Investing in Gold, Silver, and Precious Metals: Is It a Smart Idea?

Gold, silver, and other precious metals have long served as a store of value. Especially in the case of gold, these metals have historically served as a hedge against inflation. In times of economic instability, precious metals might be a good asset to consider for your investment portfolio. Additionally, alternative assets like precious metals and real estate provide a level of diversification compared with more traditional stocks and bonds.

As with any investment, however, there are risks to consider with precious metals investing. Unlike many other asset classes, gold and silver need to be physically stored. They also don’t add to your cash flow or pay out dividends.

Here are seven things you need to know before investing in gold and silver. And then four ways you can invest in these and other precious metals.

Gold and silver may be a good inflation hedge

During inflation, consumer goods become more expensive as the dollar falls in value. Because gold and silver are valued in U.S. dollars, they increase in value too. As a result, some investors convert their cash holdings to gold to protect the value of their assets in times of inflation. Furthermore, because silver has many industrial uses, it tends to rise in value more than gold.

Silver is more volatile than gold

The price of silver can be two to three times more volatile than the price of gold on a daily basis. Short-term traders in the metals could benefit from this volatility if they “bet right” on the direction of the price swings. However, this may not be so positive for investors looking to silver as a diversifier for their portfolios.

Gold has been a more powerful diversifier than silver

Both gold and silver have a relatively low correlation to more traditional investments like stocks and bonds. Historically, when stocks underperform, they have little impact on the value of gold and silver. Gold is also less used for industrial purposes like silver, so it is least correlated to the broad economy and a better safe-haven investment.

Silver is more tied to the global economy

Because silver generally has more industrial uses than gold, its price is more tied to an upturn or downturn in the global economy. When the production of silver components for heavy industry and technology manufacturing is high, the demand for silver increases driving up the price of the metal.

Gold is more expensive than silver

The price of an ounce of gold is far higher than that of silver. For example, on Jan. 14, 2022, the spot price of gold was $1,821.86 per ounce, this compares with a spot price for silver of $23.16 per ounce. The spot price of gold simply refers to the price that gold can be purchased for at any point in time on the open market.

Although these prices will vary over time and based on market and economic conditions, the discrepancy is large. This price differential factors into the amount of either metal that an investor can purchase.

You can include precious metals in IRAs and retirement accounts

Gold, silver, and other precious metals can be held inside of IRAs and other retirement accounts such as a solo 401(k) and a SEP IRA. Most conventional IRA and retirement account custodians will not allow you to hold precious metals in a retirement account, so you may need to open a self-directed retirement account or a gold IRA.

Investing in gold, silver, and other precious metals inside of a retirement account is complex and there are many rules to follow. First, the types of precious metals are generally limited to gold, silver, platinum, and palladium. Certain types of bullion, bars, or bullion coins also cannot be held in an IRA of any type, such as rare or collectible coins.

Another issue with holding precious metals inside an IRA or other retirement account is the storage of the metal. Due to IRS regulations, most self-directed IRA platforms require you to select a third-party storage deposit for the physical storage of the metal. Many of these platforms have a relationship with a precious metals storage depository facility to help you.

Precious metals don’t produce any cash flow

Precious metals as an investment do not produce any sort of ongoing cash flow. Other investments, such as individual stocks, might produce a stream of income from quarterly dividends. Mutual funds and exchange-traded funds (ETFs) that invest in stocks often have the potential for the distributions of dividends and capital gains during the year.

Bonds generally pay interest over the course of the year, as do mutual funds and ETFs that invest in bonds. These periodic income payments are in addition to any price appreciation of the individual stocks or bonds, or the mutual funds or ETFs that invest in these underlying securities.

In contrast, gold, silver, and other precious metals do not pay dividends or interest. The only way an investor in these metals will derive a financial benefit is if they are able to sell the metal for a higher price than they purchased it for.

4 ways to invest in precious metals

1. Physical metals

One way to buy precious metals is to own the actual physical metal. Some forms include gold bars, gold bullion, silver bullion, gold coins, and silver coins. Other precious metals may be available in similar forms or some slightly different configurations.

When looking to purchase physical metals, there are many factors to consider. First, it’s important to understand what you are buying. For example, gold comes in varieties or gradients of fineness based on the content of gold in the bar or the coin.

Physical metals also need to be purchased through a dealer or other type of intermediary. This may be a dealer that specializes in precious metals. There are both online dealers and those with a physical business. In some cases, major brokerage firms may also engage in buying and selling gold and other physical precious metals for their clients. Some commercial banks may offer this service to certain clients as well.

In the case of a precious metals dealer, it’s important to do your due diligence before moving forward with any purchases. For instance, have any complaints been filed with regulatory agencies? Additionally, you will want to understand how these dealers are paid and how much of a mark-up or commission they receive on transactions.

A key issue to consider in buying physical gold or other precious metals is storage. You will need to decide if you are going to store the metals yourself or use a third party. You will want to thoroughly vet any storage firm to understand how they safeguard your assets. As long as the metals are not held inside an IRA or another retirement plan, you can store them yourself.

Read how to buy gold.

2. Futures

Futures on gold, silver, and many other precious metals are actively traded on various exchanges. Futures are a financial instrument that allow traders to bet on the direction of an underlying asset such as gold or silver without actually owning these assets.

Futures trading is essentially speculation, though in some cases those who own assets like gold, silver, or a host of other commodities and financial instruments can use futures to hedge their bets on their positions in these assets.

Read how to trade futures.

3. Exchange-traded funds

ETFs offer a way for investors to purchase an investment that tracks the price of gold, silver, or other precious metals without having to own or store the physical metal directly.

An example of an ETF tracking a precious metal is the SPDR Gold Shares ETF (GLD). Shares in the ETF represent fractional shares in a trust, the only assets of which are physical gold and cash as needed for liquidity purposes. GLD’s expense ratio is a reasonable 0.40%.

Another example of an ETF that tracks a precious metal is the iShares Silver Trust ETF (SLV). SLV is backed by physical silver as well and has an expense ratio of 0.50%

These and other ETFs tracking gold, silver, and other precious metals can be traded during the hours the stock market is open just like any other ETF. As securities, ETFs can be held in taxable accounts as well as IRAs.

In some cases, some gold ETFs may be taxed as collectibles, which means that gains may be taxed at a 28% rate versus the lower long-term capital gains rates that would generally apply to an ETF. This can be avoided by holding the ETF inside of an IRA.

Read what is an ETF fund to learn more.

4. Mining stocks and funds

Another way to buy gold, silver, and precious metals is to invest in the stocks of companies that mine them. There are also mutual funds that hold portfolios of the stocks of these mining companies.

Mining companies will tend to do better when metals prices are higher. However, some of the performance of these stocks is tied to the profitability of the companies, which can depend on how profitably they do their work.

Read our guide to gold stocks you can invest in.

FAQs

Bottom line

Investing in gold, silver, and other precious metals could be a good way to add diversification to your portfolio. But if you're a beginner, it’s important to understand how these metals work and decide how to invest money in these assets to meet your financial goals.