fbpx Skip to main content

Among the most crucial aspects of maintaining a portfolio is diversification. When done correctly, diversification may either reduce the risk necessary to attain a specific rate of return or enhance the return rate you can anticipate from a given amount of overall risk. 

Contrarian investors (people who decide to invest in assets that are opposite to price action) have opportunities to cycle capital into such undervalued assets when certain assets’ prices are growing, while others are often decreasing. 

A modest portion of your portfolio should be allocated to precious metals like gold and silver since they have distinct risks and possibilities than equities and bonds and are somewhat uncorrelated with them. A greater allotment could occasionally be tactically advantageous as well.

Gold and Silver’s Role in Portfolios

Simply said, precious metals protect against market turbulence, political unpredictability, currency depreciation, and economic catastrophe. Despite their potential for volatility, they have historically been excellent at long-term wealth storage.

Silver and gold have been used as a currency worldwide for thousands of years since they are chemically distinct, physically uncommon, and easily malleable. 

Benefits of Gold and Silver in Portfolios

In addition to having minimal credit risk and maintaining their long-term purchase power against inflation and currency depreciation, precious metals are not very closely associated with equities, bonds, and real estate.

Gold is immune to oxidation and corrosion, unlike other metals, which enables it to maintain its worth for ages. It is exceedingly flexible, excellent at conducting electricity, and attractive. Only 10–15% of the gold produced is used for industrial and technological purposes, whereas 85–90% is used for jewelry and bullion. 

This makes it naturally behave more like a currency than a commodity; rather than declining in usage during recessions, its price tends to grow when fear and uncertainty are on the rise.

Even more than copper, silver is the metal with the highest electrical and thermal conductivity. It tarnishes more quickly than gold, however. Silver is a more practical metal than gold and is utilized in tiny amounts in virtually all electrical devices as well as many other industrial uses, including glass and solar panels.

That silver is more erratic than gold is the “positive” news. As a result, savvy investors may profit significantly more by selling options on silver ETFs or silver mining companies. Volatility is helpful for long-term, patient investors.

Drawbacks of Gold and Silver in Portfolios

Commodities, particularly precious metals, may be quite volatile and do not generate any cash flows on their own. The majority of precious metal miners are notoriously bad-managed businesses that suffer from significant financial losses.

When an economic downturn occurs and output declines, industrial demand for silver also declines, which typically results in a decline in silver’s price. Because of this, it is too connected with stocks to serve the primary function of providing downside portfolio protection.

Should You Include Gold and Silver in Your Portfolio?

Surprisingly, there is debate about whether or not investors should purchase gold and silver. On the one hand, some fear the world economy and place practically all of their investments in precious metals. 

The majority of mainstream portfolios, on the other hand, have no exposure to precious metals, and some investors think that no credible portfolio should have any allocation to gold or silver at all. In most currencies save the U.S. dollar, gold is at record highs.

It appears that investors in certain nations get overconfident. Even though it has occurred several times in the past, they believe that many of the negative things that happen to other markets cannot happen to their own.

In 2018, when the currencies of Turkey and Argentina fell sharply, we witnessed an illustration of this. Their bond rates rose, and their stock markets crashed. This resulted in a decline in bond prices and dismal inflation-adjusted returns for several asset groups.

These occurrences take place sometimes all around the world. The ones who profited most from the havoc in their home economies were investors from those nations who held gold or assets denominated in foreign currencies.

How Much Gold and Silver Should You Include In Your Portfolio?

The answer to this query is specific to you and your particular situation. Consider:

  • How old you are
  • The country you live in
  • Your financial situation

Precious metals should typically make up 5% of a portfolio, although, in exceptional circumstances, 10% may be adequate. If you make excessive investments, you run the danger of missing out on the historically superior growth provided by other asset types. 

Having no allocation, however, exposes you to certain risks that stocks and bonds may not always be able to cover.

  • Famous Shark Tank investor Kevin O’Leary keeps 5% of his holdings in gold bullion and gold ETFs. He sells some gold when the price increases significantly. He purchases more as it falls.
  • As part of an “all-weather” strategy for a portfolio that performs well in a wide range of economic scenarios, billionaire hedge fund manager Ray Dalio advises keeping a 5 to 10% allocation to gold.

Both of those scenarios are feasible, and many people would benefit from a minor allocation to precious metals in a portfolio that otherwise consists mostly of equities, bonds, and real estate.

In Closing…

Investing in silver and gold may be profitable since precious metals are different from equities and bonds as an asset class, are somewhat mutually independent, and bring a number of unique risks and opportunities.

As a result, they are perfect candidates to be used as a part of portfolio diversification plans. Among the many methods to invest in silver and gold, the best plan will be based on your goals.

For the 5% allocation of gold and silver in your portfolio, take into account investing in precious metal ETFs and streaming/royalty businesses. Consider buying some gold coins and keeping them hidden away for emergencies.

Back to top