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How Much Should I Invest in Precious Metals?

What percentage of a balanced investment portfolio to allocate to Gold or other Precious Metal investments is a number that is widely debated by experts and amateurs alike. The simple fact is that there is no single, definitive answer to this question. Every investor has different needs and objectives, a different tolerance for uncertainty, different views on the economy and different standards for portfolio diversification. Here, we will briefly discuss some of the pros and cons of investing in Precious Metals and look at some of the more commonly-held thoughts regarding as to what an appropriate allocation for Precious Metals investment might be.

Common Arguments Against Investing in Precious Metals

Precious Metals do not pay dividends:

Holding Physical Gold and Silver does not provide earned dividend income. This is a common argument against Precious Metal investments, as equity investments paying dividends have the potential to accelerate portfolio growth.

Precious Metals require a large cash outlay:

Precious metals can be costly, and investors may pay considerable premiums to purchase Gold and Silver. Dealers charge whatever they want to maximize their profits. The investor cannot purchase Gold or Silver at the spot price. Further, some coins and bars bear high numismatic premiums as well. It is difficult to get good value for your investment dollar because of dealer premiums.

Precious Metals storage may be challenging:

Depending on the volume of your Precious Metal holdings, secure storage of your investment items can become an issue. The average house can only securely store so much Gold and Silver. Using a safety deposit box or a Precious Metals depository accrues another fee to the investment each month, quarter, or year that the pieces are held. Additionally, an investor’s access to their property may be limited by bureaucracy or logistics.

Liquidity Issues:

Although Precious Metal products are widely thought of as very liquid, many are not. This can make cashing in difficult and if you need funds quickly that can be frustrating.

Precious Metals may be volatile:

Gold, Silver and other Precious Metals can be very volatile on the open market and will expose investors to wild price swings. Precious Metal prices may be driven by geopolitical politics and events.

Common Arguments in Favor of Including Precious Metals in a Portfolio

Precious Metals can offer diversification: The market price of Gold, Silver and other Precious Metals products generally moves independently of stocks or bonds. Precious Metals add diversify investment portfolios with an investment product free from the volatility of the stock market.

Precious Metals provide a possible hedge against inflation:

Precious Metals have the potential to provide a hedge against inflation. Inflation is a major concern for serious investors; rising prices can erode the purchasing power of money, devaluing your investments. The idea of owning assets that generally rise in tandem with product costs in general comforts some investors.

Precious metals have been prized as currency for literally thousands of years:

Gold and Silver have a very long history of being a reliable for of wealth all over the world.

Precious metals have no attendant counter-party risk:

Precious metals can be transacted wholly free from counter-party risk. Precious metals are tangible commodities, not paper assets, and require no backing.

Precious metals may possibly hedge depreciating currencies:

Gold and Silver have the potential to help offset currency depreciation. When currencies weaken, their purchasing power is lessened, making everything more expensive. Because Gold is denominated in U.S. dollars, when the dollar weakens Gold prices could rise.

Gold and Silver are natural resources with finite supplies:

Due to the finite supply of Precious Metals, increased demand may drive prices up as well.

Precious Metals may provide insurance:

Many people think of Gold, Silver and other Precious Metals as something like a world currency. Governments can topple, banks and financial institutions may fall, and currencies can fail, but Gold will always be Gold.

Precious metals may appreciate:

Although no one has the proverbial crystal ball, it is plausible that Precious Metal prices could increase with demand. This price appreciation has the potential to add value to a portfolio.

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

There is single, definitive answer when it comes to allocating investment resources. Precious Metals including Gold and Silver might possibly provide peace of mind to a nervous investor, but may bear an attendant opportunity cost. One must consider the issues and try to find their sweet spot. Some investors want to own tangible wealth in case of hypothetical situations that are unlikely to ever come to pass. These are scenarios like the collapses of fiat currency and the Government of the United States. While events of this nature are rare, they have happened. One must weigh their feelings and determine how much investment capital they are willing to devote to emotional security against a rare occurrence. Here are a few questions to help you determine what role Precious Metals should play in your investment portfolio:

  • Is my portfolio well-diversified or could I use more assets that are untethered to stocks and bonds?
  • Does my portfolio contain assets which may provide a hedge against inflation?
  • How important is liquidity to me?
  • Do I have concerns about the economy or political climate?
  • What is my tolerance for risk with investments?
  • Am I able to ride out market volatility in Precious Metals prices?
  • Do I need continual portfolio income?
  • What is my investment timeline?
  • Do I fully understand the risks associated with investing in Precious Metals?

Naturally, this is not an exhaustive list and there are other factors to consider along with those listed. Financial professionals variously recommend percentages from 2 to 20 as a reasonable portion of an investment portfolio to devote to Precious Metals. Where you may comfortably rest on that spectrum depends on you

The writer is not a licensed financial adviser strongly recommends that anyone wishing to make a large Precious Metal investment complete due diligence, including seeking the advice of a licensed financial planner or investment professional. 

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