Plan your portfolio.
“When you focus on the fundamental, the single most beneficial aspect to investing in precious metals is as an asset diversifier,” says Saulnier. The benefit, he explains, is that gold and silver do not follow the same market trends as stocks and bonds, creating a much-needed buffer for portfolios heavy in those areas. He encourages individuals to evaluate their overall risk profile, personal beliefs and investment goals before determining how much to allocate to gold or silver.
“If they do not want the volatility of equities, or they can’t handle volatility emotionally, I will allocate a greater percentage to multi-asset classes, with gold or silver being one of them,” says Saulnier. “Some clients have strong political beliefs and desire a large allocation to metals. Others find the entire idea of investing in what they consider to be nothing more than shiny rocks abhorrent. [Regarding investment goals], if the client needs the assets in less than five years, I will often avoid precious metals entirely due to their volatility. If the client needs the money in five or more years, I will begin to allocate to metals. If the client needs their money in more than 10 years, they have no objections to metals and they have the appropriate level of risk tolerance, I will allocate my largest percentage to metals here.”
Consider your options.
Once you’ve made the decision to invest in precious metals, there are several options to consider, each carrying its own advantages and disadvantages.
Certainly, the most obvious way to invest in gold and silver is through the purchase of actual physical assets. There’s an inherent store of value, which means that, regardless of economic fluctuations, holding the tangible metal will always ensure some value. The problem, says Saulnier, are the costs. First, there are costs for storage, and there’s also the reality that any capital gain from owning the metals will be taxed at 28 percent. Namely, though, Saulnier is concerned with what he calls “collectable charlatans.”
“They sell you a collectable coin, and you often pay a premium over the spot price of the metal based on the alleged collectable value of the coin,” Saulnier explains. “This is an arbitrary measure of worth and is often presented to the buyer as a non-negotiable value. The problem is—very few people buying collectable coins are really knowledgeable in the true value of the coin, and they pay far too much for this perceived collectable value.”
When you invest in an Exchange Traded Fund (ETF), you do not own the actual gold or silver bouillon. The ETF retains ownership, while the investor owns a claim to the ETF’s total holdings. “Your investment into the fund represents a proportional ownership of the bullion the fund holds,” says Saulnier. “The fund tracks the actual performance of the metal and will therefore provide returns that mimic the actual returns of the metal.” Obvious benefits here include not having to worry about storage and safe-keeping of the metals and, adds Saulnier, the transaction processes for buying and selling ETFs are often much easier than with the actual metal.
Investing in a mutual fund that owns stocks of gold and silver producers, miners and refiners allows investors to see greater returns—and also greater losses—than they would from owning the actual bouillon. “These funds carry the greatest amount of volatility because of their stock exposure,” Saulnier explains. “They also have higher correlations to stocks than owning the actual metal. If you truly want exposure to the metal, including its stock diversification benefit, do not invest in stock mutual funds. The SPDR Gold Trust EFT is a better option, because it represents a proportional ownership of the actual metal bullion and does not carry the correlation and volatility of stocks.”
Now is the time!
Currently, Saulsier is actually going against his own standard advice and recommending that clients invest in mutual funds. “Mining stocks were punished far more last year, with some mining companies losing over 70 percent—that is far more than the near 30 percent drop in gold bullion,” he says. “I find mutual funds holding gold stocks a better risk reward right now than owning a collectable gold/silver coin or gold bullion ETF.”
Saulnier’s advice is indicative of the fact that, like any asset class, the performance of gold and silver may ebb and flow, and it’s up to individuals (or their advisors) to be savvy enough to stay on top of the trends.
But if you’re still on the fence about whether to invest in precious metals, consider Saulnier’s perspective on their enduring value: “Never in history have gold or silver been worthless. Name one currency that is still in existence today that was in existence 1,000 years ago; I can rattle off dozens that are worthless today that were staples of their respective economies over the past hundred years. That alone should be reason enough to hold 2 or 3% of your investments in gold or silver.”
For more on this year’s investing trends, check out Top Investing Trends to Watch in 2014.