If you consider yourself an investor you’ve probably heard the name, Ray Dalio. This billionaire hedge fund manager founded Bridgewater Associates in 1975, the world’s largest hedge fund. Since then, his returns and ability to understand and predict economic cycles have turned him into a living legend. When he speaks, the investing (and political) world listens.
Ray Dalio’s Influence
Not only is he an incredible teacher who created a library of written and video content, but Ray is the creator of the All Weather Portfolio, designed to weather any economic storm, regardless of the state of the world.
As the name suggests, the asset allocation within the portfolio delivers considerably lower amounts of volatility than most. An integral contributor: Gold. As the markets ebb and flow, many people feel comforted in learning how to invest in precious metals. Other than gold, what are precious metals going to help with? Read on to find out.
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Gold and other precious metals have long been considered safe-haven assets. When an unexpected event causes the value of paper assets, like stocks and bonds, to fall, investors flock towards these commodities to serve as protection.
These commodities can appreciate (which can be bought speculatively), but the primary purpose of buying precious metals is split between capital preservation and hedging, two sides of the same coin. At their core, precious metals are a way for investors to diversify their portfolios in an asset uncorrelated to their stock and bond holdings.
What are Precious Metals?
A precious metal is any metal with a high economic value. Common characteristics are scarcity, utility, and high demand. For investor purposes, you want one additional factor: to be functional as a store of value. Since precious metal prices vary, invest in metals that should hold a fairly steady price from year to year, holding your level of purchasing power relatively constant.
Throughout history, there has been no sustained challenger as a store of value (though governments in the last few hundred years have left it for fiat money, which is much easier to control). It does have some industrial applications, but it is principally a form of currency.
Gold has held its value incredibly well over a very long period, making it the go-to investment hedge. The sheer size of above-ground gold and how little new gold is mined every year make for a very stable environment for gold prices.
When financial concerns, war, inflation, or other global news strikes, investors everywhere flock to gold.
Unlike gold, the price of silver fluctuates between its role in industrial settings and as a store of value. Thus, the silver market is more volatile than its gold counterpart.
In addition to its practical applications, silver is by far the second most common form of precious metal investment. Its price will also rise sharply in stressful investing environments, as those seeking stability add it to their portfolios.
Keep in mind, however, that shifts in non-investment demand for silver can significantly affect its price, both higher and lower.
Platinum and Palladium
These are two of the lesser-known precious metals and have only recently begun making their way into more investment portfolios. Both are in high demand (driven by the autocatalyst and jewelry markets) and are rarer than gold and silver. Platinum and palladium are only produced in several countries around the world, making their supply (and prices) more sensitive to changes.
Of the ones mentioned, these two are the most volatile of the precious metals.
How to Invest in Precious Metals
Let’s consider a few ways you can fill up your treasure chest, either physically or virtually.
You can buy real gold, silver, platinum, and palladium and have them delivered to your door. It can be expensive, and a bit of a hassle, but buying and storing your metals is the ultimate hedge. Many investors consider having digital exposure to metals and other commodities as worthless since they’re all wrapped up in the same financial system as your other paper assets.
You can purchase coins, bars, and bullion, which are commonly stored in a safety deposit box, a safe, or buried in the woods.
Outside of the additional costs, storage needs, and transportation requirements involved, investing in physical metal is illiquid and bothersome. Unless you have a long time horizon and willingness to bear these burdens, stick to digitized, paper assets.
Exchange-traded funds (ETFs) are available for gold, silver, platinum, and palladium alike, and offer a convenient and liquid way to buy and sell these metals when you open a brokerage account.
Mining Stocks and Mutual Funds
The companies which mine precious metals are highly correlated to the price movements of those metals. Buying shares of stock in this field can be a risky investment, and most often should be categorized as speculative.
On your treasure hunt journey, this is where a financial advisory firm in Norman OK can assist. No matter where you find support, mutual fund managers with a track record of solid performance can honor your needs.
A Note on Commodities
Remember, these metals are commodities. While they hold their value long-term and may rise in price in times of high inflation and/or economic uncertainty, they do not produce cash flow (like equities) or pay interest (like bonds). If you expect to make money on these investments, you can sell them for a higher price in the future than you bought them for today.
In 2022, trying to determine if the headwinds – inflation, equity valuations, the Fed, interest rates, private equity bubbles – or the tailwinds – rising corporate profits, wealthy consumers, soft monetary policy – will prevail will lead to poor investment decisions and even worse performance.
You might follow Ray Dalio’s lead: add precious metals to your portfolio as a rational hedge against unexpected volatility. Maybe you will sleep better at night knowing your portfolio is subject to much less risk than your neighbor’s. To us, that’s one mark of a great investment.
Get started in investing in precious metals. TRAC offers independent investment advice and helps you withstand any type of market volatility with confidence. Get started in learning more by scheduling a phone consultation today.
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TRAC Advisor Group Inc. is a full-service, fee-based financial advisory firm in Norman, OK. We offer independent investment advice and help people withstand any type of market volatility with confidence.
As an independent investment advisor, we can offer alternative investments like numismatics and precious metals to diversify and hedge against uncertain times. With a straightforward and direct planning style, you can trust that we’ll keep you on track towards your financial goals.