Gold & Silver Investment Strategy

With uncertainty persisting in global markets it behooves investors to observe the old European maxim that “… one should always have just enough gold to bribe the border guards …” Gold and silver offer investors tangible assets with the opportunity for capital preservation. The price of precious metals fluctuate, but their inclusion in your portfolio can be an effective hedge against a world awash in turmoil.

Before Investing

Investors interested in procuring gold or silver or both to protect their wealth should consider the following topics: risks and benefits, asset allocation, investment vehicles, and tax advantages.

Assessing the Risks and Benefits

One of the most important pieces of information to know about investing in gold and silver is that prices for both metals are consistently resilient. The potential for capital depreciation is minimal, but it does exist. Nevertheless, historical data show that precious metals markedly increase in value in times of financial turmoil. Noticing the movement in the price of gold and silver from 2008, when the economy convulsed, until the present is one indicator, but the charts recognize market psychology at other times of tension as well. Spikes in prices on the charts easily correlate to times of historical uncertainty.

Allocating Precious Metals in a Portfolio

As with any investment strategy, allocating assets to gold and silver should always fit with a plan for diversification. So while the value of precious metals can soar in bad times, the main reason for participating in this market is for wealth preservation. Nick Barisheff, in the website The Market Oracle, gives a helpful description of how these kinds of investments should be viewed and allocated: “To protect your portfolio and preserve your wealth, a 5-to-20 percent allocation to precious metals is an absolute necessity.”

Assess the Main Choices

There are fundamentally three ways to invest in gold and silver. Bullion provides the simplest way to invest in gold and silver assets with minimal risk. However, this means having to physically hold the asset at home, in a safe deposit box or pay for custodial services. Investors can also buy the stock of gold and silver mining companies, but this has potential downsides. Purchasing the stock of any public company means putting faith in the company’s management, its earnings potential and balance sheet. As with any equity, research and due diligence are required. Either of the above strategies can be pursued by purchasing shares of a physically backed gold or silver exchange-traded fund (ETF) or shares of an ETF that holds stock in gold or silver mining companies. Mutual funds that invest in gold and silver mining companies are also available.

Don't Forget About Taxes

Many investors don’t realize they can include physical gold and silver bullion in a tax-advantaged, self-directed IRA. There are restrictions on what types of assets are allowed, but a self-directed IRA offers more flexibility than many other types of retirement accounts. As with any investment decision, it’s always prudent to consult with a financial adviser or tax professional before investing.

Photo Credits

  • Gold Cubes in Motion Blur image by Dan Collier from Fotolia.com

About the Author

Wayne Marks has more than 20 years of experience in finance, education, public relations and marketing in both New York City and Washington, D.C. He has worked for corporate and nonprofit organizations and holds a certificate from the Wharton School of Business.

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