What about Investing in Gold and Silver?

Investing in Gold and Silver

What about investing in gold and silver?

My Old Coworker’s Obsession

I remember a few years ago when I worked with a couple guys who were obsessed with buying gold and silver. They were totally and completely convinced that stockpiling these two assets, physically was the best way to put their hard-earned dollars to work. I remember thinking that this seemed like a complicated endeavor because you had to go buy the product and hope you were not getting ripped off, then you had to store it somewhere and pay for the costs associated with that and finally, you had to sell it to someone, who you would hope would give you a fair price.

Gold and Silver ETFs

These days, it is easier than ever to “invest” in gold and silver without having to hold the physical product by buying ETFs such as GLD or SLV. Most of these ETFs have an expense ratio of about 0.4-0.5%, which is higher than many other ETFs, but remember that they actually buy the product and store it, so they have additional costs associated with that. If you do decide to include some gold and silver in your portfolio, I strongly recommend using ETFs instead of buying the product yourself. It is just far simpler and quite likely cheaper by the time you pay commissions and storage costs.

Positives to Holding Gold and Silver in a Portfolio

Overall, I am pretty neutral on gold and silver, and hold a very small portion of both in my own portfolio (about 1% for each). The biggest positive to owning them is increased diversification. When stocks are tumbling and panic is high, people like to hold onto a physical product such as gold or silver, which increases demand and in turn increases prices. In addition, in countries like China and India, there is increasing demand due to a rising middle class so prices seem like they will go up, especially for gold over the long-term.

Stocks are Way Better, Historically

There are numerous negatives but the main ones are historical return rates and lack of earnings and dividends. According to this article, if you went back in time almost 200 years and invested $10 000 into each of stocks, bonds and gold, then adjusted the returns for inflation, today you would have: $5 600 000 000 (stocks), $8 000 000 (bonds) and $26 000 (gold). It is evident that gold is not the best choice, nor are bonds but that is a discussion for a whole other chapter!

Invest like a grandma with dividends: The Dividend Mantra Way: Achieving Financial Independence By Living Below Your Means And Investing In Dividend Growth Stocks

Gold and Silver Have No Intrinsic Value

The reason that gold and silver do not perform well over the long-term is that they have no intrinsic value of their own and they do not produce a good or service. The price of these commodities is based solely on what people are willing to pay for them while the share price of companies, over the long-term is based on their earnings (remember the price/earnings ratio (P/E) generally finds an equilibrium of around fifteen, so if a company’s earnings keep going up, year after year, the stock price is bound to follow. Of course, without earnings, gold and silver are unable to pay a dividend, which is an important to you in retirement, where you will hopefully be able to live off these payments.

Investing in Gold and Silver: A Short Video

 

 

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