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.