Gold or silver as an investment has upsides and downsides. Read this before you buy precious metal coins or bullion.
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Gold prices—the price per ounce of bullion or coin, such as Kruggerand or American Eagle gold coins—have shot up in the past several years. Silver prices have followed suit (see the current price of silver, for example). If you listen to commercials or read advertisements, prices can only go up.
Should you invest in precious metals in 2021? Not necessarily. These money metals seem alluring, but they're not always as shiny as they appear!
Silver and Gold as an Investment
Why buy gold or silver? From a purely economic perspective, without any aesthetic or sentimental factors, you have to reasons: either to make money or not to lose money.
Those aren't satisfying reasons, if you believe prices are rational. Why would you expect either outcome? That's an interesting question, based on the characteristics of the precious metals themselves!
Gold, silver, palladium, and platinum all have practical uses. A lump of precious metal can be pretty. You can admire it. You can make it into jewelry or coins. You can use it as a component in certain industrial processes.
Beyond that, a physical gold coin or bar of silver bullion sits on your shelf and collects dust. Any value it gains is independent of its existence. It's just a lump of metal. It can gain or lose value due to circumstances outside of your control. Year after year, a gold or silver coin keeps sitting around, and there's nothing you can do to it itself to affect its price.
What about factors outside of your control? Precious metal prices tend to move in directions opposite of the market. If there's a market drop (like in 2008), gold prices tend to rise. You can't count on that happening, but diversifying your investments into classes like stocks, bonds, and commodities can help you keep from losing your entire investment.
Gold and silver prices can rise. They may get more valuable because they get more scarce—mining and refining might produce far less gold or silver one year—but by the same token, they might lose value because the get more common, too. Can you predict that?
Gold and silver prices might increase because demand increases. More people want to buy them. (That's probably why there are so many advertisements to buy gold or silver!) Then again, demand might decrease. Can you predict that?
Maybe they'll do neither. Maybe they'll hold their value. Maybe $1000 in gold bullion today will be worth about $1000 in gold bullion in five years, and you'll only have lost inflation. That's better than losing everything, right?
Precious Metals versus Stocks
Compare the uncertainty of gold as an investment to a good business—one that makes money. Even a lemonade stand that costs $100 to start and makes $125 every summer produces $25 in profit the first year. Every year, the business produces more money. Remember that the money a business produces is the most important metric of success.
You can do a lot with the cash that business generates. At any point you can take your profit as the owner of that lemonade stand. You can pay yourself a dividend. You can invest back in the business, to serve more customers or build more stands.
All of those great businesses worth owning make real money every year. This profit gets returns to investors as dividends or stock buybacks or other investments to make even more money in the future.
Meanwhile, what's the market for your Kruggerand? It's not as easy to sell as a share of Coca-Cola. You need to have someone evaluate its condition and then find a buyer willing to negotiate with you for some fraction of what it might be worth. You could melt it down for its value as a fixed amount of gold, but that's illegal for many currencies and you won't necessarily get the full value of the coin.
The investor implication is important! Liquidity can be a problem, and there's no historical way to predict whether you'll earn a 10 per cent return every year or see countercyclical drops due to circumstances outside of your control.
Buy and Sell Gold, Silver, Platinum, and Palladium
If you do own gold and want to turn it into cash, how can you do that? How easy is that?
You can buy and sell gold and silver coins at a coin shop, but then you're paying for the collectible value of the coin as well and that fluctuates based on perceived scarcity of the coin and the quality of the minting.
Unlike stocks which get traded in shares, precious metals trade in troy ounces, also abbreviated as oz. (What you probably think of as an ounce is an avoirdupois ounce.) A troy ounce is slightly heavier than an avoirdupois ounce. A troy pound contains twelve troy ounces. Traders trade precious metals in troy ounces. The current price of gold (or spot price for gold) is always the cost of a single troy ounce.
You can't really buy precious metals like gold or silver on the open stock
market. There's no single stock symbol for gold, for example, though the
GLD tracks its price. There
are specialty funds you can buy which track precious metal prices or
any other investment, but keep in mind that the underlying commodity—the
lump of metal someone dug out of the ground—still has all of the
advantages and disadvantages of a lump of inert metal someone dug out of the
Two other metals are classified as "precious": palladium and platinum, and they're rarer than gold. As rare as gold is,there's even less platinum in the world. You won't find platinum or palladium coins to trade and you're unlikely to buy a bar of bullion. To invest in Palladium, purchase a physical-metal backed ETF called NYSE:PALL. To invest in Platinum, buy the ETF called NYSE:PPLT.
If you're curious about jewelry applications, you might wonder how to invest in diamonds. Again, you should think about whether buying physical diamonds which sit in your drawer is the best option or if diamond stocks are better for you. Be cautious; the Diamonds ETF (NYSEARCA:DIA) tracks the Dow Jones Industrial Average; to buy diamond stocks, track individual mining companies such as Anglo American (LSE:AAL), the mining conglomerate which owns De Beers, or Rio Tinto (NYSE:RIO), which owns mines in Canada and Australia.
How Much is a Gold Bar Worth?
Gold bars are often sold in two forms, both measured by weight:
- A standard gold bar weighs 400 troy ounces. You will usually see this traded by bullion dealers and held in reserve by central banks. If you're watching a heist movie, they're moving 27 pound (12.4 kilogram) bars.
- A kilobar is a lot smaller, weighing one kilogram: 32.15 troy ounces.
If the current spot price of gold is $1500/troy ounce, a standard gold bar is worth $600,000. A kilobar is worth $48,225.
Silver bars are sold in the same fashion, with standard bars (400 troy ounces) and kilobars (32.15 troy ounces). A silver bar then sells for the current silver spot price times the number of troy ounces in the bar.
What's a Precious Metal Worth after a Market Crash?
What if there's no cash available? How are you going to trade a bar of bullion for a deer carcass and some hunting rifle ammunition? Is that a fair trade?
Sure, that sounds like a wild example, but the goldbugs pushing their investment schemes seem to think that in an apocalyptic setting where there are no stocks, bonds, investments, markets, dollars, or governments, bartering bars and coins and nuggets will be more useful than bartering water purification tablets.
Suppose instead you buy gold coins or silver or platinum at a coin shop. You can sell them back there too, but you'll be trading on the collectable value of the coin, which fluctuates based on the price of the metal and the scarcity and quality of your coin.
Even if you buy gold coins, you're not necessarily better off. In that post-apocalyptic world, owning a chicken which can lay eggs every day and make more chickens is more valuable than owning a shiny handful of metal that can't make anything else.
Investing in Coins versus Bullion
As you can tell, there's an important difference between buying a lump of a precious metal and buying a pretty, shiny coin!
Think of it this way. Some scribbles on canvas could be the work of a third grader, an elephant, a robot, or Pablo Picasso. The cost of materials might be the same, but people are willing to pay millions for the Picasso because of the quality and rarity.
The same goes for coins. The Canadian government, for example, can mint Canadian Silver Maple Leaf coins all year, and people will buy them for the silver spot price if it's higher than the face value of $5. (Of course, if the spot price were lower than $5, it'd be a huge bargain.)
Similarly, a Morgan Silver Dollar from 1904 could be worth thousands ($3000? $8000?) in good condition. In this case, you're going to have to do your research to figure out rarity and even find these coins... but the thrill of the hunt can be similar to the thrill of finding a good business.
Many countries promote their mints as tourist attractions and investments. For example, Australia's Perth Mint produces beautiful gold, silver, and platinum coins and offers government-guaranteed storage of investment metals without you having to take possession of the metals.
If you're interested in coin investment, start with A Guide Book of United States Coins 2021. This is the well-loved guide to coin collecting. You'll find that the best silver coins to invest in are American Eagles or Morgan Silver Dollars, for example. Remember that you're looking for rarity and quality beyond the spot price for the underlying precious metal.
Should You Buy Precious Metals?
Why invest in gold? Why invest in silver? When you understand this, you'll know whether precious metals make sense as an investment.
Does it matter whether it's gold coins, silver certificates, or platinum bullion? Not really; the flaws of one are the flaws of the other. If you've already figured out why not to invest in silver, the same arguments suggest why not to invest in gold, platinum, diamonds, or whatever! These investments are unpredictable and risky, just as if you'd invested in precious art or other commodities which don't themselves inherently make money.
If you're looking for a safe, conservative investment, don't try to outsmart other investors. Buy pieces of companies that produce real value. (Buy the S&P 500 Index Fund to start!)
If you want a few gold coins or silver bars around for their aesthetic value, they have their uses—but you can find much better options for most of your portfolio.