Gold, silver, and other precious metals are typically seen by investors as store-of-value assets that help reduce portfolio risk. But what are the downsides? And how do you even go about investing in a precious metal like gold or silver, anyway? Below, Nugget’s News answers all these questions and more.
Investing in Gold, Silver, and Other Precious Metals
When thinking about investing in precious metal assets like gold or silver, we often picture physical bullion bars. Little do most people realise, however, that this is but one way to gain investment exposure to precious metals. Below are some other options commonly chosen by investors who are looking to buy gold, for example, but aren’t keen on acquiring physical gold bullion bars.
- Exchange-traded funds (ETFs): these investment products represent a convenient and liquid way to gain exposure to precious metal assets. Most come in the form of a so-called physically-backed ETF, meaning the precious metal itself is stored on behalf of those invested in the corresponding ETF.
- Mining companies: buying shares in a publicly-listed mining company—or a listed investment company (LIC) specialising in the resources and mining sector—is another way to invest in precious metals, albeit indirectly. With investing in mining companies, though, the growth and return in the stock depends not just on the spot price of gold, but also the expected future earnings of the company that has issued the shares.
- Tokenised precious metals: these tokens exist on a public-permissionless blockchain—such as Ethereum—and are fully backed by precious metal. Typically, one token is equivalent to one gram of a given precious metal. This is true for each of Ainslie Wealth’s Gold Standard (AUS) and Silver Standard (AGS) tokens, for instance. To maintain trust, tokenised precious metal issuers routinely have the corresponding real-world precious metal holdings verified by an independent auditor.
In the time since publishing this writeup, CoinSpot—Australia’s leading cryptocurrency exchange—has listed AUS and AGS. This news was monumental for the precious metals and cryptocurrency investing scenes in Australia, as it gave investors and traders a newfound ability to trade gold and silver 24 hours a day, 7 days a week from anywhere in the world. For investors wondering why spreads on precious metals are typically higher than cryptocurrencies, Nugget’s News recommends reading the latter half of Ainslie Bullion’s August 21 blog post. As always, over-the-counter buying and selling of AUS and AGS remains available through Ainslie Wealth.
What’s So Precious About Gold and Silver Investing?
People have been investing in precious metals such as gold and silver for centuries on end. But why is this the case? There must be some reason, no?
When hearing why people choose to invest in precious metals, a reason often pointed to is the asset class’ perceived status as a store of value. Indeed, precious metals exist independent of monetary systems based on government-issued fiat currencies. For this reason, you’ll often see gold and silver investments touted as a hedge against a would-be devaluation of a given nation’s currency.
To be sure, the topic of currency devaluation is particularly relevant in the current macroeconomic and geopolitical landscape. All over the world—be it the Bank of Japan, U.S. Federal Reserve, or European Central Bank—we are seeing central banks once more pursue quantitative-easing strategies.
Downsides to Investing in Precious Metals
By and large, gold and other precious metals are unproductive, non-yielding assets. That is to say, a precious metal investment cannot be ‘put to use’ in an attempt to generate a return. When you invest in property and subsequently rent it out, for example, your asset can be thought of as ‘working’ for you. The same goes for equity investments. The capital you provide the company—in exchange for an ownership stake (i.e., shares)—is put to use in an attempt to bolster shareholder value, which comes in the form of dividend payouts and/or an appreciated share price.
Tangential to this is another common criticism associated with investing in precious metals: the opportunity cost—the value of the next best alternative forgone as a result of making a decision—of holding an asset like gold or silver is too high. Whilst precious metals have been known to generate far greater returns than other popular types of investments here and there (e.g., in the years following the global financial crisis (GFC)), there exists an uncomfortably large number of five- and ten-year periods wherein precious metals’ returns were far inferior to those realised in equity and property markets.
Storing Precious Metals
Assuming you do choose to invest in physical precious metals such as gold or silver bullion, the next question becomes: “where are you going to store it?” Indeed, storage is something precious metal investors must carefully consider.
Of course, there is the option of home storage. For those that envisage themselves hoarding gold for the long term, spending time and money setting up a high-security storage solution on your property may be worthwhile. A big drawcard associated with storing precious metals at home is that it eliminates counterparty risk—the risk of the other party (or parties) to a financial transaction failing to meet its obligations. Home storage brings with it a heightened level of personal risk, however.
Another option that’s popular amongst investors looking to store their precious metals is by entrusting them with a private company that specialises in operating vault security systems. Often, these high-security vault operators—which are located in most of the world’s major cities—offer insurance coverage, something that is incredibly difficult to access if you are storing your precious metals at home.
One such precious metal storage provider is Ainslie Wealth, a long-time partner of Nugget’s News and a trusted gold and silver bullion dealer.
“Central banks doing more of this printing and buying of assets will produce more negative real and nominal returns that will lead investors to increasingly prefer alternative forms of money (e.g., gold) or other storeholds of wealth.”– Ray Dalio (July 18, 2019)