A question I get a lot from all types of investors is this: Should I own gold and silver? Or should I dump my gold and buy Bitcoin? That’s a great question…but it’s not an easy one to answer. For most people, the answer is: “it depends”. It is no surprise that during the recent financial crisis, many people were fleeing the stock market and looking for safe havens to invest their money. Gold and silver have always been and will always be a safe haven in times of turmoil and economic strife. Precious metals are a hedge against inflation, buying power erosion, quantitative easing and a zombie or nuclear apocalypse. Could any of those happen in the near future???
Since the peak of gold and silver in 2010, both metals slowly declined until early 2016. They both bottomed out in early 2016 and have seen a slow march upwards since then. Many of those that invested heavily into precious metals looking for more stability than the stock market could offer landed right in the middle of another asset that was also declining, although much more slowly. So where does that put us today? Many experts believe that gold is poised for a resurgence and there are some that believe it is going to continue to decline.
Back to the original question: Should you own precious metals in YOUR portfolio? My answer is “Yes.” However, there are limits to that affirmative and some general rules that you should follow if you feel like precious metals may be right for you. On the high level, the thirty-thousand foot view, it should not be the majority of your asset allocation. Obviously, the number will vary depending on where you are in your career and life span but I believe precious metals should be a small part of a diverse investment portfolio, comprising 5-15% at a maximum. Another critical factor here is the CONTRARIAN INVESTOR rules. Precious metals are relatively cheap now. That’s when you buy. Where is Bitcoin? Who knows? Maybe it’s on it’s way to $50,000 per coin. Or maybe it’s on it’s way to ZERO via another bubble exploding. We will come back to this one later and spend more time there because EVERYONE wants to talk CRYPTOCURRENCY.
There are certain ratios that are very important in determining what is the proper percentage of a precious metal portfolio. Of course, the percentage of your total portfolio that we just mentioned is possibly the most important. Some other ratios that you could consider are the gold to silver ratio within your portfolio. Is it a 50 gold and 50 silver mix? There are times when it should be around that number and times when it should float to 60/40. Other ratios that you should follow are the Dow to Gold ratio and this measures the value of gold compared to the stock market. This is simply calculated by dividing the DOW on any given day by the price of 1 oz of gold at that same time. This will tell you how many ounces of gold are required to buy the “stock market”. There are parameters that dictate when it is time to transfer some funds from the market into gold and there are also times when it makes sense to transfer funds from gold into the market. Currently that ratio is about 20 meaning 20 ounces of Gold would “buy the Dow Jones”. If it goes to single digits, gold is strong and the market is weak, sell gold and buy equities. If it’s between 30-50, gold is weak and the market is strong, sell equities and buy gold. Other ratios to look at are the Gold to Silver ratio based on the price of each metal. As these swing, there are certain times where it makes sense to transfer ounces of silver into ounces of gold or vice versa. Evaluating these ratios is beyond the scope of this blog (same with premium swaps – look it up!). But the big picture is this: I believe that gold and silver do have a place in the modern portfolio….albeit, a small one. I would never recommend overdoing it and committing a disproportionate amount of capital to it. I think every investor is best served to seek professional advice to evaluate all of the ratios that we discussed before deciding on a personal investment strategy.
A couple more things to consider beyond the above ratios are as follows: don’t forget that gold and silver can both be held in self-directed retirement accounts. They can also be held outside of one’s retirement account if you take physical delivery. On the personal side, you have the option of storing in a secure facility which can be a local bank or international vault or they can be put into a home safe which is another discussion entirely. Precious metals that are held within self-directed retirement accounts can be held by a variety of different custodians and, as a result, these can have a place inside and outside of retirement accounts.
Finally, remember that all of the gold that has ever been mined would fit into 2 Olympic swimming pools. The shares of paper gold exceed the amount of physical gold by 500X. The US is an exporter of gold and most other rising nations (China, India, Russia, and others) are importing gold. Incredibly, a gold coin that changed hands during the Roman Empire or sank to the bottom of the ocean in a Spanish Galleon 300 years ago is MORE valuable today than it was then. How would a Bitcoin hold up to 300 years at the bottom of the ocean? I believe that a gold coin I purchase today will be worth more hundreds of years from now also.
I hope the information above shed a little bit of light on what can be an obscure topic. Feel free to email me (firstname.lastname@example.org) and ask any further questions that you have and I look forward to seeing you soon. Until next time….