Gold prices-the price per ounce of bullion or of coins, such as Kruggerand or American Eagle gold coins-have shot up in the past several years. Silver prices have followed suit (see the current price of silver, for example). If you listen to commercials or read advertisements, prices can only go up.
That means 2017 is a great time for investing in silver or gold, right? Not necessarily.
Investing in Silver; Investing in Gold
People invest in gold and silver for two primary reasons. First, they might hope that prices will continue to increase (desire to gain money). Otherwise, they believe that other investments will decrease in value (desire not to lose money). Yet how do you know when either will happen?
Gold and silver both have practical uses. A lump of precious metal is often pretty. You can admire it. You can make it into jewelry. You can use it as a component in certain industrial processes.
Beyond that, a gold coin sits on your shelf and collects dust. Any value it gains is independent of its existence. It’s just a coin. Due to circumstances outside of your control it could be gaining value now-or it could be losing value.
Compare that to a business. Any good business worth owning will make you money. Even a lemonade stand that costs you $100 to start and makes you $125 every summer produces $25 in profit the first year. Every year you keep running the business, it produces more money. Remember that the money a business produces is the most important metric of success.
At any point you can take your profit, as the owner of that lemonade stand. You can pay yourself a dividend. You can invest back in the business, to serve more customers or build more lemonade stands. You can do a lot with the cash that business generates.
Every year, your gold or silver coin sits on the shelf and collects dust. There’s little you yourself can do to affect its price.
Are Precious Metals Good Investments?
Why do people invest in gold? What’s the point?
Is buying gold risky? Depending on your appetite for risk, sometimes it can make sense. Precious metals like gold and silver and platinum tend to move in directions opposite of the market. If there’s a market drop (like in 2008), gold prices tend to rise. You can’t count on that happening, but diversifying your investments into classes like stocks, bonds, and commodities can help you avoid losing everything.
Gold and silver prices can continue to increase. They may get more valuable because they get more scarce-mining and refining might produce far less gold or silver one year-but by the same token, they might lose value because the get more common, too. Can you predict that?
Gold and silver prices might increase because demand increases. More people want to buy them. (That’s probably why there are so many advertisements to buy gold or silver!) Then again, demand might decrease. Can you predict that?
Maybe they’ll do neither. Maybe they’ll hold their value. Maybe $1000 in gold bullion today will be worth about $1000 in gold bullion in five years, and you’ll only have lost inflation. That’s better than losing everything, right?
Meanwhile, all of those great businesses worth owning make real money every year. This profit gets returns to investors as dividends or stock buybacks or other investments to make even more money in the future.
Meanwhile, what’s the market for your Kruggerand? It’s not as easy to sell as a share of gold.
You need to have someone evaluate its condition and then find a buyer willing to negotiate with you for some fraction of what it might be worth. You could melt it down for its value as a fixed amount of gold, but that’s illegal for many currencies and you won’t necessarily get the full value of the coin.
How Do You Sell Gold?
If you do own gold and want to turn it back into cash, how can you do that? How easy is that? Or what if there’s no cash available? How are you going to trade a bar of bullion for a deer carcass and some hunting rifle