The stability of precious metals

Eternally attractive to mankind, precious metals have found their principal use as a store of value. Because of their rarity and durability, for thousands of years precious metals have been accepted almost universally as money.

Because the value of gold (the most recognized of all precious metals)—what it can buy in real goods and services—has remained remarkably stable for the past 500 years, it is widely sought after throughout the world for both its investment qualities and its industrial properties.

The ownership of precious metals, particularly gold, has become controversial over the past 75 years. What has probably created the controversy in precious metals is the belief that the economy is moving toward collapse and gold, specifically, and other precious metals, to an extent, will be the salvation of all wealth.

There could be some truth in that belief if the economy does collapse under the weight of its excessive debt burden, because it is possible that precious metals could appreciate greatly in value during that time. The fallacy of that theory is to believe that gold or any other precious metal will become the principal means of transacting business.

With the highly volatile situation in today’s stock market, many investors are fleeing paper assets, moving out of the high tech stocks, and protecting their savings by adding precious metals, especially gold, to their portfolios.

Through hard times and times of plenty, gold endures.

Although market cycles are permanent facts of life, gold has maintained its long-term value. As an investment, gold typically is viewed as a financial asset that will maintain its value during times of political, social, or economic distress. This is why gold is often purchased as a hedge against inflation and currency fluctuations.

As such, gold is commonly viewed as providing individual and institutional investors alike with a portfolio safety net against sharp downward spikes in complementary assets, such as stocks and bonds.

In the past, fixed assets, such as precious metals, have held their value relative to other assets. Typically, because precious metals represent the more stable asset in times of economic difficulty, precious metals will usually do well in a volatile economy, particularly in a hyperinflationary period, simply because they are still recognized as standards of value by most investors worldwide.

Investing in precious metals

Solomon, in his wisdom, offers an excellent investment strategy in Ecclesiastes 11:2: “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.” Solomon found the only path to peace of mind in investment planning was to diversify and surrender the outcome to God. Based on this, it would be wise for investors to make informed choices that are spread out to cover the various categories of the investment spectrum.

Many investors today are hoarding precious metals, especially gold, as economic crisis insurance. Caution and preparation are wise, but no one can prepare for every possible calamity. Because the buying and selling of precious metals is oriented more toward a long-term investment strategy, any long-term financial planning could conceivably include the purchase of some precious metals.

Generally though, the only people who are able to make money with precious metals are the brokers who live off of gullible amateur speculators. Nevertheless, if an investor is interested in investing in precious metals, he or she should limit his or her investment to no more than 5 to 15 percent of the total investment portfolio.

Conclusion

Precious metals are long-term stores of value, highly-liquid, and internationally recognized assets of last resort. They can diversify and stabilize a person’s portfolio, they can protect it against market fluctuations, and they are easy to buy and sell, any time, anywhere in the world.

However, precious metals are very volatile, speculative, and high-risk investments. This investment area is for the investor with a strong heart and cash only. Unless an investor can afford to lose what he or she has invested, this is probably not an area in which a person would want to risk a lot of money, especially savings or retirement funds.

Although a portion of an investor’s investment portfolio could include precious metals, these will probably not protect an investor from financial misfortune in case of an economic crisis.

Originally posted 1/10/12.