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Diversification is a crucial aspect of investment strategy, allowing investors to balance risk and return. While traditional stocks and bonds are commonly used to achieve diversification, alternative assets like precious metals offer a unique opportunity to reduce exposure to stock market volatility. In particular, gold and silver have proven to be valuable additions to investment portfolios as they serve as a store of value over the long term.
As the Chief Marketing Officer at Regal Assets, a leader in the physical precious metals market, I have witnessed firsthand how gold and silver holdings have helped numerous investors build and protect their wealth. Here are some key insights into why gold and silver are worth considering for your investment portfolio.
One of the primary reasons for including precious metals in your portfolio is the natural boom-and-bust cycle of the economy. Keynesian monetary policy, which has been maintained since the Great Depression, leads to periods of economic growth followed by stagnation or decline. As we are currently experiencing the longest economic expansion in history, it is reasonable to anticipate an eventual economic contraction.
During times of economic decline or crisis, the value of stocks and bonds tends to plummet. In contrast, rare commodities such as gold and silver hold their value relatively well, making them a hedge against traditional asset volatility. By investing in precious metals, you can protect your wealth when you need it most, especially during economic downturns.
This protection is particularly relevant for entrepreneurs who operate in the highly volatile startup world. Precious metals can serve as an effective risk management tool, offering cash flows during market downturns and slowdowns in the business cycle. Moreover, gold and silver are strategic long-term holds that can preserve wealth in the event that a business needs to close its doors.
Determining the appropriate allocation for gold and silver in your portfolio depends on your risk tolerance. As a general guideline, we advise clients to allocate 5% to 15% of their portfolio to precious metals. Allocating too large a percentage to precious metals may result in missed opportunities for higher returns from other asset classes. On the other hand, investing too little in gold and silver exposes you to risks that other assets cannot mitigate.
An example worth noting is Kevin O'Leary from ABC's Shark Tank, who allocates around 5% of his portfolio to gold. This demonstrates that even successful investors recognize the value of including precious metals in their asset allocation.
Now, let's explore how to buy precious metals. The purchasing process depends on the type of asset you're interested in—physical gold bullion or exchange-traded funds (ETFs).
Physical gold bullion offers direct ownership of the commodity. It can be purchased in large or small dollar amounts and is easily transferable. However, it is important to note that bullion is taxed as a collectible. Holding it for longer than one year incurs a capital gains tax of 28% on the net gain from its sale, while bullion held for less than one year is taxed as regular income.
ETFs provide improved liquidity and convenience in buying and selling. They can be purchased in small dollar amounts and trade at the net value of the underlying asset. Bullion ETFs offer access to gold and silver with the added benefit of liquidity. However, it's essential to consider that with ETFs, the physical bullion is held by a bullion bank, introducing counterparty risk if they default or fail to fulfill their obligations. Investors holding gold or silver ETFs do not retain full ownership of their investment and cannot use their bullion or coins as money in the event of economic collapse or disaster.
When buying physical gold bullion, exercise caution and ensure you purchase from reputable vendors. Look for bars or coins that clearly display the manufacturer's name, weight, and purity grade.