Today we shall take a look at gold and silver investment strategies. At this point in time, more and more people are beginning to open up to the inclusion of gold in their retirement investment portfolios, and if you are here because you are trying to establish how to get started, then you are in the right place. All you need to do is read on till the end of the article, to gain some valuable insights to guide you on the way forward.
Physical gold and silver coins or bullion
The most traditional way to invest in gold and silver is to purchase physical coins or bars. The physical approach has the advantage of being the safest and least complicated way to invest in gold and silver. You are simply required to purchase some from a reputable vendor and store them in a secure location. However, it quickly becomes more complicated than that. How do you keep it safe, and where do you keep it? A precious metal IRA!
Precious metal IRAs
If you’re unfamiliar with the term, a precious metal IRA is essentially a self-directed Individual Retirement Account that allows you to invest in a wide range of assets, including precious metals. The Self-directed IRAs or SDIRAs as popularly abbreviated are quite popular for allowing investors to put their money into literary any imaginable assets, with the exception of a few of them. The good thing is that the investors can still the tax benefits that come with the other types of IRAs.
A precious metal that allows investors to invest in a certain asset is commonly named after that asset. In this case, a precious metal IRA that allows you to invest in gold is known as a gold IRA, while one that allows you to invest in silver is known as a silver IRA.
You should note, however, that you may also be allowed to use your gold IRA to invest in silver and other IRS-approved precious metals ( platinum and palladium), and also other assets such as real estate, startups, etc. In fact, the term gold IRA is commonly used in reference to precious metal IRAs.
While a precious metal isn’t the only way through which you can invest in physical gold and silver, it is the top option for most investors who are trying to invest for their retirement years.
Precious Metal Royalties Royalty/Streaming Companies
There are numerous gold and silver mining companies in which to invest. You can also invest in a few exchange-traded funds (ETFs) that hold a basket of miners. Miners have the advantage of being able to avoid many of the issues associated with precious metals investing. Whereas precious metals do not generate cash flows and are expensive to manage, miners do generate cash flows and frequently pay dividends.
Gold miners, on the other hand, are leveraged against gold. Whereas the price of gold may double or halve over several years in extreme cases (say, from $800 per ounce to $1,600 per ounce, or vice versa), gold miner stock prices may fluctuate 5-10x.
Assume a gold miner has a free cash flow break-even point of $1,000/ounce, which means they have positive free cash flow when gold is above that point. In simple terms, if gold is currently priced at $1,100/ounce, a gold miner will earn approximately $100/ounce in profitable free cash flow per year for each ounce mined.
If the price of gold rises to $1,500/ounce while the miner’s expenses remain constant, the miner will suddenly generate $500/ounce in profitable free cash flow. Profits increased 400% despite a 36 percent increase in the price of gold. If gold falls below $800 per ounce, the gold miner goes into the red, losing money quickly, piling up debt, and falling to a rock bottom share price.
If you own gold, you can ride out any downturns in the price of gold.
Gold miners, on the other hand, are concerned that if gold remains low for an extended period of time, they will go bankrupt before the price of gold rises again. It is certainly possible for gold to fall below all-in sustaining costs (AISC) for years if demand falls for whatever reason because annual production only accounts for about 2% of the current gold supply.
In other words, the market can remain irrational for a longer period of time than miners can remain solvent. Furthermore, gold miners have historically been poorly managed. They don’t keep costs under control, so they miss out on the most profitable gold price spikes.
They frequently make ill-advised purchases when precious metals are at high prices, creating a value trap when prices fall back to normal. They have low insider ownership as a group and CEOs who are paid very well in comparison to the size of their companies.
ETFs and Options on Gold and Silver
Buying one or more exchange-traded funds is the simplest way to invest in gold and silver (ETFs).
The main benefit is that they are extremely liquid, and you can buy and sell them through your brokerage account. This enables simple portfolio rebalancing as well as a low-cost and hassle-free buying/selling process. Historically, these were somewhat pricey, but they are becoming more affordable. As ETFs become more popular, the general trend is for them to become less expensive.
The SPDR Gold Trust (GLD) ETF, for example, was established in 2004 and is on the pricey side. Then, in 2005, the iShares version was released, which was slightly less expensive. Far later, in 2018, SPDR released their GLDM ETF, which is even cheaper.
If there is a disadvantage, it is that they lack the “catastrophe insurance” aura that physical bullion does. Most of these ETFs aren’t redeemable for gold or silver, and you don’t have physical possession of them. So you’re out of luck if there’s a zombie apocalypse and markets go dark.
Frequently Asked Questions on Gold and Silver Investment Strategies
1. What Are the Advantages of Investing in Precious Metals Rather Than Stocks?
Investing in precious metals has some advantages over investing in stocks, including being a hedge against inflation, having intrinsic value, no credit risk, a high level of liquidity, adding diversification to a portfolio, and ease of purchase.
2. What Are the Best Precious Metal Investing Strategies?
The best way to invest in precious metals is to buy the metal outright and keep it in physical form, or to buy exchange-traded funds (ETFs) that have significant exposure to precious metals or companies involved in the precious metals business. The truth is, however, that the best way to invest in gold is determined by your financial goals and objectives.
3. Can I diversify my retirement investment with gold and silver?
In general, gold and silver are regarded as diversification tools. For example, it is obvious that gold has historically served as an investment that can add a diversifying component to your portfolio, regardless of whether you are concerned about inflation, a falling US dollar, or even protecting your wealth. If your primary goal is simply diversification, gold is unrelated to stocks, bonds, or real estate.
4. What Exactly Is the Gold-Silver Ratio?
The gold-silver ratio, also known as the mint ratio, is the value of an ounce of silver in relation to an equal weight of gold. Simply put, it is the amount of silver in ounces required to purchase one ounce of gold. It can be used by traders to diversify the precious metals in their portfolios.
That will be all for today’s article in which we have looked at gold and silver investment strategies. I hope that the much we have covered herein was helpful to you, but if you would need more information on how to go about investing in this industry, then you can drop me some questions in the comments section- I will get back to you ASAP and point you in the right direction.
I wish you well,
Eric, Investor and Team Member at Gold Retired!