Investing

Everything you need to know about investing in gold and precious metals

Twenty/20

Your investment portfolio, experts agree, should include a curated mix of stocks and bonds. And some investors find that adding a little glitter can be a good idea, too.

Gold, silver, and other precious metals are, in many respects, the original investment. People have been digging up and refining precious metals for more than 6,000 years. The search for gold opened up the New World in the 1400s and 1500s, establishing trade routes to North and South America. Later, gold prospectors packed up and headed to states like California and Alaska in the mid-1800s and ended up settling in great swaths of the U.S. West.

Centuries later, precious metals — a classification that, these days, mostly refers to gold and silver, but can also include platinum and palladium, which are generally used as components in manufacturing — still haven't gone out of style.

But is it smart for ordinary people to think of gold and other metals as investments, and are there safe ways to include them in your portfolio? Experts explain.

'Gold is a good alternative currency'

Some modern-day investors like precious metals for the same reasons their ancestors did: Because they can seem like "the ultimate form of wealth," says Jeff Clark, senior precious metals analyst at GoldSilver.com, an online precious metals dealer. Clark says that there are two primary reasons that investors are attracted to gold, specifically: Gold is traditionally the strongest way to store wealth, and it's also "a hedge" — that is, when other investments lose value, gold tends to appreciate.

"Gold is your Iron Man suit," he says, as it can provide investors a refuge when markets decline. For example, gold and silver prices have climbed this year as uncertainty about the ongoing trade war with China has led to bumpy patches in the stock market. Fears about a decline were unfounded, though, as the market has instead gained more than 25% so far in 2019.

In a general sense, though, when investors get spooked, they sell stocks and buy investments like precious metals. "It's something people flock to when they're uncertain of the markets," says Katie Brewer, a Dallas-based certified financial planner who runs the financial firm Your Richest Life.

It's something people flock to when they're uncertain of the markets.
Katie Brewer
Certified financial planner

In the past, Brewer says, precious metals were a staple in a lot of portfolios. "Investors had to have precious metals because that's the only thing that kept any of its value," she says.

This year, the price of gold has mostly hovered between $1,250 and $1,550 per ounce. Some analysts expect this price to climb even higher in the near future. David Roche, president and global strategist at Independent Strategy, recently told CNBC that gold could top $2,000 per ounce in 2020 due to lower interest rates.

"Gold is a good alternative currency because it's safe, and because it costs nothing to own it," he said.

The advantages and drawbacks of gold

Aside from being a relatively "safe" investment, Clark says gold has a few other advantages. For one, it's physical, so you can actually store it in your home if you want to. Second, it can't be hacked or erased. And third, it has no counter-party risk — the risk that another party could default on their obligation, like a bond-issuer failing to pay a bond-holder — that could affect its value.

There are drawbacks, too. Because gold is a tangible investment, you may have to find a place to store and protect it. And there are transaction costs associated with it, such as having to refine it into jewelry or bars.

Brewer says that investors should also keep in mind that precious metal prices tend to be very volatile. Wild price fluctuations aren't uncommon. She says investors should also remember that physical precious metals aren't liquid assets — it isn't always a quick and easy process to sell them if you need to tap into the equity.

How to invest in gold and precious metals

There are numerous ways to invest in precious metals, both through the stock market or by purchasing the metals themselves.

Invest through the stock market. There are ETFs that give investors exposure to precious metals. You don't actually own the metals themselves, Clark warns, but rather shares in a trust. You can also buy shares of companies in the mining and refining industry.

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Purchase the metal itself. If you'd rather buy a physical investment, you can purchase gold, silver, and other metals at a dealer either in person or online. Clark says that gold bars and coins are generally 99.99% pure gold. Because they've gone through a refining process, they can cost more upfront. Then, of course, you need to have a safe place to store them.

Brewer warns that your focus as an investor should remain, overwhelmingly, on stocks and bonds. Make sure you've covered all of your bases and built a diversified portfolio, she says, before even considering alternative investments like precious metals. Even then, they should represent only a small percentage of your total holdings.

That said, some experts point out that incorporating some precious metals can help you diversify a portfolio that's primarily composed of stocks and bonds, especially with some economists warning that the economy could slow down in 2020.

Jim Cramer, for example, touts the benefits of investing in precious metals. "If you're looking for an insurance policy against volatility and economic uncertainty, gold is a great way to go," he said on CNBC's "Mad Money" earlier this year. "I always advocate owning at least a little as insurance against the unknown."

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