Investing in Gold and Silver

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When I was a kid I used to go to the local coin shop with money that I earned mowing lawns and buy an ounce or two or five every now and then – usually about once a month.  Gold was too expensive for a kid from a middle class family.  But back then an ounce of silver was around $4 – $5 compared to the $30 that it is today.     

In addition to silver bullion, I also saved silver certificates.  For those of you who don’t know, silver certificates are a type of representative money and were printed until 1964.  They were initially redeemable in the same face value of silver dollar coins and then later in raw silver bullion. 

Since 1968, however, they have been redeemable only in Federal Reserve notes.  That makes them obsolete but still very collectable.

When I was ten years old I bought a little fire proof safe at the local K-mart for twenty bucks to store the silver and silver certificates that I accumulated over the years.  Every now and then I would take my silver out and look at it because doing so made me feel good.

But you don’t need to go and find a local coin shop or jewelry store to buy gold or silver.  In fact, buying gold or silver is just as easy as buying a stock!

How to Buy Gold and Silver

Nowadays you can purchase shares of iShares Silver Trust (NYSEMKT: SLV) or iShares Gold Trust (NYSEMKT: IAU).     

These investments seek to reflect the price of silver or gold owned by the trust less the trust's expenses and liabilities – which are somewhere around 0.25%. These funds are intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver or gold.

Although these funds are not the exact equivalent of an investment in silver or gold, they provide investors with an alternative that allows a level of participation in the silver or gold market through the securities market.

You can also purchase SPDR Gold Shares or even companies such as Randgold Resources ADR and Silver Wheaton that mine gold and silver.

Now versus then

At one point in time the United States dollar was on the Gold Standard.  Then, in response to silver agitation by citizens who were enraged by the Fourth Coinage Act, the United States Government issued silver certificates. 

But at least the dollar was still backed by something! 

By contrast, today we are receiving goods from China in exchange for paper.  After all, if the price of gold rises to $4,000 an ounce, then we might have enough gold to pay back our debt to China! 

Fiscal and monetary policies

Fear over US fiscal and monetary policies – high deficit spending and low interest rates – makes gold an attractive alternative to investments that don’t keep up with inflation.

When interest rates are 2% higher than inflation, however, gold prices tend to decrease.

3 Factors to Consider When Investing in Gold or Silver

  1. Consider dollar cost averaging.  That means spreading out risk over time by putting a fixed amount of money into gold and silver every month.             
  2. Treat gold and silver as hedges against global uncertainty, market declines, burgeoning national debt, currency failure, inflation, war and social unrest.         
  3. Consider having between 5 – 10% of your investments in gold and silver.  That is what most money managers tend to recommend. 

My Foolish take

Adding gold and silver to your portfolio makes sense, especially if you consider the macroeconomic environment and the fact that many countries are printing money.  That said, I feel that the most logical way to invest in gold and silver is to eliminate the transaction costs of buying and selling bullion as well as to eliminate the risk of having to store the bullion and purchase either iShares Silver Trust or iShares Gold Trust or both.  Over the past 3 years, iShares Silver Trust has an average return of 19.18% while iShares Gold Trust has an average return of 14.01%.


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