Thursday, December 30, 2010

Should I Buy Gold and Silver?

Gold and silver have long held man's interest captive. Long used as currency to facilitate the exchange of goods and services, the luster and mystique of these metals have also increased due to their recent popularity as an investment option.

Maybe you've heard the radio commercials or seen the advertisements in the paper. Why all the fuss? Check out the charts below for the previous decade's pricing history for gold and silver from You'll see why it's garnering some attention.

Compare that to the Dow Jones Industrial Average for the past decade.
Now as you should know by now, past performance does not guarantee future results - although the Dow was basically flat over the past decade, a lot of people lost a lot of money by trying to time the market. In reality, they sold their equities after they had already fallen and most likely were to nervous to get back into the market until the growth was too far along - the end result being a net loss.

That being said, it's hard to convince someone not to chase returns like those that gold and silver have seen. However, those that chase returns will always get burned in the end. While some analysts see continued growth, others argue that we are seeing a bubble that will soon pop and drive prices back down to more normal historical levels.

Don't get me wrong - gold and silver do have their benefits:

Hedge Against Inflation - historically, the price of commodities has risen as inflation has also increased. Will the United States and other countries be forced to print money to solve their deficits? If we see inflation, this aspect of your portfolio may hold up well.

Recognized Worldwide - all over the globe, precious metals (especially gold and silver) are both recognized for their beauty and monetary value. Assuming you hold the actual physical gold and silver, you can take it to any place on the globe and trade it for goods and services.

Multiple Forms / Investment Methods - while some prefer to hold the actual, physical gold and silver (in bars, coins, bullion, etc), others purchase the assets and have them held in vaults by investment custodians. Others choose to invest in precious metals mutual or exchange traded funds. Still others invest in the companies that mine the precious metals (although this does not give you any control over actual precious metals, only the company that is doing the mining).

So what is the Everyman to do?

As we've discussed before, asset allocation is key. You've been drilled with the age old adage of not putting all your eggs in one basket - the same holds true here as well. What does this mean? Gold, silver, and other precious metals can and should be a part of your investment strategy - but only that - a PART of your strategy.

How much? Many sources cite a number around 10% of your portfolio, which seems like a reasonable number. The benefits of the diversification will be felt at this number, but it's not too much as to overbear the portfolio if there is a drastic downturn in the precious metals sector.

Where to Buy Precious Metals

In today's world, some of the best prices for buying precious metals can be found online. While I'm not recommending any particular site, I've listed a few of the more popular sites below.
American Precious Metals Exchange
Bullion Direct

You may also be able to find precious metals dealers in your area - some stores specialize in buying and selling gold and silver. Still others may find success with pawn shops. You may even try eBay or craigslist (at your own risk - if you go this route, only meet in a public place - if I were doing this, I'd recommend meeting in a bank lobby - it's public and relatively safe).

As was mentioned before, some prefer to buy the exposure to the assets without actually holding them in their possession. A good way to do this is through the purchase of ETFs, such as GLD or SLV. These are purchased exactly the same way you would a stock - you can use the same channels (your financial advisor or online broker).

However you obtain your exposure to precious metals, it is worth having in your portfolio. Sure, it would have been nice to have purchased them a decade ago to be able to partake in the massive returns that they have seen. But they still have their benefits (as listed above) and should be a part of any investment portfolio.

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