Investing In Precious Metals: Is It Worthwhile?

Several readers have written to me recently about investing in precious metals. Here’s one:

While perusing the internet, I came across a political movement towards a new gold and silver-based currency called the Liberty dollar. They are selling 1-oz silver “Liberty” coins for $20 plus shipping. What do you think about this currency from an investment standpoint? How is this different/better/worse than investing in silver bullion? Thanks!

The Liberty dollar that the reader writes about is one of several private currencies produced by people who want the United States to return to the gold and silver standard, meaning that a dollar bill would be worth a certain amount of gold. This is a political argument and the people involved are serious enough about it to buy silver and mint their own coins made of silver.

At current prices, silver at about $11.75 an ounce. Thus, a coin made out of one ounce of silver should come at a slight premium to this price – probably $13 an ounce. A coin made of a precious metal has a slight premium because of the aesthetic appeal and the easy quantification.

Is the Liberty dollar thus cost effective as an investment? Not really. Is it effective as a political statement? Maybe – that’s for you to decide for yourself.

Why would an individual want to invest in rare metals, like gold or silver? Precious metals can be a part of a well-diversified investment portfolio. Over the long haul, they return quite well, but also can be highly volatile. One big advantage is that they often are stable when the U.S. stock market is unstable, which can make your overall portfolio more stable.

How should an individual invest in rare metals? There are a lot of ways to invest, from tangible metal (coins and bars) to certificates representing ownership of a certain amount of metal to mutual funds made up of an assortment of metal. It’s really up to you; I have a relative who has a lot of silver and gold coins locked up in a box in his basement which he refers to his “apocalypse” fund. I myself own a small handful of one ounce silver coins and a single one ounce gold coin.

One major problem in owning the metal yourself is that you usually have to acquire it from a dealer, who will usually sell it at something of a markup (8-10%) and also buy it at a bit of a markdown (8-10%), based on the current market value of the metal. Thus, it’s very hard to make a quick buck with such items as you’ll be eaten alive with such marks. This is why I’m fine owning a bit of metal directly almost as a novelty, but if I were to do serious investing in precious metals, I would focus on a precious metal fund like the Vanguard Precious Metals and Mining Fund.

If investing in precious metals is of interest to you, do some research and jump in. It’s an interesting place to put your money – and a surefire way to meet some interesting people. However, I personally wouldn’t invest my money in individual Liberty coins at $20 a pop unless I were doing it for political reasons.

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  1. Dave says:

    Over the long term, rare metals do not return well at all. Accounting for inflation, the rate of return on gold over the past century has been, oh, 0%. $1 invested in gold would be worth about 98 cents.
    In reality, precious metals don’t go up in value, but the dollar goes down in value.

  2. joewatch says:

    Precious metals are hedges, not investments, as they do not generate income. Mutual funds that invest in mining companies such the Vanguard one you mentioned are investments, but they hold the risk the mining companies will lose money.

    If you wish to hold them, precious metals should probably be at most 5% of your portfolio. The best way to hold them is through an ETF. Gold = GLD or IAU.
    Silver = SLV.

    Recently, your favorite investment guru, Robert Kiyosaki, made an argument for buying silver:

    http://finance.yahoo.com/expert/article/richricher/42433

    Good luck!

  3. Rob says:

    You missed the other option Trent…

    Invest in the mining companies.. If the price of Gold goes up – so does the profit of whoever mines it.

  4. dong says:

    The other problem with investing in physical metals of any substantial quanity and want to store it, you need to insure it. I would stay away from investing in physical metals, and just stick with funds unless you’re paranod about a state of anarchy and want physical metals to barter with…

  5. Harm says:

    And maybe the price of precious metals his
    going up more, but who knows? If you buy at
    these levels, you are ‘buying high’ which is
    historically bad advice. Again, no one knows
    what the future holds, but you are likely better
    off holding something that pays dividends, and
    you don’t have to pay to store…..

  6. rstlne says:

    The markup/markdown depends on the coin dealer. You’ll have to shop around. I’ve dealt with APMEX. They buy at spot price and sell at around a 2% premium for the most basic kinds of gold coins and bars. Of course, there are more expenses once you figure in shipping and insurance but it won’t be as bad as 8-10% both ways.

    As for the comment about buying gold now being buying high, I think gold is cheap when you consider the monetary inflation that has taken place since its last peak. The most conservative estimates I’ve seen of where gold should be right now put it at a bit over $900/oz, while I think fair value is somewhere over $2000 myself. Also, I find it odd that buying into gold a mere couple of years into the gold bull market is considered buying high while buying into stocks *25 years* into the stock bull market is not considered buying high. Think about it.

  7. st says:

    it would have been interesting if you also mentioned the current price of gold, and the amount you paid for the gold coin you have.

  8. Steph says:

    That VanGuard fund is closed to new investors, but I like the idea of this investment. Are there any other precious metal funds you would recommend?

  9. Dave hits the nail on the head. It is worth saying twice: “In reality, precious metals don’t go up in value, but the dollar goes down in value.”

    Precious metals do not grow in size (like a company can), they do not pay a dividend (like a company can), they do not pay interest (like a bond or savings account), and the government can confiscate gold coins. The U.S. government confiscated gold coins in 1933 because of an “emergency”, then devalued the dollar against gold, and made it illegal to own gold coins until 1975 (except under limited conditions).

    Personally I buy gold and silver coins that have a numismatic value and hold on to them. At the very least, they have an artistic and historical value. I also do not buy at retail prices (found in the Red Book) because if you know what you are doing, you can buy them at a discount at coin shows.

    What are some good coins to buy? Morgan dollars (1878-1904), Peace Dollars (1921-1935), and American Eagles (1986-present) to name a few.

  10. Dave says:

    I’d like to add this to my earlier post:
    “Consider this data from Jeremy Siegel, originally collected for his book Stocks for the Long Run . Adjusted for inflation, $1 invested in stocks in 1802 would have grown to $599,605 by 2001, in bonds to $952, in Treasury bills to $304. And at the end of that 200 years, $1 invested in gold would have been worth just $0.98. Simply put, gold is an awful
    long-term investment.”

  11. james says:

    i invested into the usaa precious metals mutal fund for my son’s college fund. Its performed really well since i opened up that fund.
    To each their own though.

  12. Mike says:

    I sometimes find him annoying, but in this case Robert Kiyosaki had some rational comments on investing in consumable precious metals as opposed to gold. That strikes me as the right strategy. Even though it’s the precious metal with the most press, gold is the least interesting of the precious metals because it’s the least consumed. Everyone hoards gold, but the other ones (silver, platinum and palladium for example) have economic value beyond being held. Silver’s used in photography, electronics, and as an anti-microbial. Platinum is a catalyst (notable in the catalytic converters in cars) and used in fuel-cells. Palladium is used in electronics (capacitors) ad is also a catalyst used in petroleum.

    I will admit that I’m openly biased toward things that have a functional value.

  13. Chris says:

    A friend is considering buying gold coins (not bullion) for the inheritance he’s going to give his kids down the road because of the lack of a paper trail, i.e. he can hide them in a place his kids know about, and they can get them without “penalty”. In addition, the government cannot get them if, for instance, he spends the last years of his life in a nursing home with no savings left.

    I disagree with the approach, but all of my alternatives have paper trails, which is what he’s primarily trying to avoid. Any thoughts?

  14. MossySF says:

    Precious metals have returned gangbusters the past 6 years — a whopping 28% annualized real return for Vanguard Precious Metal fund. BUT the problem is that funds tend to only show 1/3/5/10 year performance so this recept asset bubble period is over emphasized. Out of the last 22 years, 10 of them have been real losses — some of them rather whopping.

    1985 -8.29%
    1988 -17.55%
    1990 -23.96%
    1992 -21.78%
    1994 -7.83%
    1995 -7.09%
    1996 -3.58%
    1997 -40.32%
    1998 -5.38%
    2000 -10.37%

    Now there have been pretty crazy gains also:

    1986 +47.07%
    1986 +33.83%
    1993 +87.80%
    1999 +26.06%
    2002 +31.26%
    2003 +55.91%
    2005 +39.08%
    2006 +30.09%

    Basically, this is very volatile stuff. After the losses are cancelled out, you have an annualized real return of 7.48% with a standard deviation 30.56% for the past 22 years. To give you a comparison, Emerging Markets has returned 16.97% with a standard deviation of 31.42%. Basically, you are taking EM risks without EM returns. So precious metals would be good as a hedge position — perhaps 5% of your portfolio at best — but not as a core position.

  15. Amanda says:

    I wouldn’t buy right now – the support price is around $550, and when gold falls to that level, I’d buy. Then again, if Bush attacks Iran (which he’s crazy enough to do) the stock market will take a nosedive and the price of gold will go up.

    My personal holdings are about the same as Trent’s. I’m personally fond of gold Krugerrands, which are an alloyed coin, and thus less prone to scratching. (Still contain a full ounce of gold, though – the coin itself weighs slightly more than an ounce.) If you’re looking for silver coins, I’d consider the Canadian maple leaf coins (still being minted, so less “collector” value) or the Morgan silver dollars, which are very beautiful. My grandfather gave me some of these, so I didn’t have to pay the collector markup.

    If you’re Canadian, you can get Canadian coins (both gold and silver) directly from the mint.

    If you’re not looking for numismatic or collector value, you might consider gold bullion, which is oftentimes sold at less of a markup. Harder to trade with, though, should the apocalypse come in the form of Argentine-style hyperinflation, or Peak Oil, or whatever.

    What Dave said is right (the value of gold hasn’t changed since the Roman era – you could buy a very nice suit and a pair of shoes with a 1 ounce gold coin, just as you could buy a very nice toga and a pair of sandals with a 1 ounce gold coin back then) but I strongly disagree with his conclusions. I would rather have had all of my money in gold buried in my back yard in 1929 than in the stock market!! A major depression will happen again, so having real money is a nice backup. :)

  16. Shawn says:

    Gold would be fairly worthless in the face of economic collapse. When Katrina hit having some gold wouldn’t get you much but having water or gasoline were huge. If all has broken loose and society is crumbling what exactly are you going to do with some gold coins?

  17. FIRE Finance says:

    An interesting topic. We acquiesce with Trent that investing in an index fund or ETF tracking the metals is a safer bet. We had covered this topic in details in this post “Investing – Digging for Gold – Online!” – Link: http://firefinance.blogspot.com/2006/04/investing-digging-for-gold-online.html
    Cheers,
    FIRE Finance

  18. Walter says:

    The Vanguard fund that you mention is a good one, but it is closed to new investors.

  19. Liz says:

    The Vanguard precious metals fund is closed to new investors. It looks like gold is overvalued right now anyway, so not a great time to buy. To Dave: the fact that the dollar invested in gold over the past two hundred years would be worth 98 cents now does not mean that it is a bad long term investment. It means that over the past two hundred years it was a bad long term investment, as opposed to stocks, which were a good investment. If you want to bet against the dollar going forward, maybe gold would be the right investment for you. Just some food for thought. Although maybe Shawn is right and in that case you should be stockpiling : )

  20. dorothy says:

    VGPMX the Vanguard Fund is closed to new investors. Has had excellent returns. Knowing when to get in and out of funds without getting greedy works

  21. Jim Lippard says:

    Note that most precious metals and mineral funds invest in mining companies, rather directly in the metals, which over time will typically give you a better return than investing in the metals themselves.

    If you want to invest in the metals themselves, there are exchange-tracked funds you can invest in like GLD, SLV, and CEF.

  22. Ryan says:

    Mossy’s gave an excellent analysis. Gold could be a worthwhile hedge for a high worth, veteran investor, but not for me and for most readers of this site.

    I personally think your time would be better spent covering sensible asset allocation principles and the few investments 90% of people will ever need: int’l stock index, US stock index, and bond market index.

  23. roger says:

    they are called precious metals…

  24. razmaspaz says:

    Others have mentioned alternatives to metals as a doomsday hedge. I can’t see precious metals being worth much in a post nuclear (or disaster) world. If I was going ot buy anything as an investment in the coming of the apocalypse, it would be bullets. I figure there are enough guns i nteh world, but the average gunowner would run out of bullets pretty quickly. Maybe a few guns (to protect my bullets) but it seems like that would be worth more than anything else in a world where industry has disappeared. I don’t own any guns, but if I thought the world was going to end, I would sell everything and buy guns and ammo.

  25. Dave says:

    Liz,
    Gold will never earn any profits, or distribute those profits as dividends. Golds profits will never increase year-over-year. As such, it will never match the stock market in long term gains. However, on the flip side, gold will never go out of business.
    But as Mossy pointed out, gold is extremely volatile, but overall returns are low. That pretty much means gold is not an investment, but a speculation.
    And that’s the real conclusion. Over time, it doesn’t go up in value (although the dollar goes down in value), and I don’t feel like risking my retirement by speculating something will go up when it can just as likely go down. That really doesn’t sound worthwhile.

  26. Amanda says:

    Dave, no one is saying that gold should be one’s only position, nor that it should comprise a great percentage of your portfolio. If someone is interested in investing in precious metals, then they should by all means buy in.

    The real inflation rate (the one that the government has stopped reporting – google the M3 money supply figure) is 10-12% right now, depending on how you calculate it. The feds are pumping so much money into the market that the dollar is going to completely tank – and ALL fiat currencies tank eventually. When that happens I’d sooner have a couple of gold coins tucked away in a sock under a loose floorboard than a wheelbarrow full of useless paper, no matter how well it had theretofore been invested. (Ask the folks in Germany after WWI.)

    Again, no one’s saying that all your money should be in gold, but it is a valuable asset to have – if only for the peace of mind. The wild market returns party cannot continue indefinitely, as American history has proved.

  27. Amanda says:

    “I don’t feel like risking my retirement by speculating something will go up when it can just as likely go down. That really doesn’t sound worthwhile.”

    Just an addendum… you’re doing the thing that Dave doesn’t want to do when you buy stocks, too. You’re speculating that they will go up when they can just as likely go down! :) There is risk either way, and my money (a portion of it) is riding on the only thing which is retained its value for more than 3 millennia – gold.

  28. Trent says:

    This is an excellent discussion.

    Also, about the Vanguard fund: it re-opens semi-regularly for new investors. I know someone who bought in about a year and a half ago and is loving the returns.

  29. MossySF says:

    iShares Comex Gold (IAU) tracks Vanguard Precious Metals close enough. No need to wait for Vanguard to reopen this fund if you really want to get into this asset class.

    http://finance.yahoo.com/q/bc?s=IAU&t=2y&l=off&z=l&q=l&c=VGPMX

  30. Dave says:

    Amanda, people have been predicting that the dollar will collapse like a house of cards for decades now. It hasn’t happened yet, and I don’t think it will any time soon.
    I’d also like to point out that there is a difference between speculating/trading stocks, and investing in stocks. In the short term, sure a stock investment may go down in value, but over the long term, smart diversified investments are MUCH more likely to go up than down.

  31. Amanda says:

    Sure, they were predicting it would collapse in the 80s. That disaster was narrowly averted. The geopolitical and social climate is much different now, and I don’t think that there is a call for unbridled optimism that “Hey, the Fed can pull us out!” any more.

    That said, the dollar won’t collapse any time within the next 5 years. Bernanke and co can keep spending capital into the market – socialism for the rich, dontcha know – for about that long. I look to see inflation (again, real inflation, not the figure the government reports) of about 18% at the end of this cycle – and that inflation figure will wipe out any gains anyone is making in the stock market. Still, the central banks have been playing a shell game with our currency for almost 100 years, and their little house of cards – as history tells us – has got to fall down eventually.

    All bets are off, though, if the geopolitical climate _really_ changes – that is, if we’re actually stupid enough to attack Iran. If you wake up one morning and there have been airstrikes, it’s too late to save your portfolio. :)

  32. Jim Lippard says:

    Dave: The dollar has lost tremendous value in the last 57 years. A 1950 dollar is worth somewhere between $7.05 and $44.91 2006 dollars, depending on how you measure (see http://www.measuringworth.com/calculators/compare/).

    I’ve had a portion of my assets in a precious metals and minerals fund (USAGX) for the last several years. It has been returning double-digit returns each year for the last several years (39.24% in 2005, 43.19% in 2006), and its five-year average return is 27.79%. I missed its best year return, 2003, when it returned 79.43%.

  33. SLVBug says:

    And what is everyone’s take on precious metals NOW (early 2009)?

    The thing is, instead of arguing for or against gold or the DOW or etc etc etc, we should all be looking for the best place to put our money. Sometimes the best place is the stock market (1980-2000); sometimes it’s best to buy gold (2000-present).

    Personally, at this moment in time, I put more value in believing the worth of gold (and silver) which has been around for thousands of years, acting as money in one way or another, much more so than corrupt and fraudulent Wall Street goods.

    Each has it’s place and time and value.

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