Use Precious Metals for Diversification and Risk Management, NOT for Long-term Investing

Gold and silver might be good ways to diversify your portfolio and guard against risk and uncertainty (strategic portfolio risk management and mitigation). Still, you must be corrected if you make precious metals a significant part of your portfolio in most cases.

As ultra-successful investor Warren Buffett has stated, and as any good investor knows, gold and silver (and pretty much every such precious metal and commodity) are not productive assets – they sit there and look pretty. Compared to successful businesses, they don’t make more money, as illustrated in the example below.

If you had $1000 to invest today and purchased silver bullion with the entire sum, the value of your initial $1000 investment in 10 years would depend solely on the supply and demand for silver. That’s it. If you invested that money into buying a share of a successful and profitable business, however, the value of your $1000 investment in 10 years would depend on more than the supply and demand for that business. It would depend on that, of course, but it would also depend on the business’s management. This innovation occurred within the business, how effectively the business model and the business’s plans were carried out, etc. Over those ten years, your silver would just be sitting there, but the business would be working hard to sell products or services, grow, and become more efficient. It may turn out that the investment in the business was a bad idea, but that wouldn’t be because of the nature of the investment. It might be because of other factors such as a recession, depression, poor management, an act of God, etc. If your investment in the silver bullion turned out to be highly profitable, however, it would only be because of the speculative nature of investing. You would have guessed correctly that market forces would cause an increase in the price of silver. Over those ten years, your silver bullion would have been sitting there, but the business would have been hard at work creating value and serving its customers.

Investing in precious metals and commodities is not a bad idea by any measure; it is just important that you do not place your hard-earned money into an investment or speculative venture without fully understanding what you are doing. It isn’t wise, for example, to have 100% of your portfolio in precious metals.