A Beginner’s Guide to Investing in Physical Gold and Silver

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Precious metals like gold and silver have a long history as dependable, valuable investment opportunities. Today, these metals are considered a reliable option to diversify the portfolio. There are various ways of investing in gold and silver: You can invest in the stocks of miners and developers, in exchange-traded funds (ETFs) that focus on these precious metals, or in physical gold and silver bullion (bars)/ coins.

Keep reading to learn more about investing in physical gold and silver including supply and demand, market performance, and how you can buy physical gold and silver.

Gold

This lustrous yellow metal is an excellent conductor of heat and electricity. It is also one of the densest, most ductile, and malleable elements. Having these properties means that the precious metal has many different uses.

Demand and Production of Gold

Gold has long been used as a method of payment. Coins were used historically as high-denomination currency and in the 19th century, gold was used to back paper currency (the gold standard), often held in the form of bars.

In terms of gold demand by industry,  jewelry was first in 2021 globally, making up over 55.43% of the share. Investment was second (25.02%), followed by central banks (11.3%) and technology (8.21%).

Open mine gold production has increased steadily since the 2008 economic crisis, reaching a high of 3,300 metric tons in 2018 and 2019. In 2020, gold production equaled 3,030 metric tons. China, Australia, Russia, The United States, and Canada are among the top producers of the precious metal.  

Performance of The Gold Market

Because the gold market is less volatile than the stock market, gold is often used as a hedge against stock investments. Another hallmark of the metal is the consistent performance it has shown over time.

Long-term and Short-term Returns

Gold has seen massive performance changes in the last 30 years, appreciating by almost 380% from about $349 to $1,668 since October 1992. In the last decade, returns have been largely flat. However, gold has delivered returns of 9.05% in the last three years, outperforming both the Dow Jones (3.34%) and silver (7.59%).

Above-Ground Gold Supply

When it comes to fluctuation in gold prices, the larger, “above-ground” gold supply plays a more important role than the smaller new production from mining companies. Prices are influenced by the decisions made by holders of the precious metal. By the end of 2021, above-ground gold investors held 205,238 tonnes of the precious metal.  About 46% of these reserves were in jewelry, 22% in bars and coins (including gold-backed ETFs), and 17% in central banks.

Silver

Like gold, silver is ductile and malleable. It also has the highest thermal and electrical conductivity of all metals.

Demand and Production of Silver

Historically, silver was the standard form of payment globally. Silver bullion and coin reserves were used for monetary purposes, and use of the precious metal to make ornaments and jewelry is equally long-standing. More recently, there has been an increase in the use of silver in the electronics industry.

In 2021, the electrical & electronics industry led others in demand for silver, with 330 million ounces of the total 1,049 million ounces of silver demand worldwide. Electrical was followed by bar and coin investments (278.7 million), jewelry (181.4 million), and other industrial (130.5 million). Brazing alloys, silverware, photography, and net hedging demand were other contributors to demand.

In terms of production, global mined  silver for 2021 was estimated at 24,000 metric tonnes. In 2020, the majority of the world’s silver was produced by Mexico (178.1 million ounces), Peru (109.7 million), and China (108.6 million).

Performance of The Silver Market

Historically, the performance of the silver market has been less consistent compared to gold. Factors influencing silver’s price include its use in the industry and as a store of value.

Long-term and Short-term Trends

In the last 30 years, the price of silver has appreciated by 440.27%, rising to $20.26 in October 2022 from just $3.77 in October 1992. In the last 10 years, silver has dropped in price by 41.96% but in recent times (January 1, 2022, to October 3, 2022) has produced positive returns of 7.59%.

Factors that Influence Investment in Physical Gold and Silver

Investors turn to gold and silver in times of uncertainty because of their established positions as a supply of value. Two factors that influence the demand for the precious metal are inflation and stability.

Inflation

Gold and silver are traditionally considered a hedge against inflation. For example, gold produced good returns for investors during the high inflation years of the 1970s. While an increase in gold prices with a rise in inflation is far from a surety, people tend to buy the relatively stable asset during times of high inflation.

Stability

The stability of banks is another factor that affects the demand for gold. If investors feel that their money isn’t safe in banks because of political or other reasons, they often store it in the form of gold or silver.

How to Buy Gold and Silver

Two popular ways of buying physical gold and silver are in the form of bullion or collectibles.

Bullion

Bars of gold and silver come in different sizes, usually measured in ounces or grams. Investors can buy bullion from local dealers or online stores. Buying online may mean that you can choose from a larger selection and even possibly pay less, but buying locally allows prospective buyers to inspect the item before making a purchase. APMEX, Money Metals Exchange, and JM Bullion are well-known online gold and silver retailers.

Collectibles

Investing in collectible coins (and jewelry) is another popular way of holding physical gold and silver. The quantity of the metal used in gold and silver pieces also varies. For example, the Canadian Maple Leaf gold coin contains 99.90% gold, while the American Eagle gold coin is 91.67% pure.

Investors should also be aware of the following considerations when buying precious metals:

  • The bullion or collectible should be produced by a reputed manufacturer.
  • The item should come with important information, including stamp, weight, and purity
  • If you plan on reselling gold bullion, it may be better to buy the metal in smaller denominations than larger ones.
  • Think about how you will store the gold and silver (in a safety deposit box, at home, etc.). If you plan on storing it at home, it’s a good idea to insure the assets.
  • With coins, you will be paying more than the market price because of the numismatic (currency) value of the collectible.
  • Comparing different retailers is useful, because some retailers may offer discounts on certain products or generally have lower rates.

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