This question is one of the most important for investors to answer. After all, experts suggest limits on how much of any types of investments should go into a portfolio. After deciding to purchase and own Precious Metals and considering how much money to allocate, one can then think about how much and what to buy at any point in time…

What Experts Recommend for a Portfolio

First and foremost, investors should consider the pros and cons of having Precious Metals in their portfolios, since how they view these points will dictate the amounts they should own. Below is a graphic that shows one recommendation for portfolio diversification. A general guideline is to dedicate 5% to 10% of an overall portfolio to Precious Metals, but this figure depends on several factors, including demand, expense and time and effort to spend.

Next, an investor should consider owning Precious Metals as a diversification strategy, along with varying their portfolio as they grow their asset base. Precious metals are non-correlated assets. That means that generally when the stock or bond markets are experiencing wild fluctuations, investors tend to prefer the safety and stability of precious metals. Also, an investor should consider planning to invest in Precious Metals to help build wealth over time, keeping in mind that needs and desires will change with time and other factors.

(Finally, APMEX recommends consulting certified and licensed financial advisers or investment professionals to help make the best possible financial decisions.)

Pros and Cons of Precious Metal Ownership

As with any investment, investors must weigh several considerations and do their own research. Precious Metals have stood the test of time, having been around for more than 5,000 years, and will be here for years to come. The following information outlines the general pros and cons to owning Precious Metals.

Pros:

Diversification: Precious Metals tend to perform inversely to equities, especially in more volatile times. Also, as the dollar has historically weakened in buying power, history has shown that Precious Metals have held their value or increased significantly. Precious Metals tend to do better than traditional “paper” investments, while an investment portfolio can decline when the market is underperforming; this is due to the almost inverse relationship the market and Precious Metals have. Unlike paper assets, precious metal values can never go to zero.

This chart shows the inverse relationship between Gold and the S&P 500. Source: Topforeignstocks.com

No Counterparty Risk: Instead of dealing with banks or other financial institutions to buy physical Precious Metals, one can get them from APMEX. You are not wagering your investment on any broker, analyst recommendations or on any mining company operations. The precious metal itself is the investment.

Hedge Against Inflation: Due to inflation, the purchasing power of the dollar tends to decrease over time. However, Precious Metals tend to hold their value with time, especially in the event of market downswings; thus, buyers are apt to turn to Precious Metals as assets that will maintain their value.

Privacy: Precious Metal ownership is a more personal investment than stocks or bonds. There is no reporting requirement when you purchase precious metals – no one knows that you have them. It is also a way to pass along a physical form of financial security to loved ones or give to future generations in an estate.

Long-Term Store of Value: Precious Metals are generally viewed as a viable asset, having held their historic value over the centuries. They have been used in bartering and backing currencies and are stored by leading world banks.

Proven Performance: Although history is no predictor for the future, Precious Metals have performed well since 2000, with Gold being the second-best performing asset class after real estate. Many investors do not generally take this fact into account, since they usually purchase safe haven investments during more unpredictable times in the marketplace.

This chart compares the overall historical performances of gold and real estate investment trusts (REITs) since 1970. Source: Scopemarkets.com

Intrinsic Value: Unlike some more recent investment vehicles, Precious Metals and their prices are driven by actual supply and demand. Precious Metal mining has become far more difficult and costly over time, while its uses continue to expand. Thus, the demand outweighs the supply, and their values continue to climb.

Worldwide Demand and Interest: Precious Metals serve an essential role in various countries and in many societies. Developing countries like India and China are significant consumers of Precious Metals. India’s gold demand, in particular, is “interwoven with culture, tradition, the desire for beauty and financial protection,” according to Somasundaram PR, the managing director for India in the World Gold Council. China encourages its citizens to buy gold for their future and China also limits the exportation of gold from within its borders.

This chart shows the demand of Gold by country in 2020. Note the outsized demand by China and India together. Source: Talkmarkets.com

Also, the use of precious metals in “green” technologies is increasing. One of the most rapidly increasing uses for Silver is in manufacturing solar panels. Platinum and Palladium, in particular, have been used in catalytic converters in all automobiles made since 1993. These devices use Platinum, Palladium and other similar metals to convert toxic gases from gasoline vehicles’ exhaust to nitrogen and carbon dioxide.

Plus, Precious Metals’ use in technology and medicine drives its overall demand. According to the U.S. Geological Survey, the typical cellular phone’s contents include Gold, Silver, Platinum and Palladium (9), while medical implants use Gold, Silver and Platinum.

Cons:

Though Precious Metals’ pros outnumber the cons, the cons are certainly worth taking into account when considering how much Precious Metal to buy.

Non-yielding asset: Though Precious Metals may increase in value, they do not earn an overall return, whether through dividends or interest.

Tracking Gains and Losses: One aspect of Precious Metals is that investors must track them manually to determine gains and losses and then report details, like acquisition cost and liquidation value, to their state governments, where applicable. Plus, Precious Metal taxes and regulations vary from state to state. A majority of states do NOT tax Precious Metal purchases.

Many experts share the view that Precious Metals should be regarded as an insurance policy for a portfolio, like putting cash in a safe. Investing in Precious Metals should be long-term, not a way to make a “quick buck.” For these reasons, many investors overlook the cons of precious metal ownership.

What the Analysts Do and Say

When working with investors, financial analysts will ask several questions about their investment plans and present them with much information to consider.

These include questions about the target retirement age, how much money to save per year toward financial goals, how much money needed in retirement, and end-of-life plans to distribute wealth. Other information includes tax strategies, risk profile and asset reallocation versus incremental savings (slow and steady investments without much rearranging of assets).

Assuming one has not yet determined whether to invest in Precious Metals – whether in an ETF or a digital or physical format – here are some final thoughts from leading analysts.

First, the wrong approach to investing in gold is trusting in the notion it never loses value, since gold, like any financial asset or investment, is subject to fluctuating values. Another is that the intrinsic value of Gold and Silver will outlive all fiat currencies, including the U.S. dollar. And a third is that future inflation (19), due to “a global economy of debt,” makes gold a currency that preserves its purchasing power.