Precious Metals vs. Stocks: How To Pick The Best Asset-Class For Diversification

By Angel Broking | Published on 26th October 2020 | 1580

Precious Metals vs. Stocks: How To Pick The Best Asset-Class For Diversification

Precious metals are an interesting proposition while you are diversifying your portfolio. This blog will discuss precious metals vs. stocks and see how both can help you achieve your financial goals.

Investing in gold and silver is significantly different from investing in shares. When we buy company shares, we obtain partial ownership in it. Conversely, gold and silver are commodities and trade in a different exchange.

In the last few months, the market has experienced a significant surge in gold and silver values, reflecting increasing demand and diminishing supply. But, what causes the demand to rise?

Before we begin, let’s give you a context of why we think the discussion of precious metals vs. stocks is important. Historically, the stock market has outperformed precious metal investment. Stocks are attuned to inflation and generate a better return in the long run. On the other hand, precious metal investment is viewed as a hedge against inflation. However, there is a massive shift in this accepted wisdom, and both gold and silver consistently outperforming DJIA (Dow Jones Industrial Average).

There is a simple explanation for the modern shift in the choice from equities to precious metal investment – it’s the global economic changes. Here are the three reasons that are driving the demand.

  • Rising unemployment and shrinking consumer demand resulting in ever-expanding monetary policy. Pumping money into the economy has become a norm to keep it afloat, but, at the same time, it’s also pushing commodity prices high.
  • Secondly, the stock market has been behaving erratically recently. Rising volatility in the stock market caused an upswing in precious metal demand.
  • The looming debt crisis in the European countries has pushed the demand in the precious metal segment up. Investors are willing to sacrifice higher returns to safeguard their investment.

The advent of advanced technologies, an increase in trading facilities, and year-round price discovery mechanisms mean there are more retail investors participating in the market.

In the discussion of precious metal investments vs. stock market it is important to acknowledge that both has pros and cons – understanding those will help you make better decisions regarding your investment.

Advantages And Disadvantages Of Investing In Precious Metal

  • Precious metals offer a safe haven to investors when volatility in the stock market increases. it’s been seen that precious metals provide stability when banks are unstable, and income for G-sec bonds have hit rock bottom
  • Several industries use precious metals. The performance of these sectors also influence the global demand and supply of these metals
  • Metals like platinum and palladium have extensive use in reducing car emission. So investors can expect a rise in price due to strict regulation on the supply of these metals

When investing in precious metal sounds like an exciting idea, investors should also consider the cons.

  • A certain degree of risk is associated with investing in the precious metal segment
  • Challenges associated with buying, selling, and hoarding physical goods is another factor that wards off retail investors
  • As with all types of investment, precious metal price movement can be erratic, especially when the economy is unstable – war, pandemic, or political reasons. it can drive the demand high
  • High risk regarding storing and chances of theft also make investing in precious metal risky

However, there are now more ways to invest in precious metals than transacting in physical goods, which reduces the risk.

Pros And Cons Of Investing In Stocks

Purchasing stocks is the traditional way to raise ownership in a company. The shareholder isn’t directly responsible for running the company or its debts, but it is a great way to benefit from its growth. Shareholders receive a dividend on their investment, which is a portion of the company’s profit that the management decides to distribute among the investors.

Investors also gain from trading company stocks in the secondary market. Everyday company share price fluctuates, creating earning potential for the investors.

Pros

  • Possibility of high return. Historically, stocks as an asset-class have generated a higher return on investment
  • An easy way to claim a share in a company’s performance
  • High liquidity creates ample opportunities for traders and investors to build trading strategies

Cons

  • Company stocks are susceptible to market volatility and more affected by economic swings than commodities
  • Earning from equities depends on the company’s performance. you can’t expect a high return if the company isn’t performing well
  • Thirdly, equity investment is risky. Equity investors are placed at the bottom of the investor hierarchy. It means, if a company goes bankrupt, shareholders will get their investment back, if at all, after the bonds holders and institutional investors are paid

The Final Word

There is a risk associated with every type of investment. That is why you must diversify the portfolio. With time, precious metal investment has taken many new forms. Millennial investors can include sovereign gold bonds or invest in gold ETFs instead of holding bullions. Also, investing in gold or silver mine companies or in industries that use precious metals extensively is another way to include precious metals in your portfolio.

But to invest in any investment tool, a basic understanding of the market is necessary. You would need to learn the market jargon and find a good broker to start investing.