Investment advisors always place special emphasis on the importance of diversifying investment portfolios . Although each investment asset carries a series of risks and implicit volatility, probably the worst decision we can make for our savings is to put all our money in a single type of asset, or as we commonly refer to as “putting all our eggs in the same basket.”
A well-diversified investment portfolio is much less likely to suffer a major setback, regardless of market conditions at any given time gold ira. On the contrary, an investment portfolio with low diversification, that is, with very few different or highly correlated assets, is more vulnerable to the swings of the stock markets, expectations and short-term news.
In this sense, can investing in assets such as gold or silver be a good investment strategy to diversify our portfolio?
Most people invest in precious metals such as gold, silver, platinum or palladium not to earn income, but to protect themselves against inflation , as well as uncertainty, volatility in stocks and the economy.
Traditionally, gold has been considered the safe haven asset par excellence, this means that gold and precious metals have been seen since ancient times as a means to maintain wealth in times of economic uncertainty.
Although many people have a basic knowledge of the stock market, ETFs or mutual funds, not everyone considers investing in gold or precious metals. Let’s see how investing in gold or silver can help us build a portfolio designed to last.
What are precious metals?
What makes a metal considered precious to an investor? The answer is simple: scarcity and demand .
A metal is considered precious if it has a limited supply and economic value. As for the economic value, it can come from the demand of investors or from manufacturers who need the precious metal to produce a product, such as jewelry, machines or chips.
Although there are some metals that fit the above definition, investors typically focus on gold, silver, platinum, and palladium . Gold is, by far, the most popular precious metal and has been used for more than 6,000 years by humans as a way to store value for generations.
What makes gold’s value above all other precious metals is its use as a store of value, far superior to its use as an industrial manufacturing material. Investors tend to buy gold and “hold” it, which creates demand and scarcity.
Silver is similar to gold, however the price of silver is between 1% and 1.5% of the price, because the demand for silver as a manufacturing material is very important. To satisfy this demand, more silver is extracted, which maintains a lower price per ounce (1oz=28.7g).
Platinum prices are approximately 60% of the price of gold. It has practical uses, but its price is higher due to its greater difficulty in extracting and its scarcity.
Palladium, whose popularity and price are increasing as it is one of the elements used to create batteries for electric vehicles , is another precious metal included in the platinum group of metals, along with iridium, osmium, rhodium and ruthenium.
What moves precious metal prices?
In the current market environment, the price of gold is around $1,700 per ounce (1oz=31.1g). Over the past two years, the price of gold has been rising from $1,200 to the current level.
The main historical trend that moves the price of gold is inflation. Investors have long used gold as a hedge against inflation . While inflation typically has negative effects on stocks (due to rising interest rates), the price of gold tends to rise when inflation increases.
But there is another trend that makes the price of gold move, the printing of currency . Historically, the greater the money supply of central banks, the higher the price of gold. As gold is a scarce asset, with a supply limited to the number of ounces that can be extracted from the earth’s surface, it is less susceptible to devaluation.
Silver is currently trading around $19 per ounce. It usually tends to move proportionally with the price of gold and can also serve as a hedge against inflation, although to a lesser extent. The same can be said for platinum, which is currently around $860 an ounce.
In the case of silver or platinum, industrial demand can strongly affect its price in both a favorable and unfavorable sense. If an innovative new product requires a large amount of silver, demand for silver could suddenly increase. The price of silver would probably move completely independently of gold until new demand could be met through increased extraction.
Likewise, if a product that requires a significant amount of silver as a raw material becomes obsolete or loses position in the market, the price of silver would likely fall until supply and demand adjusted again.
Both platinum and palladium, which are currently around $1,800 per ounce, move independently for primarily industrial reasons.