Gold & Silver Investing: Good Inflation Hedge or Bad Bet?

Gold, silver and other precious metals are commonly used to diversify an investment portfolio. Is this a good idea or would these funds be more profitable invested in other ways?

Traditionally, it was a fairly safe bet to invest long-term in metals like gold or to use them as a hedge against inflation. In general, this really isn’t the case anymore. It’s still possible to make profitable investments in precious metals, but other options like the stock market will usually provide better returns.

Historical Gold & Silver Returns

Depending on the timeframe you examine, precious metals like gold and silver can sometimes look like a great investment and other times they don’t come close to comparing with other options like index funds.

As of June 7, 2022, returns for the S&P 500 have been have -1.58% for the past year. For gold returns have been -2.66% and silver has been -20.61% for the last 12 months. When you zoom out to the 5 year chart, s&p500 has returned 71.10%, while gold has given +42.10% and silver is +24.67%. Over the last 30 years, the S&P 500 has gone up 931% while gold and silver have both only gone up 443%.

One of these figures make gold and silver look like a good investment compared to stocks. However, there are some shorter-term periods where precious metals can outperform the market.

Gold as Inflation Hedge

In 1971, President Nixon eliminated the gold standard that pegged each dollar to the storage of real precious metal. This did kick off an inflation event for a decade. The S&P500 only gained about 22% during this decade while gold went up about 1,770%. For this reason, many people think that gold is a hedge against inflation, but the truth can be more complicated.

There were actually more factors in play during the 1970s. Right before Nixon’s change, governments had been suppressing the price of gold by offsetting very high demand with extra supply to stabilize the market. This stopped in the 70s and gold went through the roof. This did happen alongside of rampant inflation and weakening fiat currencies, but just inflation alone may not be enough to make gold prices skyrocket to be a safe hedge.

If you examine recent charts from the first half of 2022, you can see inflation spiking up to levels not seen since the 1970s. However, there hasn’t been a corresponding spike in gold prices this time around. This should be fairly solid proof that other factors were in control in the 70s and this history isn’t likely to repeat itself with gold prices. The value of the US Dollar is probably a better gauge than inflation. Its value has been rising recently while gold has fallen and inflation has gone up. When the dollar starts to shown signs of trouble is when gold is likely to rebound.

Long-Term Metal Investments

Over the long run, you are usually going to fare better by investing your money in other alternatives like the stock market. You’ll simply see better returns than gold and silver can deliver. The investment value with precious metals lies more in trading specific market conditions that could ignite a bull rally.

Many people do consider gold to be a reliable store of value since it is an asset with limited supply. Considering the price will typically rise when fiat currencies fall, that has indeed been the case in the past. It may continue to be the case in the future as well, but there may be some limitations to that statement. Bitcoin is rapidly rising in popularity as a store of value for the future instead of gold. It has a truly limited supply, and we know the exact amount that will ever exist (21 million BTC). It’s quite possible that a shift could happen in at some point in the coming years where institutions and even governments begin to store reserve currency in Bitcoin instead of USD or gold.

One more thing to think about is the “limited supply” nature of the gold asset value. In my opinion, this classification is a bit old fashioned and honestly near-sighted. First, you can never truly know the total possible supply of gold. Even if you could know exactly how much gold is here, you’re only considering the planet Earth, and that is where the real problem lies.

At some point in the future, humanity is going to expand into the stars. They really don’t have to go very far either until they start to run into literal piles of gold in the form of asteroids. Just a single one of these rocks in space can hold a much larger supply of gold than we estimate to ever be able to dig up on Earth. What happens when that science fiction becomes a reality. Maybe it will happen in 30 years, maybe in 100. When it does, the days of gold being a store of value and a limited supply asset class are over forever. The same goes for all other precious metals because every single one of them exists in huge quantities in space.

Buying Gold & Silver

Many brokerage accounts can be used to buy physical gold, silver and even other precious metals like platinum these days. When you buy these metals, you can choose to actually receive delivery of your assets to physically possess them. This can be one of the main reasons why some people like this form of investment because it’s something real that you can hold.

When you buy gold, the third-party services offered by your broker can also retain physical possession of the metals for you, if you’d prefer. This would be more useful if you were planning on trying to sell them and wanted to be able to do so quickly when necessary.

In general, gold and silver are considered volatile assets, so you may want to exercise caution when investing.

Precious Metal ETFs

Another option you can use for investing in gold is an ETF. Gold, silver, and other precious metals like platinum can all be bought through a wide variety of different kinds of ETFs available on the open market.

Some investors will prefer using ETFs because they are a more liquid investment compared to physical metals. They’re also managed funds that are probably not 100% invested in the metals, so they’re more likely to be diversified to lower price volatility typically experienced with precious metals.

This can be a cheaper option to invest in gold compared with buying the physical metal. You avoid having to pay the storage costs and markup fees that often come along with physically buying and possessing gold bullion.

Gold & Silver Mining Stock

A final option to invest in precious metals is to go direct to the source. I’m talking about the actual mining companies that work around the world to dig through the Earth to find, harvest and recover gold and silver.

Any kind of precious metal mining on a large scale require enormous amounts of capital. In most cases, this is usually only achieved by publicly traded corporations. As a result, you can easily become an investor and part-owner in a gold mining company by simply buying shares of their stock. There are even ETFs that exclusively deal in shares of mining companies.

In many ways, there is actually more risk involved investing directly with a single company compared with the overall gold or silver market. However, with that extra risk also comes the potential opportunity for additional rewards. Your profits will hinge on the success of the company. If they have a bad year, you may lose money. If they hit a once in a lifetime motherlode, you could be in for a big pay day.