Gold, Silver, and Other Precious Metals: Use them for diversification and portfolio risk management, but not for long-term investing
Gold and silver might be good ways to diversify your portfolio and guard against risk and uncertainty (strategic portfolio risk management and mitigation). You are mistaking, however, if you make precious metals like gold and silver a very significant part of your portfolio in most cases. e to edit.
Gold, silver, and other precious metals aren't productive assets - they effectively just sit around
As ultra-successful investor Warren Buffett has stated and as any good investor knows, gold and silver (and pretty much every such precious metal and commodity) are not productive assets - they just sit and look pretty. Unlike a successful business, they don't make more money, as illustrated by the below example.
If you had $1000 to invest today and you purchased silver bullion with the entire sum, the value of your initial $1000 investment in 10 years would depend solely on the supply and demand for silver. That's it. If you invested that money into buying a share of a successful and profitable business, however, the value of your $1000 investment in 10 years would depend on a lot more than the supply and demand for a share of that business. It would depend on that of course, but it would also depend on the business's management, the innovation that occurred within the business, how effectively the business model and the business's plans were carried out, etc. Over those 10 years, your silver would just be sitting there but the business would be working hard to sell products or services, grow, and become more efficient. It may turn out that the investment in the business was a bad idea, but that wouldn't be because of the nature of the investment. It might be because of other factors such as a recession, depression, poor management, an act of God, etc. If your investment in the silver bullion turned out to be extremely profitable, however, it would only be because of the speculative nature of investing. You would have guessed correctly that market forces would cause an increase in the price of silver. Over those ten years, your silver bullion would have been sitting there, but the business will have been hard at work creating value and serving its customers.
A quote from Warren Buffet on gold and silver
Here's a quote from world-renowned investor Warren Buffet - he can put it better than anyone can:
"Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be $9.6 trillion. Call this cube pile A.
Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond."
Precious metals like gold and silver may help diversify your portfolio and mitigate risk, even if they aren't great standalone investments
Although not good for long-term investing strategies, precious metals like gold and silver may add some risk-mitigating diversity to your portfolio if done correctly.
In many instances of economic downturns and recession -- but not all instances -- precious metals and commodities outperform traditional asset classes such as equities. Even real estate usually doesn't perform well during a recession. But, precious metals occasionally experience an uptrend during times of economic uncertainty because there is a perceived level of safety in them.
The perceived safety may arise from many reasons, which might include:
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledger technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).