emotion (economic fear or confidence), partly by real interest rates (because cash that earns actual interest returns in a bank may be more desirable than holding gold that produces no cash flow), partly by inflation or perceived future inflation (against which gold holds its value very well), partly by energy costs and other costs associated with mining it out of the ground (which can affect supply and demand

For most of the United States history since its inception, an ounce of gold was worth around $20 because money was defined by its quantity. This increased throughout the Civil War but then decreased shortly after. In the post-Depression 1930s, gold was valued at around $35 per ounce.

Eventually in the 1970’s, gold was divorced from US money, and so it has inflated in its face dollar value ever since. The highest reported price was nearly $1,900/ounce in mid-2011, amid a gold bubble.

So, is it possible to value gold fundamentally? There are a few simple solutions.

Gold to Money Supply

There is approximately one ounce of pure gold for every person in the world, and the supply of gold grows at a rate roughly equal to population growth. Thus, the amount of gold per person is roughly constant.

In contrast, most central banks around the world continue to produce greater units of currency per capita. Even though the amount of gold per person remains essentially constant, the number of dollars per American, the number of yen per Japanese person, and the number of euros per European all continue to rise.

In theory, the long-term price of gold should correspond to the rise of the per capita money supply. In the United States, this has averaged more than 5% per year over the long run. Another way to put it is that because the number of dollars per person is increasing while the amount of gold per person remains constant, the dollar should devalue against the price of gold at the pace of new money production per capita, which is approximately 5% per year on average.

And, as shown in the chart above, gold prices have risen at the same rate as the per capita money supply, albeit with greater volatility. During periods of currency instability in 1980 and 2011, due to inflation and money printing, respectively, the price of gold rose far higher than the growth of per capita money supply but subsequently returned to the trend.

During the late 1990s and early 2000s, there was a protracted period of strong economic development and high real interest rates, which briefly reduced gold prices relative to the growth of the money supply, but they soon returned to the trend.

As a general rule, I’m happy to acquire gold as long as it doesn’t exceed the money supply trend. In the late 1990s and early 2000s, I was in my teens and began collecting little gold and silver coins. I then sold all of my gold and silver coins in 2011 during a boom and began buying again in 2016 when prices returned to trend.

All-In Sustaining Costs

Gold mining firms’ all-in-sustaining costs (AISC) reflect the partial costs of producing gold and are reported per ounce. If the price of gold per ounce falls too near to or below these levels, gold miners become unprofitable. They become unprofitable above that level, however, this is an industry-defined threshold.

AISC is a statistic published by the World Gold Council and provided by several gold mining corporations that aims to standardize reporting on mining operations. It is currently used with other metals as well.

Top miners today have AISC prices below $1,000/ounce, with the lowest at $800/ounce or as low as $600/ounce for select big mines. That is how much money it takes to produce one ounce of gold. If the gold price falls to that level, gold miners will lose money since it costs them more to manufacture the gold than it is worth when sold.

Over the previous decade, the cost of mining one ounce of gold has climbed substantially. Energy and labor prices have had a substantial impact on costs. Exploring new deposits in challenging regions, obtaining licenses despite reasonable concerns about environmental damage, and establishing mining infrastructure is a lengthy and costly process. And, as the easier gold areas are mined out, the ones that remain are tougher and more expensive.

Furthermore, the free cash flow (FCF) breakeven point is often around 50% greater than the AISC per ounce. So, if a corporation reports an AISC of $750/ounce, it will normally require gold to be around $1,050/ounce to generate positive free cash flow that year. Of course, this varies by company and depends on a variety of factors, but the general rule is that AISC is an understatement of how much it costs to mine gold successfully over time.

A decent sanity check is to look at three or four of the biggest gold producers regularly and see if they have a lot of positive free cash flow as a whole. This might help you determine whether gold is overvalued or undervalued.

The point is that gold has a reasonable price range. If it falls below $1,200 per ounce, less efficient gold miners may cut operations, lowering global gold supply and providing a natural floor for how low the price of gold should fall. If it drops below $1,000, even the most efficient gold miners will struggle to make a profit. There is no hard floor for gold prices, but the lower they go, the more production is decreased, causing the supply/demand balance to gradually shift higher.

The total amount of gold extracted since the beginning of time is impossible to determine with certainty, however, it is usually estimated to be less than 200,000 tons and less than a cube 25 meters on each side. That’s a small amount of gold for the entire world.

Gold’s top discovery year was 1995. The industry has never found as much gold in a single year as it did that year, and the discovery charts show a definite pattern. It takes around two decades to turn a gold discovery into a functioning gold mine because of the difficulty in obtaining regulatory permissions and the lengthy construction process of creating infrastructure for a gold mine.

As a result, many industry experts believe we are nearing peak gold production right now, around 2020, because we are roughly 25 years removed from that peak discovery in the mid-1990s, when maximum production may be coming online alongside somewhat high gold prices that justify the output.

The long and short of it is that it is worthwhile to monitor gold miners to determine how profitable they are at present gold prices and whether they can invest enough money in new gold exploration to replace their underground deposits. When gold becomes too cheap, production may decline until the supply/demand balance pushes higher gold prices and increased exploration.

Interest Rates

The real interest rate is the difference between a safe investment (such as a Treasury bond) and inflation. During periods of extremely low-interest rates, the interest yields on premium savings accounts and Treasuries may be lower than inflation, implying that consumers who save diligently are nevertheless losing purchasing power. In contrast, during periods of higher interest rates, depositors in those instruments may get a real return that exceeds inflation.

Gold is an ancient kind of money that has retained value over millennia by keeping up with inflation in fiat currencies, albeit with significant volatility.

If savers have the choice between holding gold, which keeps up with inflation and maintains global purchasing power over time even in the event of a disaster, and holding fiat currency, which is currently paying negative real interest rates (rates that do not keep up with inflation, resulting in purchasing power loss), gold suddenly becomes quite appealing. Higher demand for gold might result in higher gold prices.

On the other hand, if investors can earn a respectable real interest rate above inflation on their savings accounts and safe bonds, the value of storing gold decreases. Lower demand for gold can result in lower gold prices.

However, market instability also has an impact on gold prices. When investors are worried, they generally turn to gold, driving up the price. As a result, while interest rates play an important role in gold valuation, they are far from the sole factor involved.

Silver Investing 101- Uses and Valuation

Silver has the highest electrical and thermal conductivity of any metal, even more so than copper. However, unlike gold, it tarnishes easily.

Silver is employed in trace amounts in almost every electrical gadget as well as a variety of other industrial uses such as glass and solar panels, making it a more functional metal in practice than gold.

This appears to be a good thing, but when a recession occurs and economic output decreases, industrial demand for silver declines, and the price of silver typically falls. This makes it overly connected with equities to serve its primary goal of providing downside portfolio protection. This is also true for platinum and palladium, which tend to fall in price during recessions similar to equities since they are employed in industry, such as catalytic converters on automobiles.

The “good” news for silver is that it is more volatile than gold. That means that savvy investors can make a lot more money by selling options on silver ETFs or miners. Volatility can be beneficial for long-term investors.

You can value silver in the same way that you would gold. Pay attention to the current AISC for silver per ounce and compare it to the historical inflation-adjusted pricing. Take note of the true interest rates on secure investments.

The Gold-To-Silver Ratio

For thousands of years, gold was valued 10-20 times more than silver. Although there were occasional transient outliers, the ratio always returned to that range when looking at Greece, Rome, Japan, China, or the Middle East over a sufficiently long period.

During the early years of the United States and Napoleon’s reign in Europe, the price ratio was approximately 15-to-1.

During the last century, however, the ratio has averaged around 50-to-1, which is significantly higher than in thousands of years of global history. But during the last century, it has ranged between 10-to-1 and 100-to-1. Gold is fickle; silver is even more so.

Between 1980 and 2011, when gold reached its highest inflation-adjusted levels in modern history, silver surged even higher (compared to its typical price), closing the margin to less than 15-to-1. However, during eras when both gold and silver were cheaper than their historical norms, gold’s ratio to silver increased by more than 50-to-1, sometimes reaching 100-to-1.

Even during the last ten years, the price ratio has ranged between 30-to-1 and 86-to-1. As of now, the ratio is 86-1. Gold has always been overrated in comparison to silver, and silver is currently only slightly higher than its AISC. As a result, I believe silver will rise in value.

Interestingly, while silver is around 20 times more common in the earth’s crust than gold, it is significantly less abundant above ground. This is because central banks and governments stockpile gold, but not silver. Those large institutions hold very little silver, which is widely disseminated in electronics, glass, silverware, jewelry, medical supplies, and other items.

When windows and electronics are discarded, much of it ends up in landfills. However, no one tosses out enormous quantities of gold. The amount of silver in the globe is significantly more difficult to measure than the amount of gold, which has a very close consensus estimate.

If anything, this justifies the historical ratio of almost 15-to-1. However, for whatever reason, gold has recently outperformed silver in terms of price. Their supply and demand pressures are determined by distinct markets, and their mining features and costs differ. Nowadays, silver is frequently produced as a byproduct of other mines.

When you see that silver is reasonably valued or undervalued in terms of 1) historical inflation-adjusted pricing, 2) gold-to-silver ratio, and 3) current AISC of silver (and silver firms do not generate a lot of free cash flow), it makes sense to have some silver exposure.

How Do I Invest in Gold and Silver for Retirement?

Investing in gold through a retirement plan can provide a hedge against inflation as well as exposure to an asset that has historically served as a haven investment during times of financial market volatility. You can easily obtain exposure to gold in a traditional IRA by acquiring shares in gold ETFs, as most brokerage IRAs allow you to designate certain ETF investments. To possess physical gold in a tax-advantaged account, you must first open a self-directed IRA with a custodian and an approved depository. Finding the appropriate business for a gold IRA might make things a lot easier.

What’s the Best Way to Invest in Gold?

There is no single ideal approach to investing in gold. If you want to possess physical gold, bullion bars are the most cost-effective option because the aesthetics are less important than the purity and weight, so the markup is lower. If you want to use gold as a financial hedge in your portfolio, an ETF is the best option due to its liquidity and convenience of buying.

If you want to profit from gold price movements, options on gold futures need the least amount of capital and provide the most leverage. The only “bad” ways to invest in gold are bullion coins and jewelry because their aesthetic value makes them more of a collection than an investment.

Should I Invest In Gold?

Gold does offer diversification from market assets, but that doesn’t imply it’s right for you. People who use gold as a financial hedge seek to mitigate the risks associated with having their primary wealth invested in financial markets. If you don’t already have any stock, bond, or ETF assets, you’ll probably obtain a better return by investing in those first before considering gold.

Similarly, a person who invests all of their wealth in gold foregoes a significant amount of regular return and has seen protracted periods of underperformance relative to the market. However, if you’re interested in investing in gold, an ETF is a low-risk and reasonably inexpensive method to get started. If you choose, you can use physical gold instead. Just remember that if you know to invest well in something, it is worth thinking about.

In Conclusion

Purchasing alternative assets, such as precious metals, can help you weather economic volatility over time. There are numerous ways to purchase gold and silver, so before deciding on a strategy, evaluate your investment objectives. If you enjoy the concept of physically holding gold or silver coins, for example, you may go that path; however, if you prefer the liquidity and relative convenience of trading stocks, you may purchase an ETF or shares of mining firms.

Similar Posts

Leave a Reply

Your email address will not be published. Required fields are marked *