For many investors, there’s something magical and intriguing about silver and gold. Perhaps it’s because these precious metals have spurred the interest of explorers and adventurers across the globe for centuries — or maybe it’s the potential to reap significant profits. But before you invest, separate fact from fiction by learning the biggest marketplace myths about investing in gold and silver.
Myths About Gold
From the price of gold to how wise an investment it is, here’s a look at the most common myths related to gold.
1. Gold and Stocks are Inversely Correlated
One of the biggest myths about investing in gold is that when stocks go up, gold goes down and vice versa. Like many myths, there is some truth to this — when stocks sell off dramatically, gold typically pops up. But overall, there’s not a direct correlation.
In 1993, for example, stocks were up 9.94 percent, and gold was also up by 17.35 percent. In 2000, stocks were down 9.03 percent, and gold was also down 6.26 percent. Gold can be a hedge against sudden market shocks, but it’s not inversely correlated with the stock market.
2. Gold Goes Up When Inflation Rises
One of the main reasons that investors buy gold is as an inflation hedge. The problem is that this is far from an exact correlation, and in many cases, ancillary effects contribute to a rise in the price of gold when inflation is also rising.
From 1980 to 1989, for example, inflation rose by about 64 percent, but gold actually lost nearly one-third of its value during that decade. Gold does historically protect against sharp inflation spikes, but the long, slow grind upward of inflation is better protected by investments such as Treasury Inflation-Protected Securities — aka TIPS.
3. Gold Is a Solid Long-Term Investment
Many gold brokers will tell you that gold is a better investment than stocks or bonds, but the historical record doesn’t bear that out. Although gold prices are subject to spikes when there are shocks in the economic system — such as major stock market selloffs or rapid jumps in inflation — over the long term, gold has been beaten significantly as an investment.
Since 1980, gold has provided a compound annual return of 3.2 percent. U.S. stocks have returned 11.4 percent, whereas government bonds have gained 5.5 percent.
Myths About Silver
From the scarcity of silver to whether or not it can be used to fund a retirement account, find out the facts when it comes to this precious metal.
1. Silver Is Priced in Relation to Its Scarcity to Gold
Supply and demand play an important role in the pricing of all assets — including gold and silver. But supply and demand are clearly not the only factors when it comes to the relation of gold and silver prices.
As of April 9, 2018, the silver price per ounce was about $16.43 per ounce, whereas gold traded at about $1,332.80 per ounce, meaning gold was about 81 times as valuable as silver. Although this might imply that there should be about 81 times the amount of silver in the world as there is gold, the proportion is actually much smaller: There’s roughly 19 times the amount of silver in the Earth’s crust as gold, and when it comes to the amount of these precious metals mined, the proportion shrinks to nine to one.
2. Silver Is Hard to Buy
Gold coins seem like they are everywhere. Popular products such as the American Gold Eagle coin and the South African Krugerrand have been traded for decades. Some investors think that they only way to buy silver is in coins with numismatic value, such as silver dollars. The truth is that you can buy one-ounce silver American Eagle coins — the silver version of the gold coins — for just a small premium over the current silver spot price.
You can also buy a number of silver exchange-traded funds, such as the iShares Silver Trust, if you want to pay roughly the silver price today. Those funds trade like a stock on the stock exchange, making them easy to buy through any broker.
An individual retirement account is used to build wealth for after retirement. Because silver is a real, hard asset, some advisors suggest that you should hold onto some, particularly to stave off disaster in the event of a collapse of the global financial system.
Whether or not that idea has merit, the truth is that you can’t simply put your silver jewelry — or gold bars — into your IRA. The IRS does allow for specific gold, platinum and silver coins to go into an IRA — such as the American Eagle coins — but no other coins or precious metals are allowed to be deposited into an IRA.
Before You Invest in Gold or Silver
Silver investing — and investing in gold — usually comes in the form of silver or gold bullion or silver or gold coins. You can also buy exchange-traded funds to get your gold or silver fix. But before you invest in a gold bar or gold and silver coins, be aware that much of the “common wisdom” about investing in precious metals, especially regarding their performance or their reaction to market conditions like rising inflation, are myths.
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