Are Precious Metals Investments?

In my Jan. 7, 2021, column, I noted that the price of gold From Dec. 31, 1999, to Dec. 31, 2020, had increased more than 550 percent, as measured in U.S. dollars. Further, I noted that this performance was better than that of other precious metals and major U.S. stock indices over the same time period.

One reader of the column took exception to this information ("Precious Metals Not the Best Investment Out There," Letters to the Editor, March 30 Numismatic News). He noted that if someone had purchased one share of Coca-Cola in 1919 for $40 and held it until today that the appreciation in this stock far outperformed that of gold over the same time period.

In that he was absolutely correct. However, there were a number of flaws in his cherry-picking one example stock and trying to pretend that this reflects the results of the overall stock market over the past century.

Of course, the first question to ask is whether precious metals serve as investments. In my mind, I consider owning physical gold and silver as “wealth insurance” against the risk of falling values in paper assets such as stocks, bonds, and currencies.

The World Gold Council (WGC) generally agrees with this idea. In February, the WGC published a research report titled “The Relevance Of Gold As A Strategic Asset,” which you can read here. It confirms that over the past two decades, the price of gold has outperformed many equities, bonds, currencies and commodities. The report notes that “the price of gold in U.S. dollars has increased by an average of nearly 11 percent per year since 1971 when the gold standard collapsed.”

Further, Table 1 of this report compares a hypothetical U.S. pension fund average portfolio performance depending on whether the portfolio does not own any gold or owns the equivalent of 5 percent of assets in gold. In the analysis for the past year, past five years, past 10 years and past 20 years, the annualized returns for both kinds of portfolios were about the same. However, the overall volatility was lower among portfolios that own gold.

Now, beyond the question of whether precious metals are appropriate to consider as investments, the next point is to compare the long-term performance of gold against any cherry-picked single stock.

The reason I bring this up is that prudent investors are those who own diversified portfolios. While it will always be true that some individual stocks will perform spectacularly over any given time period, the average returns, as reflected in stock indices, are much less impressive.

When the Dow Jones Industrial Average was created in 1896, it included 12 top quality companies. None of those companies are in this Average today. In fact, only one survives in business under the same name (General Electric). Had an investor bought one share of each of these 12 companies 125 years ago and held them until today, the results would be a tiny fraction of the appreciation of Coca Cola stock.

Another factor to consider is how many people “know” when a company debuts that it will be one of the very few that will perform spectacularly over the next century. Sure, Ty “Georgia Peach” Cobb may have become the first Major League Baseball player to become a millionaire, not from his athletic skills but from being an early investor in Coca-Cola, but how many people invested only in Coca-Cola stock – and no others – in 1919 and held it for a century? How many people can claim that the only stock investment they ever made was at the creation of Apple, Microsoft, Tesla and other examples?

Here are some other examples of major businesses that did not ultimately fare so well. In 1880, Knapp, Stout and Co. was the world’s largest lumber company and also one of the world’s largest corporations. This company failed in 1901. Baldwin Locomotive Works was one of the world’s largest companies at the beginning of the 20th century, but went bankrupt in the 1930s and failed in the 1950s.

In my mind, gold and silver are worth considering as an investment, especially because of their high liquidity in all markets. Did you know that the average daily global trading volume of gold, as measured in U.S. dollars, is about two-thirds of that of all of the stocks combined that are included in the Standard & Poors 500 Index (see the above referenced WGC report)? However, as with any other investment, it is only prudent to include it as part of a well-diversified portfolio.

Patrick A. Heller was honored as a 2019 FUN Numismatic Ambassador. He is also the recipient of the American Numismatic Association 2018 Glenn Smedley Memorial Service Award, 2017 Exemplary Service Award, 2012 Harry Forman National Dealer of the Year Award and 2008 Presidential Award. Over the years, he has also been honored by the Numismatic Literary Guild (including twice in 2020), Professional Numismatists Guild, Industry Council for Tangible Assets and the Michigan State Numismatic Society. He is the communications officer of Liberty Coin Service in Lansing, Mich., and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at www.libertycoinservice.com. Some of his radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio archives posted at www.1320wils.com).