The key to an awesome precious metal coin collection is diversification. While it’s all well and good to have only Proof American Silver Eagle coins, wouldn’t your collection be that much more impressive if you had rare issues of the Proof Canadian Silver Maple Leaf, Proof Australian Silver Kookaburra, or some of the many historic US coins like the Morgan Silver Dollar?
Just as a diverse selection of coins enhances the appeal and value of your coin collection, so too can diversification enhance the stability and power of your investment portfolios. As more and more investors turn to the safe haven of gold and silver, it’s important to have a brief look at the value of diversification and the role of precious metals in enhancing that diversification.
This is the second installment in our blog series that comes directly from our Facebook community. While this week’s blog is focused intently on investments, diversification, and the role of precious metals, this piece is entirely based upon outside research and does not constitute financial advice on behalf of JM Bullion.
Why Diversification Matters
According to US News & World Report, diversification is “one of the basic building blocks of a solid portfolio.” As the article in US News points out, the term diversification is an elaborate term reminding you not to place all of your money or assets in one arena. A well-balanced investment portfolio would ideally have a healthy mixture of stocks, bonds, and cash. Within each of these categories you would have diversified plans that make use of the strengths and minimize the weaknesses of cash savings accounts, stocks, bonds, mutual funds, ETFs, private equity, and various other investments.
For example, consider an investment portfolio that was heavily or entirely dependent upon oil and related refining businesses. During the height of the Great Recession and the more recent fracking boom those investments would have skyrocketed along with the cost of oil and expansion of the refining industry. However, as oil prices plunged to lows not seen in decades in 2014 and 2015, remaining flat this year, all of your gains would have been wiped out. On top of that, you’d likely have lost some if not all of your initial investment funds as well.
Diversification helps to insulate your investment portfolio from the ebbs and flows experienced by different industries and assets. Oil and gas funds are a great tool in a well-balanced portfolio, helping to boost overall gains when the entire economy rises, but protecting against major losses when the rest of the economy sinks but oil stays strong, or vice versa should oil shrink while the rest of the economy grows.
The Role of Precious Metals
As already discussed, asset allocation and diversification are critical to any investment strategy. A diversified portfolio across different classes of assets provides balances and reduces the risk of loss. As such, gold and silver can play a pivotal role in helping bring balance to your investments. Goldline notes that:
“The US Mint reports many investment experts believe that adding gold to a portfolio improves performance, ‘because the forces that determine gold prices usually differ from, and in many cases counter, the forces that determine the price of many financial assets. Investment advisors often suggest that this relationship may help to reduce portfolio volatility.’”
A perfect example of this is the relationship between paper currencies and the value of gold or silver. When global economies are humming along and foreign reserve banknotes gain in value, gold and silver tend to drop. However, weakening paper money, such as the plummeting Sterling Pound (GBP) can send gold and silver prices up. In either case, paper currencies can rise and fall, but precious metals always retain their intrinsic value.
The true value of gold and silver in your investment portfolios is the almost complete lack of correlation between gold and stocks. According to Jeff Christian, managing director of the CPM Group, a commodities research consulting firm, the correlation between the two is “virtually zero.” According to US News & World Report, the annualized return for gold bullion from 2001 to 2014 was just over 12%. This further cements the belief that gold allocation, and to a lesser degree silver, can protect and enhance returns while reducing volatility.
3 Ways You Could Diversify with Gold, Silver, and Other Precious Metals
The very same US News article just referenced points out three ways you could diversify with precious metals, but we’ll only cover them briefly as we are not offering financial advice herein:
- Bullion Coins: Popular products like the American Gold Eagle, American Silver Eagle, and Canadian Maple Leaf help diversify a portfolio, but only provide a boost to your holdings when prices rise.
- ETFs: Some investors add gold and silver to their investments through baskets of securities that trade like stocks. This allows individuals to buy singular shares of ETFs backed by physical gold.
- Gold Stocks: Finally, you could buy stocks in companies that mine for gold.
Thanks to Gary Kline!
JM Bullion would like to thank Gary Kline for entering our recent contest on the JM Bullion Facebook page, and asking us to cover investment diversification and the role of precious metals in that process. Gary’s submission was chosen as our runner-up and featured in the second of three blog posts we put out.
Again, JM Bullion would like to remind our readers that the information presented above represents a broad overview of this concept, and is not a replacement for the advice of a trained, certified financial advisor.
