Updated on 02/07/17
Diversifying your portfolio with precious metals is a no-brainer.
But to get the most protection from this safe haven asset, it pays to diversify your metals holdings, too. While silver and gold are closely correlated, there are differences you should understand in order to make the best allocations for your individual needs.
Silver and gold are closely connected. Both tend to move opposite of the stock market; when stocks slide, metals rally (and vice versa). This is a large part of what makes precious metals a safe bet for hedging a portfolio.
But while gold has been the traditional go-to for investors looking to store wealth in a hard asset, the rise in industrial demand for silver has many seeing its investment potential in a new light.
Today, about 56% of silver is used for things like electronics, solar panels, medical equipment, and other industrial applications—and demand shows no sign of slowing. This, coupled with silver’s accessible entry price, is prompting many investors to buy silver bullion such as sovereign silver coins or silver bars.
Silver may never be valued as highly as gold, but it does deliver some benefits that gold simply can’t.
Here are some others:
As noted above, silver is more closely correlated to stocks because of its role in the industry, so your precious metals portfolio can benefit from a diversification into gold.
In fact, the World Gold Council recently found that gold’s correlation to stocks actually drops during a recession.
This means that, historically, gold will more often than not move in the opposite direction of stocks during periods of recession. And since stocks typically decline, gold is likely to rise.
Notice what happens to gold’s correlation to other asset classes when the economy moves from economic expansion to contraction (data from 1987 through 2015)…
But that’s not the only reason to buy gold bullion. Gold has intrinsic financial traits and offers a level of wealth protection unmatched by any other asset.
Look at the central banks, which have gone from selling off gold to buying and stockpiling it en masse in recent years. Their reversal only proves the perilous state of global monetary systems and shows the protection owning gold bullion can provide.
While it can be argued that it is always a good time to buy silver or gold bullion, the market reality is that prices do fluctuate to the benefit of some investors and the detriment of others.
One of the biggest hindrances to growing an allocation to precious metals is that many individuals live and die by the week’s price chart and never wind up making a move, always waiting for “the bottom.”
Don’t chase the market. Both silver and gold have seasonal patterns, and knowing these seasonal trends can provide reliable market insight.
Silver prices climb higher from January through May and sink in the summer and fall. Whether silver will gain or lose on any given day is never a sure thing, but investors typically get better value in the second half of the year.
Gold trends high in January and September. August and October also see gold performing well. Prices tend to dip in April, June, and July. But March is historically the worst performing month for gold—and the best time to buy if you’re looking to get into the market.
Of course, one of the easiest ways to buy bullion is to dollar cost average into your position. That means, committing to making regular incremental purchases—market volatility be damned.
In the end, the average price you pay for your holdings can be on par with or even near the low end of silver or gold’s trading range at the time.
A precious metals IRA makes it easy to diversify your nest egg with the security of physical precious metals.
In five of the last seven recessions, gold moved higher. And three of those times, it rose double digits. Here’s proof. Notice how gold has performed.
Anyone with a significant amount of gold doesn’t just stand to survive the next recession—they can prosper during it.
And because gold is immune from the corrosive effects of inflation, your gold will always retain its purchasing power. Bottom line: if you buy gold bullion for your IRA, you’ve made a solid, long-term investment.
The downside: gold is better for preserving wealth than growing it. The gold in your retirement account pays no interest or dividends.
Silver can also benefit your retirement savings.
There’s been steady growth of silver production in the last 50 years, but it’s not enough to satisfy growing industrial demand. Another decade or two of this kind of growth will push prices much higher—and make the silver bullion in your retirement account that much more valuable. For now, silver remains an affordable alternative or complement to gold.
The downside: silver comes with a little more risk than gold because of its ties to industry. If manufacturing drops off, silver will stagnate.
Holding both gold and silver in your IRA will ensure your wealth can never evaporate and set you up for potential profit for years down the road.
Arguing about whether to buy gold or silver to protect your financial future is imprudent. To truly hedge your portfolio against all kinds of risk, a fully diversified precious metals allocation is your best bet.
In the end, whether you invest in silver or buy gold bullion, you’ve made a wise choice. But both silver and gold have their own unique benefits to deliver.
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