Gold prices—the price per ounce of bullion or of coins, 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.
Does that mean you should invest in precious metals in 2018? Not necessarily.
Buying Precious Metals as an Investment
Investors buy precious metals for two primary reasons. First, they hope that prices will continue to increase (desire to gain money). Second, they believe that other investments will decrease in value (desire not to lose money).
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 gold coin or 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 affect its price.
Compare that 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.
Are Precious Metals Good Investments?
Depending on your appetite for risk, sometimes precious metals make sense. Their 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 avoid losing everything.
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?
Meanwhile, 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.
How Do You Sell Gold?
If you do own gold and want to turn it into cash, how can you do that? How easy is that? Or 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? (Is that a wild example? Yes, but the way some people talk, they 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.)
If you buy gold coins (Where do you buy gold and silver coins? Often 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.), 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
Ah, but 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 spot price of silver far over 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.
If you're interested in coin investment, start with A Guide Book of United States Coins 2018. 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.
Two other metals are classified as "precious": palladium and platinum. They're even more precious than gold, because they're rarer. 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.
Buying Silver or Gold as an Investment
If you decide to invest in precious metals, 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! Investing in gold is unpredictable. Investing in silver is risky. The same goes for precious art or other commodities which don't themselves inherently make money.
Do Precious Metals Have Stock Symbols?
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
Should You Buy Precious Metals?
Ask yourself this: why do people want to invest in gold? Why invest in silver? When you understand this, you'll know whether precious metals make sense as an investment. If you're looking for a safe, conservative investment, don't try to predict what other investors think or do. 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 your portfolio.
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