Smart investors evaluate all potential avenues to select asset classes that accurately align with their short- and long-term financial goals and risk-taking comfort. By gaining a more intimate understanding of your different investment options, you can choose vehicles that work for your needs without taking unnecessary risks or missing out on opportunities.
Precious metals and the stock market are among the most popular investment avenues. However, they differ in significant ways.
Below, we compare precious metal investing to stocks to give you an overview. For professional guidance and support, please consult a financial advisor.
Key Differences Between Precious Metals and Stocks
Precious metals are tangible, rare, natural elements like gold or silver that serve industrial functions and carry historical value. Because they can store value over time, they are highly sought after. The stock market involves buying shares in various companies to invest in their success and potential profits.
Before we dive into the benefits of each investment vehicle, let’s go over the key differences:
| Precious Metals | Stocks | |
| Asset Nature | Tangible commodities like gold, silver, platinum, and palladium | Equities representing ownership in a company |
| Income Generation | Do not generate income; returns depend on price appreciation | Potential for dividends and capital gains |
| Market Volatility | Generally less volatile; often considered safe-haven assets | Can be highly volatile, influenced by company performance and market conditions |
| Liquidity | High liquidity, especially for widely recognized forms like bullion coins | Highly liquid, with the ability to buy and sell quickly on exchanges |
| Inflation Hedge | Historically act as a hedge against inflation | Can outpace inflation over the long term but may be affected by economic downturns |
As you can see, precious metals and the stock market do share a few similarities, such as high liquidity and the ability to hedge against inflation, but they primarily operate as distinctly separate investment vehicles. Physical, rare metals usually do not generate instant income, but they can offer lower volatility. The stock market can perform phenomenally in the short term when risks are averted and are highly liquid for fast trading, while precious metals are typically used in longer-term savings scenarios with the ability to hedge against inflation over time.
Benefits of Investing in Stocks
To fully weigh the pros and cons of precious metal assets versus stock market investments, you need to understand the benefits of either option. Shares can offer significant dividends and convenient liquidity for traders hoping to access regular income in the near future. Let’s explore these benefits:
Growth Potential
Companies can take off seemingly overnight. When one becomes more successful and its profit grows, its stock values increase, and any stakes you’ve purchased will gain value accordingly. With proper market research and due diligence, you can buy shares that offer significant capital appreciation.
Be sure to consider that the reverse can also be true. Companies can fail just as quickly as they can succeed, especially with so many players involved. A simple misconstrued statement from a company’s CEO can destroy its reputation and, in turn, its stock value, potentially tanking your investment.
Because of this, stock market investing comes with significant counterparty risks. To reduce these risks, some people choose index funds, growth companies, or blue-chip companies rather than investing in just one risky startup.
Dividend Income
A dividend is a percentage of a company’s earnings paid to a stakeholder on a quarterly or annual basis since they hold a share in the profits. When you invest in this asset, you can enjoy dividend income based on the number of shares you own. Any resulting extra cash flow can contribute to your normal income, helping you pay for life expenses or anything else you deem necessary.
Ownership Stakes
When you invest in a company, you become a stakeholder, meaning you’re now a partial owner. This investment comes with added perks. You can often participate in decision-making and company growth activities, as many companies address stakeholders before making financial moves.
The more stakes you hold in a company, the more you can influence its corporate decisions. While this is usually not a major factor in deciding what to invest in, it can be an added benefit for those who like to feel involved in their financial interests.
Liquidity
This asset offers excellent liquidity, meaning you can easily buy or sell shares on a daily basis using stock exchanges. Depending on your goals, this level of liquidity might be preferred. If you’re simply hoping to invest in something for long-term growth, daily trading likely won’t be as big of a factor for you.
Benefits of Investing in Precious Metals
If the above benefits do not quite align with your financial goals, or you’re simply looking to invest in multiple asset classes, you might be wondering what the benefits of precious metals are. First and foremost, they generally offer better protection against inflation and more stability during uncertain times:
Diversification
Gold, silver, platinum, and other metals typically do not correlate with other asset classes. When the stock market plummets, precious metal investments often skyrocket because investors flock to the asset that’s historically been considered a “safe haven” for market instability. Because these metals share this inverse relationship with the stock market, they serve as a preferred diversification tool for many.
Portfolio diversification with precious metals allows you to limit risks while enjoying benefits from both asset classes.
Inflation Protection
Because rare metals have an inverse relationship with the stock market and the U.S. dollar, they generally perform well when the economy crashes. This allows them to store purchasing power during inflationary periods. As other investment classes crash, gold gains value because investors, central banks, and major organizations flock to what is considered the “safe-haven” asset, allowing its pricing to soar.
For example, in 2009 and 2010, the years closing the Great Recession, gold gained 27% and 32%, respectively. People hoping to store value over time and hedge against inflation over long periods often choose precious metal investing.
A Tangible Asset
Gold is a physical commodity. Physical ownership can provide a heightened sense of security as it eliminates many counterparty risks. Such metals are used in many industrial industries and jewelry applications, so their demand rates do not depend on the success or failure of one company’s decision.
That said, investing in physical commodities still has its downsides. You must consider storage costs, insurance on the physical assets, delivery fees, and liquidity complications.
“Safe-Haven” Status
Many consider gold a “safe-haven” asset because of its stability during economic and geopolitical uncertainties. When major countries go to war or other global events break out, the stock market might crash, but the precious metal market tends to excel. For example, in 2020, gold gained 25% amid the COVID-19 global pandemic.
When Are Precious Metals Better for Your Portfolio?
While stocks offer the potential for faster gains and quick trading in a stronger market, your physical commodity option can help protect your wealth in the long run, especially during economic downturns.
Here are times when you might consider rare metals for their portfolios:
- Economic uncertainty: Predicting how the stock market will perform during market volatility or economic downturns is impossible. Because of this, some people sell their shares and move their funds into more stable physical commodities. Gold or silver might be better for your portfolio if the economy is experiencing a downturn or you want to protect your wealth from future market crashes.
- Inflationary periods: Some traditional assets can hedge against inflation, but this is highly dependent on what you choose to invest in. If your main goal is simply to beat the downturn of the U.S. dollar, metals might be better for your portfolio. The more value the U.S. dollar loses, the better physical assets like gold tend to perform.
- For diversification needs: Because these assets are physical commodities, they can serve as excellent portfolio diversification tools. When seeking to balance and reduce overall portfolio risks, gold and other metals might be a preferred move, especially if you’re already invested in riskier asset classes.
- For long-term value: Gold, silver, platinum, and palladium are considered a “safe-haven” asset because they offer long-term growth potential. If you’re hoping to store value over extended periods and aren’t interested in trading on a routine basis, these assets might be suitable.
Investment Options for Precious Metals
If you decide shiny rare metals meet your investment goals, you have a few options. You do not necessarily need to buy gold coins and store them in a safe, but you can if that’s what you prefer. The ability to see assets in tangible form is of great value to certain investors.
Here are the most popular ways to invest:
- Physical bullion: Bullion involves purchasing physical coins or bars for direct ownership. Through this method, you can own the real commodity, but you’ll have to pay for storage or vaulting and face lower liquidity issues.
- Exchange-traded funds (ETFs): ETFs allow you to invest in funds that track metal prices. This offers higher liquidity and eliminates issues with storage, but you will not own the physical metal.
- Mining stocks: This involves buying shares of companies that produce metals. While you’ll be invested in the target market, you’ll still be purchasing traditional shares, which involve all the benefits and disadvantages we outlined previously, such as high liquidity but increased counterparty risks.
- Futures contracts: Futures allow you to speculate on future prices of assets through contracts. With this investment vehicle, you can enjoy high liquidity and easy entry into the metals market.
Investing in Precious Metals Using an IRA
Because metals like gold can store wealth over long periods, many investors choose to use them as a retirement savings tool. With precious metals IRAs, you fund your individual retirement savings account using IRS-approved metals. Self-directed IRAs offer tax-advantaged precious metal investing and the potential for long-term returns.
To create an IRA, you first need to select a custodian who will help you establish the account. Your custodian handles everything from rolling over funds from previous retirement accounts to purchasing approved metals on your behalf and managing your account moving forward, so you must select a trusted provider who will comply with IRS regulations.
Your bullion will need to meet IRS purity and form requirements to qualify for an IRA. You also must store the bullion in an IRS-approved depository for safekeeping, so you are not allowed to store it at home. Your custodian can walk you through all of these requirements, along with minimum distributions, to ensure you stay compliant with all the proper regulations.
Are You Interested in Investing in Gold?
Now that you’ve evaluated precious metals versus stocks, you might be interested in diversifying your portfolio with a gold IRA. If so, you’ve come to the right place. Call Preserve Gold today at (877) 444-0923 to learn about our industry-leading IRAs or shop our premier metals online.
