Whether you already have a large portfolio or you’re just getting started in investing, precious metals like gold, silver, platinum, and palladium can diversify your portfolio and serve as a hedge against inflation and market volatility. Gold and silver bullion and coins can also come in handy during times of civil unrest and political instability, so if you’re worried about needing emergency currency, you may be considering investing in precious metals.
But precious metals can strengthen your portfolio even if you aren’t expecting a societal collapse. Unlike currency and stocks, precious metals have inherent value. Silver is a particularly good choice for the new (or even the experienced) precious metals investor, because it’s useful as a currency and also has widespread industrial applications — plus, it’s a lot cheaper than gold. Beef up your portfolio with precious metals, and add some stability with assets that hold their value long-term. Let’s take a look at what precious metals can do for your portfolio.
Reduce Counterparty Risk
Put simply, counterparty risk is the risk that the other party in a trade, investment, or credit transaction will fail to uphold their end of the bargain. When you invest in stocks and bonds, you run the risk that the other party in the transaction — the company or entity issuing the stocks or bonds — will fall on hard times and fail to honor their obligations. Even when you invest in precious metal exchange traded funds (ETFs), you’re taking the risk that the institution backing the funds will pay as agreed.
But when you buy real, physical precious metals, you’re buying something that has inherent value outside the stock market or the monetary system. Investing in stocks, even mining company stocks, or funds, even precious metal ETFs, won’t give you the right to take delivery of actual gold or silver (or palladium, or platinum) if you so choose. But if you buy a 100 oz silver bar, you will have the exact amount of silver you paid for, and there will be no other parties involved to create a counterparty risk. You can store the silver at home in a safe or vault, or in a depository. But either way, you can access the physical metal if you need it, and while the value of precious metals might fluctuate, it’ll always have some value.
Hedge Against Inflation and Market Volatility
The value of precious metals like gold, silver, palladium, and platinum is intrinsic, so it doesn’t fluctuate when the market does. If the stock market crashes and your portfolio loses value, you at least won’t have to worry about the value of your precious metals. To the contrary, the spot price of precious metals, especially gold, often goes up during times of market volatility, because people feel safer investing their money in gold at such times. You can mitigate your losses, and maybe even manage to break even, by adding precious metals to your portfolio.
Gold, silver, and other precious metals can also provide a hedge against inflation. Inflation can easily chip away at your returns on other kinds of investments — if your return on an investment is six percent, for example, but inflation is three percent, you’re really not getting back as much. But precious metals are inherently valuable, so when the dollar itself becomes less valuable, precious metals just become worth more dollars. You’ll be able to get back your full return on the investment.
Markets can be extremely volatile, and, historical trends aside, no one can really predict what they’re going to do. That’s why it’s so important to diversify your portfolio. The more different types of investments you have, the less vulnerable you are to market volatility. But diversifying doesn’t just mean investing in companies that work in lots of different industries. It’s not about having the highest number of different investments, either. It’s about making each individual investment serve a different function. You might buy an S&P 500 Index fund for small-cap stocks and one for large-cap stocks. You might buy some municipal as well as corporate bonds. It makes sense to add an investment that has intrinsic value, like gold or silver.
Precious metals have an important role to play in protecting your portfolio from inflation, market volatility, counterparty risk, and more. Metals like gold, silver, palladium, and platinum will always be valuable, for their industrial applications as well as for their use in jewelry and as currency. Add some precious metals to your portfolio, and give your future self something to be grateful for.
Disclosure: This is not trading or investment advice. Always do your own research before investing in any markets.