How Much Should I Invest In Precious Metals?

The question of how much of a portfolio should be invested in gold, silver or other precious metals is a topic of debate. The fact of the matter is that there is no clear answer to this question. Investors may have different goals or objectives, different tolerances to risk, different views on the economy and different ideas on portfolio diversification. Here we will look at some of the potential pros and cons of investing in precious metals. We will also look at some common recommendations as to what an appropriate allocation in precious metals may be.

Common Arguments Against Investing in Precious Metals

Precious metals do not pay dividends – Owning physical gold and silver or other precious metals does not give one the opportunity to earn dividend income. This is a very common discussion regarding these investments, as equity investments that pay dividends can potentially give investors the opportunity to accelerate portfolio growth.

Precious metals are costly – Precious metals are costly, and investors often pay some heavy premiums to purchase gold and silver. Precious metal dealers mark up the cost of bullion and coins in order to make a profit and stay in business. The investor, therefore, is buying gold or silver above the spot price. In addition, some coins and bars have collectability premiums attached to them, as well. These premiums can make the bar or coin very expensive relative to the current spot price of gold or silver.

Storage of precious metals may be an issue – Depending on the size of your precious metal holdings, secure storage of these metals can become an issue. Only so much gold and silver can be stored at home. When using a safety deposit box or a precious metals depository, additional cost will be added to the investment. These costs are paid each month, quarter, or year that the metals are held. This along with the fact that precious metals do not pay any dividends can make owning them a costly proposition. In addition, an investor’s access to their metals may be limited. For example, if an investor lives in L.A. his metals may be stored in the Delaware Depository. Accessing his metals will take time and money.

Liquidity Issues – Although many precious metals products are very liquid and easy to transact, many are not. This could potentially make cashing in a difficult thing to do — especially if it needs to be done quickly.

Precious metals can be volatile – Gold, silver and other precious metals can be very volatile and experience wild price swings. Precious metals can be driven by geopolitical events, currency events and government and central bank policies.

Common Arguments for Inclusion of Precious Metals in a Portfolio

Precious metals may offer diversification – Gold, silver and other precious metals typically have little correlation to stocks or bonds. Precious metals may potentially provide an effective way for investors to add diversification to their portfolios due to this low correlation.

Precious metals may provide a hedge against inflation – Gold, silver and other precious metals may potentially provide a hedge against inflation, or rising prices. Inflation, or the fear of inflation, is always a concern for investors. This is because rising prices can erode the purchasing power of money, making everything relatively more expensive. The idea of owning assets that may go up with rising prices in general is comforting to some investors.

Precious metals like gold and silver have been considered a store of value for thousands of years – Precious metals have a very long history of being a reliable store of value all over the world.

Precious metals carry no counter-party risk – Precious metals can be transacted without counter-party risk. Precious metals are tangible commodities and are not paper assets that must be guaranteed by governments or central banks.

Precious metals can potentially hedge depreciating currencies – Precious metals can potentially help offset depreciating currency values. As currencies weaken, their purchasing power weakens as well, making everything more expensive. Because gold, for example, is a dollar denominated commodity, when the dollar weakens gold prices may potentially rise.

Gold, silver and other precious metals are natural resources with finite supply  Due to the finite supply of precious metals, as demand goes up prices will likely go up, as well.

Precious metals may be a great insurance policy – Some consider gold, silver and precious metals to be a world currency. Governments can fail, banks and financial institutions can fail, and currencies can fail. Precious metals may potentially provide one with some peace of mind as they may be transacted all over the globe and are recognized for their value in most parts of the world.

Precious metals prices may appreciate – Although no one can see the future, it is plausible that prices for precious metals could go up as demand increases and supplies decrease. This price appreciation could potentially add value to a portfolio.

What Percentage of My Portfolio Should Be Allocated Towards Precious Metals?

There is no one size fits all when it comes to investing and allocating assets. Gold, silver and precious metals may potentially provide added peace of mind, but may also come with an opportunity cost. One must weigh these issues and attempt to strike a balance. Some investors may want to hold precious metals simply for potential scenarios that will likely never come to fruition. These are scenarios like currency collapses and financial institution collapses. While events of this nature are few and far between, they are possible. One must ask themselves how much investment capital they are willing to give up for this peace of mind. Here are a few questions one can ask themselves to try to determine if precious metals can play a role in their portfolio and, if so, how much:

  • Am I well-diversified or could my portfolio use more assets that have little correlation to stocks and bonds?
  • Does my portfolio contain assets which may act as an inflation hedge?
  • How important is liquidity to me?
  • Do I have concerns about geopolitical risks or the economy?
  • What is my risk tolerance?
  • Am I able to endure volatility in precious metals prices?
  • How important to me is portfolio income?
  • What is my investment timeline? Am I looking long-term?
  • Do I understand the risks involved investing in precious metals?

Of course, this list is by no means all inclusive, and there are other considerations to take into account, as well. In terms of what financial professionals may recommend, we have seen numbers that are all over the board from 1 percent to 20 percent. Where one may fall along this spectrum is dependent on a number of factors

We are not financial advisers and, as such, we recommend that anyone looking to allocate precious metals to their portfolio do their own thorough due diligence and research and draw their own conclusions. In addition, we recommend that one discuss the pros and cons of such investments with their financial adviser or professional. 

All Market Updates are provided as a third party analysis and do not necessarily reflect the explicit views of JM Bullion Inc. and should not be construed as financial advice.