When you’re looking for ways to diversify your investment portfolio, you need assets that won’t follow the same market cycles as the stocks and bonds you likely own already. You need alternatives that follow their own cycles, so that when stock markets are down, you have other assets keeping your portfolio’s performance afloat. Diversification can help reduce risks and protect your wealth.
One of the more flexible, easier alternative assets that you can add to your portfolio is bullion. Bullion is the high-purity form of precious metals like gold and silver. You can invest in precious metals either by buying physical bullion or with an ETF.
Buying physical bullion is a smart way to avoid paying ETF management fees, and a trusted source for bullion can introduce you to everything you need to know about investing in bullion.
There are plenty of reasons to start including gold or silver in your investment portfolio. We’re taking a look at some of the top benefits of owning bullion, as well as some of the costs associated with it.
The Top 3 Benefits of Investing in Bullion
What can bullion do for your portfolio? Gold and silver are reliable assets that benefit long-term investors. Here’s what they can do for your portfolio.
#1 Preserve Wealth Against Inflation
The most important quality bullion has is its ability to preserve wealth against inflation. Not long ago, a surge in inflation ended what had been essentially two decades of a low-inflation, low-interest environment.
In some places, inflation is starting to come down, albeit still at rates much higher than the 2% that central banks aim for. The biggest risk that inflation poses for investors is the long-term devaluation of their wealth, especially savings that have been put in a low-risk, low-interest environment, such as a cash account or bonds.
Gold in particular is an effective hedge against inflation. The yellow metal is still considered more reliable than fiat currency, even decades after the end of the Bretton Woods system.
#2 High Liquidity for an Alternative Asset
Liquidity is always a concern when it comes to diversifying with alternative assets. Many alternative assets are considered non-liquid, which means that it can take a very long time to convert these assets into cash. Real estate, one of the most significant alternative asset classes, can take months to sell, and comes with a number of legal hurdles before you can complete the transaction.
Bullion is one of the more liquid alternative assets available. There is always a market for gold and silver. Reputable bullion dealers offer fairly standardized rates for pure gold and silver bars that are based on spot prices, and they can complete transactions on the spot after evaluating your bullion.
#3 Safe Haven During Geopolitical Uncertainty
Bullion is also considered a safe haven during times of geopolitical uncertainty and emergencies. The financial crisis of 2008 and the Euro crisis that followed initiated a period of unprecedented growth in gold prices.
There are plenty of reasons to believe in the security of gold. The main reason would be that gold is a tangible asset that’s had enduring value for thousands of years. People have always had faith in the value of gold and silver.
The Biggest Costs of Investing in Bullion
While bullion is an incredible asset for anyone looking to diversify their portfolio, like all assets, it comes with some costs. These are the two primary costs you need to take into account.
#1 Storage and Security Costs
When you’re buying physical bullion, it pays to protect your investment. There are two things to take into account: storage and insurance.
Storage can be relatively straightforward. If you’re thinking about storing bullion at home, you will want to invest in a safe. Keep the combination to yourself (and your beneficiary, in case something unexpected should happen).
You may also want to look into precious metals insurance. Most home insurance policies only cover a small amount of precious metals, including jewellery and other expensive items. If you’re going to store bullion at home, insurance can protect you against loss in the case of fire, theft, or natural disasters.
#2 No Income Generation
The other primary cost of investing in bullion is the opportunity cost. Bullion doesn’t generate interest or dividends, unlike dividend stocks, bonds, or even a savings account.
During times of high inflation, the long-term appreciation of precious metals can outweigh that lack of income, but income-generating assets are a critical part of retirement planning.
This is one of the reasons why bullion works best as a secondary asset in your portfolio. Ideally, about 10% of your portfolio can be invested in bullion, giving you the advantage of a hedge against crises without costing too much in foregone interest or income.
Bullion is a smart way to protect your wealth. Accounting for the costs as well as the benefits will help you make the right choices around bullion investing.
