Reader Question: Should I Invest In Gold and Silver?

Posted on 10/06/2011


After the sale of a property I now have some money to invest. I’m sceptical of advice given to me because I’m not that knowledgable & don’t want to lose it. I’m looking for something safe to beat inflation. Would gold/silver be a good way to invest? Thanks.

Firstly, you should note that I’m not regulated by the FSA to provide invest advice to individuals as I do not possess any of the necessary qualifications (my background is in investing on behalf of institutions).

Secondly, while you have provided me with some high level information about your situation, without knowing *everything* about your financial and personal circumstances it is challenging to provide advice.  For example, information such as your current wealth, income, outgoings, liabilities, age, dependents and willingness to take risk is essential in order to determine what investments might be suitable.

Thirdly, I don’t have any of my own assets invested in gold or silver.  My rationale for this is that I only invest in assets that I believe are undervalued (thus giving me a margin of safety), and because gold and silver do not generate any cash flows it is impossible to determine what the fair value should be.  In fact, it actually costs money to hold gold and silver, as the bullion needs to be stored and insured (these costs are implicitly built-in to financial products such as ETFs).  Because gold and silver have little industrial demand and never generate any future cash flows other than the consideration received upon their sale, their valuation is reduced to a speculation of what they might sell for at some point in the future.  For this reason, I consider them to be highly speculative assets with a high degree of risk attached.  Viewing their historical price charts confirms they have suffered from a very high degree of price volatility.

Returning to your question, I note that you “don’t want to lose it [your capital]”, and you’re “looking for something safe”.  In my opinion – though some would disagree – gold and silver don’t meet either of these criteria.  In fact, only one asset can be completely safe, and that is inflation-linked government bonds.  However, you also state that you want “to beat inflation”. Given the current interest rate environment, “beating inflation” and “complete safety of capital” are mutually exclusive.  On this basis I would recommend a portfolio that has a large portion invested in inflation-linked government bonds (to provide capital protection) with the bulk of the rest invested in investment grade and high yield corporate bonds (to provide a chance of beating inflation).  You may also wish to invest a portion in equities (to provide a higher probability of beating inflation – but also a higher probability of losing a portion of your capital).   If you still wish to invest in gold and/or silver, I would limit it to 5-15% of your portfolio.

Posted in: My Thoughts