4 Precious Metals That are Most Similar to These Stock Market Asset Classes
I’m sure many of us have seen the infamous 2013 movie, “The Wolf of Wall Street,” and the allure of stocks where more is never enough. With that said, we thought it would be a fun and interesting exercise to compare the four most popular precious metals to various stock market investing styles or types.
In fact, we’ll even go so far as to provide a few specific stocks as examples to give some further perspective. While we’re not necessarily advocating specific precious metals in lieu of these stocks, this should help to give new investors to precious metals an idea of how gold, silver, platinum and palladium trade and factors that affect their value.
The value and importance in this exercise is because not all precious metals respond the same to different economic environments.
We believe this article is timely, as the coin and bullion market is currently seeing a wave of new investors attempting to survive and thrive in the current high inflationary environment. In fact, a large investor recently made headlines when she engaged the services of a well-known coin and bullion dealer to fill a $50 million order.
The rumor is that this is the first of a few orders this individual expects to place over the next 6 – 12 months.
To circle back to our original topic, our goal is to share some details on each of the precious metals that we’re going to highlight. In doing so, we hope this information will spark some interest among those of you who are new to precious metals or are thinking of making your first foray into the field.
Without further ado, let’s begin with gold, the most popular and most recognizable of the four precious metals.
Gold is well…the gold standard when it comes to precious metals. Gold has been used as money for thousands of years. In fact, our Constitution only permitted the use of gold and silver specie (or coined money/coin) as currency.
Furthermore, the U.S. was on the gold standard until 1971. While we were on the gold standard, we experienced low inflation rates, fewer, shorter and less severe recessions and overall economic prosperity. Since severing the link between the dollar and gold in 1971, we’ve experienced record levels of debt, deficits, inflation and money printing.
One of the most important features of gold is that it prevents governments from spending beyond their means and forces discipline and restraint. When you’re required to operate within a balanced budget, you truly figure out what is important and prioritize accordingly.
How has gold held up over the years? The nice thing is that gold is as valuable today here in the states as it was in the 1800’s. In other words, a $20 gold coin in the 1800s still has the same spending power today as it did then.
At a melt value of roughly $1,600 at the time of this writing, you could afford the same nice men’s suit and shoes today as you could 150 years ago. If you instead preferred the convenience of a $20 bill as opposed to a $20 gold coin, it clearly doesn’t have the same spending power. In fact, you’d be lucky if you could even afford a belt today for $20.
Even though gold has maintained its spending power over the years and has served as a way to preserve wealth, it’s actually the least sexy of the four precious metals that we’re going to highlight. In fact, some might say that it’s a stodgy and boring investment. Of course, it’s important that you have stodgy or boring types of stocks in an investment portfolio.
Many advisors even recommend that you maintain a core of reliable (aka – stodgy) stocks that throw off dividends and provide stability in an otherwise uncertain market.
THE STOCK COMPARISON
We believe that gold is the most consistent and is most closely aligned with large divided-paying value stocks.
A good example is AT&T.
This is a large bell weather stock that has stood the test of time and has likely served as a core holding in many investors’ portfolios.
In fact, at the time of this writing, AT&T is one of the highest-paying dividend stocks in the S&P 500.
Mark Skousen famously said, “Gold and silver have always had value, never have gone to zero. Can you say the same for stocks and bonds?” Silver has traded as money or currency as long, if not longer than gold. In fact, as recently as 1964, U.S. dimes, quarters and half dollars were composed of 90% silver.
There are many references to the use of silver as money throughout history. We already highlighted the importance of silver being written into our Constitution, but there are also many biblical references of silver. Depending on which resource you use, silver was mentioned in the bible as many as 300 times, if not more. Here are some specific references that we highlighted in a previous article. Obviously, mankind has had an affinity for this precious metal as a means of currency for barter or trade for thousands of years.
The gold to silver ratio has varied over the years but was first officially fixed by the U.S. government at 15 to 1 following the passage of the Coinage Act of 1792. The ratio was originally meant to determine how much silver it would take to purchase one ounce of gold.
Today, there is no longer a fixed exchange ratio between gold and silver. Rather, the free market determines prices. At the time of this writing, the ratio is 84 to 1, which is above the historic average. While silver is estimated to be 19 times more prevalent than gold, only about 8 times more silver is being mined on an annual basis. Because of this, many investors believe that the gold to silver ratio will contract over time, pushing silver prices higher.
While gold tends to perform well in inflationary and deflationary environments, silver tends to shine brightest during high periods of inflation. It also responds well to a depreciating dollar even when there’s little to no consumer price inflation.
When we look back at when silver performed best, such as in 1980 and 2011, we were experiencing high rates of monetary or price inflation. The gold to silver ratio in 1980 and 2011 were 16 to 1 and 31 to 1, respectively, which is substantially less than the current ratio.
They say when you’re expecting gold to go up, you should invest in silver, as it tends to outperform gold during a bull market. Some people refer to it as a “slingshot effect.” It tends to go up at a much higher percentage. The reverse is also true. When gold goes down, silver tends to drop at a greater rate.
THE STOCK COMPARISON
We liken silver to a solid tech company, such as Apple.
It’s a reliable company that at times will outperform its competitors, but also appears to have limited downside risk. In other words, I don’t think anyone believes that the stock price of Apple will plummet causing the company to file for bankruptcy in the near future.
Expect nice runs in the price of silver, especially considering the current economic environment. There’s also the possibility that prices could pull back in a down market, so keep this in mind when deciding on a proper allocation.
Regardless, it’s certainly an asset class worthy of representation in your portfolio. Think of silver as a large growth stock.
Platinum is an intriguing precious metal that hasn’t had the type of long-standing history as gold and silver. You’ll see no biblical references of this metal or any mention of it being used as an acceptable form of money in any country’s founding documents. One reason for this is that platinum was only discovered in 1735. While nearly 300 years ago sounds like a long time, it pails in comparison to the longevity of gold and silver.
Platinum was first used as money in Russia in the 1820’s, as we highlighted in one of our previous articles. However, it wasn’t adopted by most other countries until it was produced as a modern investment coin. In fact, the first platinum coin in the United States, the American platinum eagle, didn’t begin production until 1997. Throughout history, platinum has been seen more as an industrial metal than an investment metal, but that has changed a bit over the past couple of decades.
Some of the more common industrial uses for platinum include jewelry, electronics and catalytic converters. Palladium has also been used for similar purposes, which we’ll highlight next. Platinum, on the other hand, has been a very popular metal used in the production of jewelry. Until recently, it has been viewed by the public as more valuable and desirable than gold. That’s because platinum has historically been more valuable than gold. Its all-time high of $2,270 eclipses gold’s all-time high of $2,075! In fact, the two metals swapped positions a few years ago and since that time, gold has consistently traded at higher levels than platinum. This is currently the case even though platinum is 30 times rarer than gold and only a handful of platinum mines exist in the world.
THE STOCK COMPARISON
Since platinum is primarily used for industrial purposes, the value tends to be more cyclical. In other words, as the economy goes, so do platinum prices.
A good example from a stock perspective is Delta.
Delta is a cyclical stock that sees its ups and downs. Clearly, there are less travelers when the economy is struggling and there’s less disposable income. Additionally, fewer people travel when the cost of flights increase due to higher oil prices, labor costs, etc. If you’re expecting an economic expansion as opposed to a contraction, then platinum is probably a good choice.
Palladium has many of the same characteristics as platinum. In fact, it’s considered to be in the platinum metal family. Palladium was discovered shortly after platinum in 1803 and has been used primarily as an industrial metal since that time.
Interestingly, most investors haven’t given palladium a second thought until recently. Historically, palladium has traded at roughly half the price of platinum.
At the time of this writing, palladium is the most valuable of the four precious metals that we’ve highlighted in this article. While prices have fallen a good bit from its March 2022 high of $3,440, it’s still trading above $2,100 and has been consistently higher than gold since around December of 2018. This shift has shed light on this metal, which has grown in popularity as an investment metal.
The spike in prices in March 2022 was primarily in response to the Russia-Ukraine war and the sanctions imposed on Russia, as they’re one of the world’s largest producers of palladium.
Interestingly, the first palladium coins were issued by Sierra Leone and Tonga in 1966 and 1967. Russia, or the Soviet Union at the time, was one of the next countries to produce palladium coins. They were soon followed by others including Canada, Australia, Isle of Man, China and eventually the United States in 2017.
The U.S. Mint has produced a limited number of palladium coins since its inaugural year with less than 100,000 coins minted through 2022.
As we mentioned above, palladium has historically been used for industrial purposes and that continues to be the case today. In fact, it’s used for many of the same purposes as platinum, including jewelry, dental, catalytic converters and electronics. The rarity, and expanded industrial use, in part, have contributed to sustained higher prices. In fact, palladium is one of the rarest metals on earth, and is 15 more times rare than platinum.
To put things into perspective, just over 6,000 tons of palladium have been mined making it 230 times rarer than silver and 30 times rarer than gold.
THE STOCK COMPARISON
Being that palladium exhibits many of the same characteristics as platinum, it would also partially qualify as a cyclical stock, but also has many comparisons to a high-flying speculative tech stock.
We’ll use Tesla as our example.
When the economy is doing well and the government is subsidizing electric vehicles, the price of Tesla stock explodes, but it’s also a very volatile stock and can experience sharp and severe downturns. At the time of this writing, Tesla is trading at nearly 50% of its all-time high, and we’re barely in bear market territory.
If we see continued weakness in the economy, including a tight monetary policy from the Federal Reserve, we could see a further drop in the price of Tesla stock.
On the same token, unless we see significant and persistently high levels of inflation or a substantially weaker dollar, we would expect for the price of palladium to equally fall in an economic downturn.
Our goal with this piece was to shed some additional light on the four most popular precious metals and provide some stock analogies in hopes that new investors can relate precious metals to an area they may be more comfortable and familiar with.
We began our discussion with gold, the most popular precious metal. It has long-term staying power, is a way to preserve wealth, and while not flashy, has consistently allowed investors to maintain their purchasing power over time. We view it as a core holding, much like a large-value stock that pays dividends. Our stock example was AT&T.
Silver is also one of the most popular investment metals and like gold, has been used as money for thousands of years, including in the U.S. as recently as 1964. This white metal is a bit more flashy and volatile than gold, but should still be considered a core holding. Because of its higher potential upside and somewhat speculative nature, we likened it to Apple stock.
Platinum is also an intriguing industrial and investment metal. While not used as money until much later than gold and silver, its value is well-known throughout the modern world. It’s 30 times rarer than gold, which is one reason why it was more valuable than gold until a decade ago.
Because of the heavy industrial use, we felt that platinum was most like a cyclical stock and used Delta as our stock example.
Finally, is palladium, the rarest of the four precious metals that we’ve highlighted. The price of platinum and palladium changed positions a few years ago and have remained that way since.
Topping out at $3,400, palladium obviously has tremendous upside potential, but is also subject to extreme volatility. Because of this, we used Tesla as a stock comparison. This is a stock that can make you a fortune on the way up but can dash your hopes and dreams on the way down.
We hope you found this piece as interesting as we did and welcome you to contact the precious metals experts at Atlanta Gold & Coin Buyers.
We specialize in all these precious metals and are one of the leading buyers and sellers of rare and bullion coins in the Southeast.
See why more and more people are choosing Atlanta Gold & Coin as their preferred coin dealer.
Happy Treasure Hunting!