Invest in Gold & Silver: Precious Metal Stocks vs. Physical Gold and Silver
If you’re interested in investing in precious metals, you might have considered investing in gold and silver mining stocks as an alternative to physical gold and silver coins and bullion. While this can many times be profitable if you’ve done your due diligence in researching the mining company you decide to buy shares in, it can also come with a lot more risk.
Investing in individual mining stocks that are related to the price of gold and silver can be a good way to get exposure to strong mining companies, however, it is a lot riskier than owning gold and silver physical coins and bullion. This is because individual companies can be impacted by any negative news surrounding their business or business partners.
If management makes a bad decision that costs a company to miss on its earnings expectations, you can find yourself sitting on an outsized loss if you didn’t manage your risk properly. Furthermore, geopolitical risks abound for mining companies, especially those that have mines or operate in high-risk areas, such as Venezuela or South Africa.
With those risks in mind, we would like to take the opportunity to go over the advantages when you invest in gold and silver coins and bullion. Additionally, we will outline the potential risks that can come with investing in gold and silver mining stocks and other alternative precious metals investments.
Investing in Gold and Silver Coins and Bullion
Those looking for direct exposure to gold and silver as a hedge against inflation might want to consider owning physical coins and metals. The advantage of owning physical precious metals is that it is tangible, you physically own it. Common storage options include a home safe, a bank vault or a precious metals depository. Having direct access to coins and bullion offers you the peace of mind that you can physically hold your investment without having to worry about your online brokerage being responsible for your assets.
Physical gold and silver coins and bullion you can touch is the safest way to own precious metals.. Some of the most popular silver bullion coins and gold bullion coin options are those produced by the United States Mint and the Royal Canadian Mint.
Four of the most popular gold coins:
- American Gold Eagle
- Canadian Gold Maple Leaf
- American Gold Buffalo
- South African Krugerrand
For silver, the most popular are:
- American Silver Eagle
- Canadian Silver Maple Leaf
Some of the other eagle coins produced by the United States Mint, such as platinum and palladium eagles are becoming a popular investment.
When comparing this investment to having stock ownership to a mining company, the number one difference is that the price of your physical gold and silver holdings will not change as much. Instead, you can expect a less volatile investment that historically has outperformed many other asset classes.
Gold and silver stocks on the other hand are a lot more susceptible to volatility. While this can be great when the stock is going up, it can be very stressful when the opposite occurs. Many stocks like Barrick, Newmont, and Freeport McMoRan are largely tied to the performance of the physical metals themselves. These companies stock prices match up to the price of gold at around 64%, which is considered a moderate.
This difference is largely due to the fact that these are individual companies that all have their balance sheets, management teams, and operational strategies. Because these differ from company to company, there is no way to know with 100% certainty a company will make sound decisions leading to profitability.
Any misstep could result in the stock price going down. This is something you don’t need to worry about when owning physical gold and silver coins and bullion. Rather, when dealing with physical gold and silver, the primary drivers are supply and demand and central bank monetary policy.
Investing in Gold and Silver ETFs
We would not be doing the reader any favors not mentioning a third investment option. This alternative is investing in gold and silver ETFs.
Investing in these products will be the most similar investment option to buying physical gold and silver coins and bullion. The price of an ETF is directly linked to that of gold and silver. You can find live spot prices on third-party sites, such as Kitco.com.
The two most popular gold and silver ETFs are the GLD and the SLV. Both offer you an affordable option to gain exposure to the precious metal market.
However, investing in these products does come with its drawbacks. The first being that you do not have actual possession of the physical gold and silver coins or bullion. Investing in a gold or silver ETF means you have bought into the underlying price of the precious metals and not the actual asset. When liquidating your possession, you’ll receive the cash equivalent of your investment as opposed to physical metals.
Highly leveraged ETFs bring counter-party risk. These risks are not present when obtaining gold and silver coins. In other words, if investors lose faith in these paper metals products, your investment could plunge in value; well in excess of the underlying metal value of the coins and bullion.
Investing in gold and silver coins and bullion can be a great investment if you’re looking to protect your portfolio. Because gold and silver are safe-haven assets, they tend to perform well during periods of market volatility. They also provide a store of value against central bank monetary policy. This is especially important at the time of this writing, as many central banks are pursuing loose monetary policies. These policies are the type that leads to inflation.
While it is tempting to diversify by investing in gold and silver mining stocks, it is important to know the risks associated. While they can offer boosted returns to your metals exposure, they also have the potential for more volatility and losses.
Your goals and risk tolerance will dictate your investment in stocks that are connected to precious metals. This being why it isn’t necessarily a bad way to get exposure to the precious metals market. However, you should always know what you’re getting into.
While ETFs offer a more attractive 1 to 1 relationship to gold and silver prices, they come with their disadvantages. These include counterparty risk, leverage, and the downside of not being a tangible asset.
If you’re looking to invest in precious metals and coins, there is no better time to start. With the Federal Reserve printing unlimited money, your exposure to gold and silver can protect your portfolio.