How Can I Diversify My Precious Metals Holdings?
What is Diversification?
Diversification is the careful consideration and combination of a wide range of investments within a portfolio in an attempt to smooth overall volatility. Diversification is a broad term, however, and can be accomplished in different ways.
A retirement portfolio, for example, may contain a mix of stocks and bonds. The idea here being that if stocks are rising bonds may be falling and vice versa. In fact, many portfolios in the past have been constructed of just these two asset classes.
As investors have become more sophisticated and economic conditions have changed over the years, more and more investors began looking for other ways to diversify.
A stock portfolio, for example, could be further diversified by owning stocks from various areas of the economy such as oil and gas, healthcare, utilities and more. The idea here being that during times of economic prosperity and higher markets, stocks that benefit from consumer discretionary spending may outperform while companies involved in “staples” such as utilities, healthcare and food companies may underperform.
In a similar fashion, bonds and fixed income investments could be further diversified by owning bonds from different issuers with different rates and maturities.
Over the years, investors sought out even more ways to diversify. Some alternative asset classes that have been utilized in recent years include precious metals, real-estate and futures.
Precious metals are recognized today as an excellent vehicle for additional portfolio diversification. Just as it may be beneficial to have different stocks and bonds in a portfolio, it may also be wise to own a diversified basket of physical precious metals.
How this applies to Precious Metals
Diversifying a precious metals portfolio is simple and convenient. In order to best diversify your holdings, it is necessary to consider a few questions first:
- What are my investment objectives?
- Is liquidity important to me?
- What is my time horizon?
- Where will my metals be stored?
Once you have answered these questions, you can begin the process. Here we will discuss some ways to diversify a standard precious metals portfolio that one intends to own as a long-term investment.
Buy different types of metal: This would seem logical, yet many people get focused on just gold or silver when it comes to owning precious metals. Platinum and palladium may also serve a purpose within a portfolio. One can consider a mix of several types of metal for various reasons. Gold, for example, is used primarily in jewelry and for investment purposes. Silver, on the other hand, is used in jewelry, for investment purposes and in literally thousands of various industrial applications. It stands to reason, therefore, that during economic boom silver could potentially outperform gold while during times of risk aversion gold could potentially outperform silver. A portfolio consisting of different metals may potentially lower volatility within the portfolio.
Buy different forms of precious metals: Precious metals may be purchased in various forms including coins, bars and rounds. Coins from major mints are well-recognized, are legal tender and very liquid. Bars and rounds, on the other hand, may offer lower premiums and carry no face value. Coins and rounds may be more easily exchanged and transacted than larger bullion bars. If you hold large bullion bars in a depository, for example, you could also consider holding smaller quantities of coins and rounds at home or in an accessible and secure storage location.
Consider some graded coins or numismatics: Graded coins carry higher premiums than standard bullion coins. This is because they have gone through the grading process by a major grading company and are certified for authenticity and fineness. Graded coins may increase or decrease in value at different rates than non-graded coins.
Numismatic, or collectable coins, are typically bought for their scarcity and not just their precious metals content. These collectable coins may carry vastly higher premiums than standard bullion or graded coins. Their value, however, is based more on their scarcity and condition than bullion coins. These coins may retain or even increase in value in spite of lower gold or silver prices. Because their value is not based solely on the spot price of gold or silver, they may provide a means of diversification.
With a little research, time, and openness to other products, diversifying a precious metals portfolio has never been easier. Just as with any other type of investment, one should not put all of their eggs in one basket.