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Does my portfolio need precious metals?

Does my portfolio need precious metals?

August 03, 2022

Over the years, many clients have asked if they need to own precious metals such as gold and silver.  My answer depends on the reason for the question.  

Gold and silver don't have a high correlation with the stock market which means that they don't do the same thing at the same time.  For example, if stocks go up, gold might go down and vice versa.  For this reason, there's nothing wrong with owning a precious metal for a small percentage of your portfolio - something like 5% of it.

In reality, I don't usually get this question because of the low correlation to stocks.  More often, investors start thinking about precious metals, prompted by infomercials that play into fear when the stock market is volatile.  There are several things to consider if this is the case.  First, the person selling a product on an infomercial is not a financial advisor; rather, he or she is a highly commissioned salesperson.  The commission paid on some of these schemes is unreasonably high.  Be sure to understand exactly what the costs are.  If you buy physical metals such as coins or bullion, be sure to understand the storage costs which, along with commissions, will eat into your return.

I've also had people ask about precious metals due to a "Doomsday mentality."  The theory is something like this... "Everything as we know it will change.  Our monetary system will break down.  Martial law will be declared.  I'll need gold or silver because the dollar won't be worth anything".  I don't usually engage in these conversations because I'm not an expert on the topic and I don't really have anything to add.  I will say, though, that this is a very, very bad reason to buy gold or silver and here's why.  If the aforementioned does happen, silver and gold won't do us a bit of good.  We won't be able to chip off a piece of gold to buy food or water or fuel.  What we would need is food, water, and fuel, etc. that could be traded.

Other than ornamental jewelry and some industrial uses, gold doesn't have an intrinsic value.  Like the dollar, the prices of gold and silver fluctuate due to supply and demand.  

In summary, precious metals can be used to diversify a portfolio but you want to make sure you're buying for the right reasons, and like any investment, you don't want to buy too much.