How to invest in gold and silver

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CMC Invest

01 December 2023

Key points

  • Gold and silver are two commodities investors often turn to in a bid to add diversification to their portfolios.
  • You don’t have to buy gold or in their physical form to invest in the metals. There are ETFs offering exposure to both, while many also look to invest in stocks of mining companies.
  • The silver price and gold price are both determined by supply and demand, but other factors, like the performance of the US dollar can also impact how these metals perform.

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Important: This information is for guidance purposes and may become out of date at any given time. It is not investment advice. Investments can rise and fall in value. We won’t make any assessment of whether the investments you chose are appropriate or suitable for you. If you are unsure of the suitability of any investment, investment service or strategy, you should seek independent financial advice. Capital is at risk.

Many a canny investor has turned to gold or silver to add diversification to their portfolio. The precious metals – like a lot of other commodities – often react differently to market conditions than stocks and bonds.

Investing in gold or silver doesn’t mean you have to raid a jewellery store or plunder some pirates’ booty. In this article, we’ll address how you can gain exposure to the metals and look at what typically drives their price.

Why do people choose to invest in gold or silver?

When people opt to make an investment in gold or silver, they often do so because they believe it helps to diversify their portfolio.

Historically, these precious metals have not been correlated to stocks or bonds. That means that amid a market crash or a run on corporate bonds the price of gold or silver has, at times, bucked the trend and remained robust.

During certain past periods of market turmoil, gold and silver have outperformed stocks and bonds. Many investors, therefore, see the metals as a hedge against markets falling, volatility and inflation. Of course, past performance is not a reliable indicator of future results.

Are there risks associated with investing in gold and silver?

As with all investments, gold and silver can rise and fall in value.

Both metals can also experience prolonged periods where their price remains pretty flat. Historically speaking, they have also underperformed stocks. The Dow Jones Industrial Average, for example, has returned almost six times more than gold over the past 100 years, according to macrotrends. Again, this past performance is not an indication of future returns.

Gold and silver also don’t pay dividends or interest, so you’re not “rewarded” with income for holding these investments. 

How do you invest in gold or silver?

It’s possible to invest in gold or silver the old-fashioned way. You can find dealers who sell gold bullion or silver coins and purchase these from them. They’ll often be marked up slightly – after all, these dealers need to make a profit – and you’ll need to figure out how to store your investment (burying it in your back garden or a Scrooge McDuck-style vault probably won’t cut it).

If you want to use your trading app to invest, however, there are a few options at your disposal.

Gold and silver ETFs:

There are ETFs that invest in physical gold or silver. When you purchase a share in one of these, you own a portion of the metal held by the fund. The price of the ETF will be directly impacted by the price of silver or gold.

Mining ETFs:

A number of ETFs don’t invest directly in gold or silver, but instead purchase the stocks of the companies mining these metals. The performance of these stocks is also linked to the price of gold and silver – after all, if the price of the metals you’re mining rises, your revenue is likely to increase.

However, since gold and silver miners are companies, their stock performance can also be influenced by things like management changes, regulatory infractions and market rumours. Additionally, as we alluded to previously, miners can also pay dividends to investors – something you wouldn’t get with physical gold.

Mining or streaming stocks:

While mining ETFs will invest across a basket of stocks, some investors may wish to pick the companies they believe will perform the best. As with the ETFs mentioned above, buying shares in a company that mines or streams silver or gold provides an indirect way to invest in these metals.

As noted above, mining stocks may pay dividends – something you won’t get by investing directly in gold or silver. They do, however, tend to be more volatile than the underlying metal.

Your portfolio will also be more concentrated if you opt to invest in a few mining companies rather than an ETF that spreads your money across several. There’s a chance this strategy can work if you’re particularly adept at identifying good stocks, but there’s also greater risk involved – bad news impacting one of your chosen investments could have an outsized effect on your portfolio.

If you’re planning on picking your own mining stocks, then make sure you thoroughly research companies before investing in them, remember your capital is at risk and seek out independent financial advice if you’re uncertain about the suitability of any investment.

What could move the price of gold or silver?

Like a lot of things, the prices of precious metals are largely determined by supply and demand.

The more gold and silver that is pulled out of the ground, the greater the supply. This will tend to keep prices lower. If less is mined, prices will tend to be pushed up.

Supply, however, is only part of the equation. High demand for precious metals will drive the price up, while low demand will drive it down. For example, central banks around the world hold gold as reserves. Their buying, or lack of it, can strongly affect gold’s price since these institutions buy in such huge quantities.

Additionally, the amount of jewellery being manufactured and purchased will also affect the demand for silver and gold. Precious metals – including gold – are also used in the manufacturing of equipment like medical devices and greater production of these may affect the price.

It’s worth noting gold and silver are usually priced in US dollars. Therefore, if the US dollar rises against other currencies, the price of precious metals will decline. Why? Because as the dollar strengthens it becomes more expensive to buy the metals in other currencies. As a result, less can be bought. Of course, this works the other way as well. If the US dollar weakens relative to other currencies, then the price of precious metals denominated in dollars will normally rise.

The World Gold Council publishes figures on production, supply and demand.