Precious Metals: Safe Haven or Investing Trap?

As silver and gold have climbed past their historical highs in recent months, the frenzy around them has also grown. After browsing Reddit posts about silver’s “climb to the moon” or seeing television commercials about the unmatched benefits of switching to a gold IRA, you may begin to wonder whether precious metals are really a foolproof investment.

The Numbers Game

Times like this, in which both silver and gold have boasted recent returns far above that of the overall stock and bond markets, can make those bullish on metals seem very smart. In the past five years, gold has risen over 120 percent, with the S&P 500 index rising “only” around 80 percent. Zooming out, however, the data flips. In the past 35 years, gold has only risen around 1,000 percent compared to the S&P 500 rising around 4,000 percent. The window of time used for these stats matters, and oftentimes these windows are cherrypicked to start at unusually low prices and end near record highs.

Volatility

If precious metals don’t provide better returns than the overall stock market, then they must be much less volatile, right? An analysis of the volatility data from the Federal Reserve shows that this does not appear to be the case. Over the past 15 years, gold ETFs (exchange-traded funds) have only shown to be negligibly less volatile than the S&P 500 on average. If gold provides lower returns and is about as volatile as the stock market, then does it serve any purpose? Proponents of gold oftentimes point to its status as a chosen hedge against inflation and doomsday scenarios as merits of the metal. Comparing the U.S. inflation rate to the price of gold, the first of those claims also doesn’t appear to be correct. During each comparatively high inflation year of 1970, 1975, 1980, 1990, and 2022, gold prices sagged as inflation rose. 

Value

Fortunately for gold enthusiasts, the claim of gold as a hedge against doomsday scenarios holds more merit. In Weimar Germany (1918-33), and in more modern examples of economic system collapse in Zimbabwe and Venezuela, gold has often been turned to as an accepted form of payment when a country’s own currency is no longer usable. Many point to gold’s industrial uses as evidence of society’s need for the metal, which gives it inherent value. These arguments are not without flaws, though, as industrial use makes up a fairly small percentage of what gold is used for—the largest category of use is in jewelry. Additionally, those that claim gold will always be valuable may forget that aluminum used to be more valuable than gold. Today, due to mining technology advancements, aluminum is one of the cheapest metals available. No mining breakthroughs are likely to unlock significant amounts of gold on our surface, but space exploration could certainly increase gold supply in the coming decades, driving down the metal’s value.

Conclusion

Gold may be far from the perfect investment it’s often portrayed as online, but it’s also far from being a terrible one. Done correctly, gold can be a reasonable part of a diversified portfolio. With that said, it’s also important to understand that historical data suggests holding a disproportionate amount of gold essentially means that you’re trading higher returns for a potential shield against a potential doomsday. Also consider how you’ll store it—physical gold needs to be safely kept to avoid theft or loss. Other options exist, like gold-based ETFs and keeping gold in safe-deposit boxes, but these remove some of the benefits that having physical gold brings (like immediate access to stored value). While there’s no perfect solution for how to invest, taking the time to understand every option is a great first step toward making the best decision for yourself.