We get questions all the time about gold and other precious metals. Our clients want to know if gold is a good investment for these times. Should gold or silver be in their portfolio—and if so, in what form? We hear questions such as:
With a new recession upon us, is gold a good investment now?”
“Should I have precious metals in my portfolio as a general rule?”
“What kind of gold or silver is best? How should it be stored?”
And so on.
These are questions that only you can answer for yourself. Our best recommendation is to do what you desire in order to have peace of mind. However, we can provide some perspective that may help your decision-making!
Table Of Contents
- A Golden History
- Is gold a good investment today?
- How to Invest in Gold or Silver
- Pros and Cons of Investing with Gold
- Gold vs. the US Dollar
- Is Gold a Good Investment for You?
A Golden History
Aside from land, livestock, and homes, gold and silver are two of the oldest assets utilized by man. They are mentioned as valuable metals in ancient texts and scriptures thousands of years old. Gold has been traded like money and used to back the value of currencies – the “gold standard.” It can still be traded for any currency.
Of course, gold is a commodity as well. Today, it is used to craft fine jewelry and make the circuit boards of mobile phones, due to its ability to conduct electricity even better than copper. Silver is also an industrial metal. Some people collect precious metal coins for either their numismatic value or as a type of economic “insurance policy.”
Gold is traditionally thought of as a hedge against market instabilities or the devaluation of the US Dollar. It is, however, far more volatile than the dollar. Currently valued at over $1700 an ounce, gold plummeted from an all-time high of more than $1900 an ounce in 2011 to just below $1050 an ounce in December of 2015. That drop represented a 45% loss and a six-year low, as this ten-year chart demonstrates:
But is gold a good investment today?
Warren Buffet has an interesting perspective on gold. “Gold is a way of going long on fear,” he has said. “You really have to hope people become more afraid in a year or two than they are now. And if they become more afraid, you make money. If they become less afraid, you lose money.”
As Buffett suggests, gold is sometimes used as the “crisis commodity.” When people are anxious or frightened and times get tough—which is certainly the case for some in our current circumstances—they may turn to gold as a safe haven. Even Berkshire Hathaway invested in a gold mining company in 2020, only to sell the position two quarters later.
Should you invest in gold now? Those who sell gold and silver will suggest your only path to survival may be to sell everything and plow it all into precious metals! Ask yourself if that sounds like reasonable advice or merely a scare tactic to make some sales. Even if the person is sincere, they may be mistaken.
Consider what purpose you want the gold to serve. A purchase of gold is not an “investment” by a Prosperity Economics definition. Gold is a currency, yet you can’t pay your mortgage with it. Precious metals produce no cash flow, which is a problem if you want your assets to work for you. It can be more difficult to leverage as collateral, like a bank CD or a life insurance policy. And while gold or silver may grow in value over time—what then? The only way to utilize the value is to sell it!
There is value in diversifying asset classes, especially as so many people have stock-market-heavy portfolios. So a bit of gold can be beneficial -especially if it gives you peace of mind. However, think through your “exit strategy.” Most prospective buyers find out the hard way that it’s much easier to buy gold or silver than to sell it… unless you are willing to take a sizeable loss.
Also consider if the financial security you seek may not be more effectively obtained by:
- A new stream of income such as a side-gig or a passive income project or investment.
- Saving more cash where you can access it easily if needed.
- A garden and a well-stocked pantry.
- Even a supply of “easy to barter” items, should we experience another depression.
How to Invest in Gold or Silver
Do precious metals belong in your portfolio? There is no question that some people feel more certain knowing there are gold coins in the family safe. If this is you, go for it – in moderation. (The answer to, “Is gold a good investment?” is the same answer to, “Does it help you sleep at night!?”)
If the answer is “yes,” we would recommend buying gold rather than silver. That’s because gold is the precious metal of choice for purchase in central banks. Smaller coins are preferable to bars. Stick to coins of known weight (such as American Eagle, Canadian Maple Leaf, or South African Krugerrand), since coins are a very tradable form of gold.
As a general rule, stay away from collectible rare coins, which, as works of art, have value beyond the metal. Selling these “numismatic” coins, as they are called, is a sophisticated game for experienced professionals. You’ll also want to pay attention to potential capital gains; this rate can be higher for collectibles. That applies to holding any physical gold, including numismatic coins. (Note that even ETFs that hold gold are taxed as collectibles.)
When it comes to storing your coins, we recommend finding a secure location at your home. If gold is your “crisis asset”—do you really want it locked in a safe deposit box in a bank or stored in a far-away facility? And do you want to pay someone to store it for you? Probably not. Of course, take care to keep it safe—perhaps in a safe!
Pros and Cons of Investing with Gold
A benefit of gold is its staying power and transferability. It becomes especially appealing when people lose faith in banks and in the stock market.
Keep in mind, gold is only one way to diversify and increase financial certainty. Life insurance, immediate annuities, and real estate are also excellent assets. They have a history of appreciation, can be borrowed against, and come with tax benefits as well.
So consider the use of gold before you go “all in.” Here again, Buffet has a long-term perspective that is humorous as well as thought-provoking:
“Gold itself doesn’t produce anything… Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
Ideally, we think investing should solve a problem or enhance peoples’ lives. We traditionally promote strategies other than the stock market or bond market. However, at least with a stock or bond, you are investing in a company that is performing a service. With gold or silver, you’re speculating its value will rise. And in the meantime, you sit and wait.
In my practice, I urge clients to position their savings and investments to serve one of three goals:
- to create an income stream
- to be liquid and available as an emergency/opportunity fund, or
- to grow money for use at a later time, preferably steadily and without the need for speculation.
Gold fits none of these categories well. In fact, if you buy gold or silver, you have decreased your cash flow because your coins are sitting in a safe (or vault) rather than working for you creating additional cash flow! However, precious metals are one way to diversify and protect your portfolio. If it ensures an even better night’s sleep for you – by all means, go for it!
Gold vs. the US Dollar
There is no question that the current circumstances and monetary policy are challenging! And yet, there is little evidence currently of rampant inflation or a failing dollar. (We must also remember that virtually all countries are experiencing challenges right now!)
At present, the US dollar still remains the world’s primary reserve currency. Many currencies are “pegged” to the US Dollar, which means the dollar is a reference point for the value of other currencies.
In terms of price stability and ease of use and trade, the dollar has actually been more stable price-wise than gold, and it is certainly more usable than gold coins in the present economy. It’s hard to buy milk, eggs, bread, and—the rarest of all commodities in 2020—toilet paper—with gold!
Is Gold a Good Investment for YOU?
Only you can decide! We want our clients to obtain predictably positive results with their investments. Because gold detracts from cash flow, costs money to store and liquidate, and grows in value sporadically, we would recommend against a sizeable position.
Ultimately, however, financial decisions are also emotional decisions. If gold coins give you peace of mind—there is a value to that and you may decide it is worth incorporating into your savings strategy.
Spencer Shaw and I recently did a podcast on gold and silver you might enjoy. There are some great stories, and we also discuss gold as an “insurance policy.”
We love the benefits of whole life insurance and believe it provides a firm financial foundation, flexibility, and greater peace of mind. Please feel welcome to reach out to us with your questions or for more information.
—By Kim Butler and Kate Phillips