How to Invest in Precious Metal Assets
Gold, silver, and other precious metals are typically seen by investors as store-of-value assets that help reduce portfolio risk. But what are the downsides? And how do you even go about investing in a precious metal like gold or silver, anyway? These questions are addressed below.
Investing in Gold, Silver & Other Precious Metals
When thinking about investing in precious metal assets like gold or silver, we often picture physical bullion bars. But most people don’t realise that this is just one way to gain investment exposure to precious metals. Below are some other options that are commonly chosen by investors looking to buy gold, for example, but aren’t keen on acquiring physical gold bullion bars.
Exchange-traded funds (ETFs)
These investment products represent a convenient and liquid way to gain exposure to precious metal assets. Most come in the form of a so-called physically-backed ETF, meaning the precious metal itself is stored on behalf of those invested in the corresponding ETF.
Read: What Are Financial Markets?
Precious metals mining companies
Buying shares in a publicly-listed mining company—or a listed investment company (LIC) that specialises in the resources and mining sector—is another way to invest in precious metals, albeit indirectly.
With investing in mining companies, though, the growth and return in the stock depend not just on the spot price of gold, but also on the expected future earnings of the company that has issued the shares.
Precious metals tokenised on Ethereum
These tokens exist on a public blockchain like Ethereum and are fully backed by precious metal. Typically, one token is equivalent to one gram of a given precious metal. This is true for each of Ainslie Wealth’s Gold Standard (AUS) and Silver Standard (AGS) tokens, for instance. To maintain trust, tokenised precious metal issuers routinely have the corresponding real-world precious metal holdings verified by an independent auditor.
You can buy AUS and AGS tokens on CoinSpot—one of Australia’s leading crypto exchanges. This news was monumental for precious metals and crypto investing in Australia, as it gave investors and traders a newfound ability to trade gold and silver 24 hours a day, 7 days a week from anywhere in the world.
(For investors wondering why spreads on precious metals are typically higher than cryptocurrencies, consider reading the latter half of Ainslie Bullion’s Aug. 2019 blog post. As always, over-the-counter buying and selling of AUS and AGS tokens are available through Ainslie Wealth.)
What’s So Precious About Gold & Silver Investing?
People have been investing in precious metals such as gold and silver for centuries on end. But why? There must be some reason, no?
When hearing why people choose to invest in precious metals, a reason often pointed to is the asset class’ perceived status as a store of value. Indeed, precious metals exist independent of monetary systems based on government-issued fiat currencies. For this reason, you’ll often see gold and silver investments touted as a hedge against a would-be devaluation of a given nation’s currency.
To be sure, the topic of currency devaluation is particularly relevant in the current macroeconomic and geopolitical landscape. All over the world—be it the Bank of Japan, U.S. Federal Reserve, or European Central Bank—we are seeing central banks once more pursue quantitative-easing strategies.
Downsides to Precious Metals Investing
By and large, gold and other precious metals are unproductive, non-yielding assets. That is to say, a precious metal investment cannot be ‘put to use’ in an attempt to generate a return.
When you invest in property and subsequently rent it out, for example, your asset can be thought of as ‘working’ for you. The same goes for equity investments. The capital you provide the company—in exchange for an ownership stake (i.e. shares)—is put to use in an attempt to bolster shareholder value, which comes in the form of dividend payouts and/or share price appreciation.
Tangentially, another common criticism associated with precious metals investing is that the opportunity cost of holding an asset like gold or silver is too high. (Opportunity cost refers to the value of the next best alternative forgone as a result of making a decision.)
Whilst precious metals have been known to generate far greater returns than other popular types of investments here and there (e.g. in the years following the global financial crisis (GFC)), there exists an uncomfortably large number of five- and 10-year periods wherein precious metals’ returns were far inferior to those realised in equity and property markets.
Storing Precious Metals
Let’s assume you do choose to invest in physical precious metals such as gold or silver bullion. The question now becomes: “Where are you going to store it?” Indeed, storage is something precious metal investors must carefully consider.
Of course, there’s the option of home storage. For those that envisage themselves hoarding gold for the long term, spending time and money setting up a high-security storage solution on your property may be worthwhile. A big drawcard associated with storing precious metals at home is that it eliminates counterparty risk—the risk of the other party (or parties) to a financial transaction failing to meet its obligations. However, home storage brings with it a heightened level of personal risk.
Another option that’s popular amongst investors looking to store their precious metals is by entrusting them with a private company that specialises in operating vault security systems. Often, these high-security vault operators offer insurance coverage, something that is incredibly difficult to access if you’re storing your precious metals at home. High-security vault operators can be found in most of the world’s major cities.
Central banks doing more of this printing and buying of assets will produce more negative real and nominal returns that will lead investors to increasingly prefer alternative forms of money (e.g., gold) or other storeholds of wealth.
Ray Dalio (Paradigm Shifts; July 18, 2019)