How much do you know about bullion investing? Gold, silver, and other precious metals can play a crucial role as a defensive asset in your portfolio. Any investor looking for opportunities off the stock market to shore up their position and diversify their risks should be looking to bullion for answers.
If you don’t already invest in bullion, now is the time to brush up on the fundamentals.
1. What kind of investment is bullion?
Bullion refers to high-purity gold, silver, and sometimes platinum products, usually in the form of highly pure bars or coins. These products can be purchased directly from bullion dealers like Global Bullion Suppliers, or you can include them in your portfolio with tools like ETFs.
Some believe that gold has intrinsic value that makes it an ideal tool for storing wealth. Importantly, it’s a tangible asset, and a material that is incredibly resistant to rust and degradation, making it a historical way for the rich to store wealth and as a medium of exchange.
Gold is traded like a commodity, but unlike things like lumber or oil, it’s not really consumed doing anything. It may be used in jewellery, but most gold that gets mined is kept and stored for centuries.
2. Gold risks and returns
Bullion doesn’t provide interest rates, rents, or dividend payments. It is an entirely speculative asset. When you invest in it, your returns come from appreciation.
The biggest risk you face when you invest in bullion is that prices will drop, much the same as non-dividend paying stocks. However, the risk factors are different, and gold and stock prices tend to be negatively correlated.
Over the long-term, gold returns have proven very effective at maintaining value compared to inflation, though gold and silver have both experienced periods of rapid price appreciation over the course of multiple years, such as the 2000-2010s bull run.
3. Economic and geopolitical factors
Bullion prices are very responsive to broader economic and geopolitical factors, largely driven by investor sentiment. Gold and silver prices tend to benefit from two things:
- Fears that there will be a recession or a stock market crash in the near future.
- Fears over geopolitical uncertainty that can upset global trade and growth.
Major crises like COVID-19 and the Russian invasion of Ukraine have all resulted in temporary bullion price spikes.
4. Diversifying your portfolio with gold
Gold is a great asset for diversification because prices tend to trend opposite to stocks. Gold prices have historically surged during recessions, giving investors a path to growth despite broader economic factors pushing against them.
How much bullion you should include in your portfolio depends on your own preferences and risk tolerance, but one rule of thumb is that a diversified portfolio should dedicate anywhere from 5 to 15% of its funds to bullion.
5. Market forecasts for the rest of 2023
The bullion market is as unpredictable as any, but looking strictly at fundamentals, a robust job market and falling inflation indicate that gold prices may come to a plateau or even fall. This can be a great opportunity for investors to get into the gold market at a lower price point. Should those indicators change and inflation or recession fears return, one could expect gold prices to rise again.
Bullion can be a very useful investment for diversifying your portfolio and exposing your savings to a different set of risks.