Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He and his wife are "empty nesters" living in New Hampshire.
Do you currently have all of your retirement savings invested in the stock market? If you do, you are at risk of losing a lot of your hard earned savings to a stock market crash or an economic collapse.
Investing in gold and silver has always been a safe haven investment throughout the history of mankind. In this guide, we'll explore the best ways to invest in gold & silver.
Best Ways to Invest
If you’re a retiree relying on your retirement investment portfolio as an important source of income, you may be getting concerned about the nosebleed levels of both stocks and bonds in recent years.
While interest rates are at near record lows, stock prices are at near record highs. That combination is hardly a coincidence. While that may seem like a perfect world event, we all know there’s truly no such thing as a perfect world.
Though the positive dynamic has been in effect for the past decade, and currently seems well-entrenched, a shift may occur at any time.
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A sudden reversal of the trend, combining rising interest rates with lower stock values – due to factors currently unforeseen – could come quickly and without warning.
Should that be the case, will your portfolio be sufficiently diversified to weather the storm? The best way to do that is through alternative investments.
Two of the best alternatives are gold and silver. They have a long history of rising in value when financial assets go into the storm cellar.
How to invest in gold and silver, especially for retirees, may be more important right now than it has been in at least a decade.
Though it’s commonly thought that bonds represent a counterweight to stocks, the experience of the past 10 years has shown otherwise.
Stocks and bonds have been moving in lockstep – with both rising. A reversal can see significant declines in both asset classes.
Should that happen, true alternative asset classes will be your best protection. And that’s why you need to become aware of how to invest in gold and silver.
Why Invest in Gold & Silver
There are several compelling reasons to invest in gold and silver:
Very long history as both a store of value and a medium of exchange
Gold and silver serve as both because they have represented money for thousands of years. While they haven’t carried the same status in recent decades, the much longer historical trend is extremely well-established.
While gold - especially gold jewelry - has traditionally been the metal of choice among the wealthy, silver has been the preferred hold among the masses.
This is due primarily to silver’s much lower price. But both have been held as a monetary asset because of their rarity.
Industrial applications
72% of gold used in the United States is for jewelry and electronics, while 51% of silver is used in electronics, photography, and jewelry and silverware.
Unlike paper money, which has no intrinsic value, or use in non-monetary activity, both gold and silver are important for their economic and technological applications.
Countercyclical investment value
This is probably the most compelling reason to own gold and silver, but especially gold. Though gold doesn’t move countercyclical to stocks on an exact basis, it’s absolutely a “flight to quality” asset.
That is, it tends to perform best when it seems like the economy and the financial system are coming unglued. For example, during the 1970s, when the S&P 500 rose by just 22% – which is well below the rate of inflation for the decade – gold increased from an average price of $36 an ounce in 1970 to an average of $615 in 1980.
That’s a gain of more than 1,700%! During the entire decade, which was marked by economic, financial, political, and geopolitical stress, gold reaffirmed its safe haven status.
But that was hardly the only episode. While the S&P 500 fell by more than 50% in the Financial Meltdown of 2007 – 2009, the price of gold increased from $640 at the beginning of 2007, nearly doubling to $1,120 by the end of 2009.
If your portfolio included a significant amount of gold in 2006 and 2007, your portfolio would have performed better than most during the meltdown.
That isn’t to say that gold is an all-weather investment, in the same way as stocks and fixed income securities. But it has a documented history of being one of the best performing asset classes during times of serious distress.
With the stock market currently trading at or near record highs, and the US federal debt rising by something on the order of $1 trillion per year, holding a position in gold and silver may be well advised.
Investing in Gold vs. Silver
While gold and silver are often mentioned interchangeably, the two seem to be parting ways in recent years. For example, the historic value ratio of gold to silver was 20:1 for centuries.
That is, one ounce of gold was worth 20 ounces of silver. More recently, with the price of gold trading at close to $1,500, and silver down around $16, the ratio has expanded to about 90:1.
Though silver may have seen its dollar price rise significantly in the past 20 years, its value relative to gold has declined substantially.
This may be due in part to silver’s much lower price, making it less suitable as a store of value. And since there aren’t too many places in the world where silver is used as a medium of exchange, the monetary value of the metal isn’t as firmly entrenched as it has been in the distant past.
In addition, while large amounts of gold are held by major central banks around the world, the same can’t be said of silver. That doesn’t mean silver isn’t worth investing in.
However, in recent years it’s been primarily used for industrial purposes, not monetary. For that reason, it’s possible that silver will continue declining relative to gold even in an economic or financial crisis.
At this point in time at least, silver should be seen primarily as a speculation, while gold functions as the traditional safe haven monetary asset.
5 Best Ways to Invest in Gold & Silver
There are several different ways to invest in gold and silver, but the two primary methods are through gold and silver stocks and funds, or gold and silver bullion itself.
1. Put Gold & Silver in Your IRA
Most investors don't know that you can actually put gold and silver into your retirement account. This is possible by doing a rollover of a 401(k) or IRA to a self-directed IRA.
This type of IRA allows you to manage your own investments, while also investing in different asset classes besides stocks. Many retirees are taking advantage of these types of accounts because of their ability to diversity their retirement portfolios.
2. Investing in Gold and Silver Stocks and Funds
When we talk about gold stocks, we don’t mean stocks of companies that own large amounts of gold. Instead, they’re stocks in companies engaged in the business of mining gold.
Put another way, investing in gold stocks isn’t the same as investing in gold bullion itself. You’re investing in the companies that produce it, which makes gold stocks more like other stocks than bullion.
But that doesn’t mean gold stocks are irrelevant if you want to invest in gold. Since gold-mining stocks are tied to the metal itself, they tend to rise when the metal increases in value, and decline when the metal falls.
In fact, during a significant increase in the value of gold, gold-mining stocks can rise in price at a faster rate than the metal. This is because gold-mining stocks represent a form of leverage on the metal itself.
As the price of gold rises, profits for the mining companies increase as well. That increase in profits can be higher on a percentage basis than the increase in the gold price.
3. The unique risks of gold mining stocks
But the opposite is also true. If the price of the metal falls, gold-mining stocks may decline by an even greater percentage. That’s because the decline in profitability will have the reverse effect.
In addition, gold-mining stocks are more subject to economic conditions. These can include high interest rates, raising the cost of borrowing, changes in government regulation, the tightening of the credit markets (limiting capital), and even political or labor unrest in the countries where the companies operate mines.
Ultimately, gold mining stocks are much more speculative than the metal itself. While it’s true they can enhance the return on the gold portion of your portfolio, that increase is hardly guaranteed.
It’s even possible that, due to economic factors that affect all businesses, the value of gold-mining stocks may go flat or even decline while the price of the metal is increasing.
As far as silver mining stocks are concerned, they’re less popular than gold-mining stocks. This is in part because much of the silver mining throughout the world is done by companies that mine other metals, including gold.
It will be much more difficult to get a pure play on silver mining stocks than will be for gold-mining stocks.
4. Gold Mutual Funds to the Rescue?
The gold-mining sector is highly specialized. In fact, it's usually only gold miners or people working for a gold mining company who have an understanding of how it works and what the forces are that affect stock prices.
A better way to invest in gold-mining stocks may be through mutual funds. Generally speaking, mutual funds are actively managed funds.
That means the fund manager actively buys and sells stock in various companies, rather than tying the fund’s portfolio to match an underlying index.
The fund manager will attempt to invest in the gold mining companies that show the greatest future potential and likelihood of price appreciation.
Though a gold mutual fund may hold a small amount of gold, it’s primarily a portfolio of stocks in gold-mining companies. For most investors, who may be interested in investing in gold-mining stocks, a gold mutual fund will be a better strategy.
The funds are managed by industry professionals, who know which companies to buy, and which ones to avoid. Investing in a gold mutual fund doesn’t guarantee investment success.
But it does give you a better opportunity to take advantage of gains in the sector, should they occur. As well, investing in gold-mining stocks through a mutual fund is a much less time-consuming way to go about it.
If you invest through a mutual fund, the only decisions you’ll need to make is when to buy and when to sell. The actual management of the stocks will be handled by the fund itself.
Two of the most popular gold mutual funds are the VanEck Vectors Gold Miners ETF (GDX) and Fidelity Select Gold Portfolio (FSAGX).
Funds can be purchased and sold through major investment brokerage firms, or even directly through the fund family that the individual mutual fund as part of.
5. Gold Exchange Traded Funds (ETFs)
Gold ETFs are a more direct play on gold bullion itself. You can invest in gold ETFs, such as SPDR Gold Shares (GLD) and iShares Gold Trust (IAU), which actually own gold bullion itself, and not mining shares.
Like mutual funds, they can be purchased through investment brokers or directly through the sponsoring fund family. Gold ETFs are a very convenient way to own the metal itself.
Though technically speaking, you won’t have direct ownership of the metal, but rather shares in the fund that owns the metal.
But through the ETF you’ll be able to hold a position in the metal in a way similar to the way you buy, hold, and sell stocks, bonds, and other paper assets.
That will make it much easier for you to buy into the metal, increase or decrease your position, or sell completely. You also have to concern yourself with taking physical possession of the metal.
This can become problematic for investors, who may not be thrilled with the process of taking delivery of the metal, storing it, and then when the time comes, selling it.
Holding bullion through an ETF eliminates those complications. However, if you prefer taking direct possession of the metals, perhaps out of concern that the financial system will undergo a complete collapse and disrupt the integrity of paper investments, you may be better off owning bullion outright.
Investing in Gold and Silver Bullion
In a world where both money and financial assets seem to be little more than computer digits, some investors prefer owning gold and silver in bullion form.
That makes it a true real asset, one that you can store in your home or elsewhere, and if necessary, even carry in your pocket and sell or exchange it to another party for something else.
It may be the only asset in your portfolio that you can take direct possession of, which can be significant in and of itself. Gold and silver bullion can be held as bars or gold coins. Bars can be purchased in quantities ranging from 1 ounce to 400 ounces.
A precious metal in a bar form is more suitable to those with high six- and seven-figure portfolios, since they occupy less space than an equivalent quantity of coins.
And because they haven’t been minted into coins, the markup on physical gold bars is lower than it is for coins. If you’re a smaller investor, or you simply prefer coins to bars, there are several coins available.
But the most popular are the American Eagle, Canadian Maple Leaf, and the South African Krugerrand. Though each of the three coins looks different from the others, they all contain one full ounce of gold.
However, they’re also available in smaller denominations, like half ounce, quarter ounce, and1/10-ounce coins. When buying coins, expect to pay a markup over the bullion value of the coins of between 5% and 10%.
Silver coins are becoming more difficult to find, because the predominant type are pre-1965 US coins, including silver dollars, half dollars, quarters and dimes.
Not only does the US government to longer make common silver coins, but many of them have been collected and melted down by the government in the past 50 years.
Numismatic vs. bullion coins
If you’re considering purchasing gold or silver bullion coins, you’ll need to understand the difference between numismatic and bullion coins.
The value of bullion coins is determined by the gold or silver content in the coin. But numismatic coins are more like artwork. Though they contain bullion, their primary value is determined by their rarity.
The older and more rare a coin is, the more valuable it will be. Put another way, numismatic coins don’t function exactly like bullion coins.
They may rise in value along with rising gold prices, but their values tend to be subjective. That’s because the value of numismatic coins is determined by their mint state, which is the grading process used to value the coins.
There’s a bit of a problem with mint states however. The grading of a numismatic coin can range between 60 and 70, with a rating of MS70 offering the highest value.
But this is where subjectivity enters the equation. You may purchase a coin graded as MS65. But when you go to sell it, the buyer may determine it to be MS63.
That difference of two points can result in the loss of hundreds or thousands of dollars in the value of your coin. Numismatic coins may be of interest to you if you’re a knowledgeable coin collector.
But if your primary purpose is to purchase gold or silver for the bullion value, numismatics are best avoided in favor of the bullion itself.
Where to Buy Gold and Silver Bullion
Whether in bar or coin form, gold and silver bullion isn’t always available from the usual investment sources, like banks and brokers.
Instead, you’ll be dealing either with local coin shops or with online dealers. If you buy from a local coin shop, you’ll be able to take immediate possession of the metal.
But the availability of bullion coins may be limited at a local shop. In addition, local dealers usually charge a higher markup on the coins.
Another issue with local dealers is that they may attempt to steer you toward numismatic coins, since they earn more money selling those.
If you do buy through a local dealer, be sure to check them through the Better Business Bureau or other sources. Alternatively, you can purchase your coins from popular online dealers.
If you choose, you can also have the online dealer store the coins or metal bars for you, though there’ll be an additional charge for doing so.
Some of the most popular gold and silver bullion dealers include Goldco, Augusta Precious Metals and Noble Gold.
And since online dealers do more sales volume than local shops, you can generally expect the price markups to be lower than at local shops.
When it comes time to sell your bullion, you can sell it back to the coin shop or the dealer where you bought it, or even a different coin shop or dealer.
However, you can also choose to sell your coins or bars through a private sale. This can be done through online sites, such as Craigslist and eBay.
Just make sure you receive payment before shipping the metals, and collect extra to cover the shipping and insurance.
Storing your gold and silver bullion
This is a potential issue with owning gold and silver bullion. If you purchase your metals through an online dealer and store your coins or bars with them, you’ll pay a fee for both storage and insurance.
The alternative is to store it at home or some other location, but that will also likely involve certain costs. For example, if you store the metals in your home, you’ll need to add them to your homeowner’s insurance policy so they’ll be covered in the event of theft, or destruction by fire, earthquake, or other disaster.
Alternatively, you can store them in a third-party facility, such as a bank safe-deposit box. You’ll pay a small annual fee for the box, and you may still need to insure the metal against the possibility of theft or destruction.
And though not many people are aware of this fact, certain gold bullion coins, like American Gold Eagles can be held in an IRA account.
Most likely, this will have to be done through an IRA custodian that specializes in holding alternative investments, like gold bullion coins.
What are the downsides to investing in gold & silver?
At the beginning of this guide we answered the question, why invest in gold and silver? Pointing out the advantages. But to give a full presentation of the facts, we also need to discuss the downsides, and there are a few:
Gold and silver don’t provide a cash flow.
Neither pays interest and dividends, so the entire play will depend upon a rise in value. Gold-mining stocks are sometimes the exception, since some pay dividends.
But for the most part, you won’t earn any income on your investment during times when the price of either metal is flat or declining.
Central bank gold sales.
The price of gold remained relatively flat during the 80s much of the 90s. But in the late 90s, central banks began selling off reserves.
When they did, the price of gold plummeted to under $300 an ounce. Since central banks continue to hold close to 1 billion ounces of gold in reserve, future sales can’t be ruled out.
However, it does need to be stated that in recent years the central banks of Russia, China, India, Turkey and other countries have been increasing their reserves.
The low interest rate/rising stock market environment may continue a few more years.
If it does, you probably won’t see much return on your metals position.
An interest rate spike.
The interest rate spike of the early 1980s put a lid on the 1970s boom in precious metals prices and the gold market in particular. Should the same situation play out again – even during a time of economic and financial turmoil – it could have the same effect.
Investors tend to favor paper investments that provide high fixed returns, like Treasury bills and CDs.
How much should you invest in gold & silver?
None of the downsides listed above are intended to discourage you from investing in gold and silver. But you do need to be fully aware of the risks if you do.
So how much should you invest in gold and/or silver? Most experts recommend you hold somewhere between 5% and 10% of your investment portfolio in gold and silver.
That would include either or both bullion or gold-mining stocks and/or mutual funds. Given the upside potential of the metals in a crisis, a 10% position can provide adequate insurance for the rest of your portfolio, should your financial assets fall in value.
The limited investment position will also serve to minimize any potential loss if the metals markets run against you.
When is the best time to invest in gold & silver?
Much like investing in stocks, it’s generally not possible to time purchases and sales of gold and silver with any precision. But as a general rule, the best time to buy any asset is when it’s either undervalued or in a prolonged holding pattern.
There doesn’t seem to be much evidence that either gold or silver are currently undervalued. But the markets for both metals have been quiet for the past few years, particularly since gold hit an all-time peak price of $1,900+ in August 2011.
It has since eased back, but has been hovering around $1,500 during much of that time. With metals prices trading in a tight range in recent years, now seems to be as good a time as any to buy in.
While we seem to be in the late stages of the current economic and financial market upturns, storm clouds are certainly gathering on the horizon.
Since precious metals tend to react to instability, there’s plenty to be found. Examples include:
- The ongoing turmoil surrounding the White House.
- Tensions between the US and Russia, China, North Korea, and Iran
- The rapidly rising federal budget deficit and cumulative national debt.
- Rising auto loan delinquencies, signaling consumer financial stability is weakening.
- The still unresolved student loan debt bubble.
- The explosion in healthcare costs, threatening to bankrupt millions of households as well as the nation at large.
Given that the powers-that-be seem to have no solutions to any of these problems, either individually or collectively, taking a small position in gold and/or silver is increasingly looking like a smart strategy.
Final Thoughts
One of the biggest problems confronting retirees in recent years – both the currently retired and those soon-to-be – is low interest rates.
Those low returns are forcing retirees into one of two strategies:
- Either drain down principal to cover living expenses, or
- Invest heavily in stocks for greater returns.
Withdrawing principal on a regular basis opens the potential to outlive your money. And investing heavily in stocks raises the prospect of losing a substantial amount of investment capital in a market crash or a prolonged bear market.
Investing a small portion of your portfolio in gold and silver is increasingly looking to be a prudent strategy for dealing with what’s becoming a very uncertain future.
And when you’re either a retiree, or soon to be, you can’t afford to ignore that instability.
Goldco
Goldco is a leader in the precious metals industry, with over a decade of experience helping customers protect their retirement savings.
Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He and his wife are "empty nesters" living in New Hampshire.
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