Understanding Gold and Silver in Your Investment Portfolio

Over the last two years, gold, silver, and other precious metals have increased in value significantly, getting a lot of attention from investors. Gold recently went above $4,700 per ounce and silver is now trading above $90 per ounce. These are record-high prices for both metals. Because of these strong gains, some investors are asking themselves if they should buy these assets. Like any investment decision, it’s important to look at the bigger picture to understand their history and how they might work in a well-balanced portfolio.

Many investors have historically viewed precious metals as a safe haven investment during periods of uncertainty. However, these metals and other commodities (raw materials like oil or wheat) tend to go through cycles of big increases and big decreases in price. Right now, gold and silver are rising along with many other types of investments because there is increased uncertainty about monetary policy (decisions made by the Federal Reserve about interest rates), fiscal policy (government spending and taxes), and geopolitical risk (tensions between countries). It’s important to think of these assets as part of a long-term investment plan that helps you reach your financial goals, not as ways to make quick profits through trading.

Precious metals often increase in value during uncertain times

Several things have caused gold and silver prices to surge. One major factor has been recent tension between the White House and the Federal Reserve (the Fed). This has created questions about central bank independence (whether the Fed can make decisions without political pressure) and the future direction of monetary policy, especially since Jerome Powell’s term as Fed chair ends in May 2026. When interest rates are lower and inflation might rise, the value of the dollar can fall, so some investors look for assets that can hold their value over time.

Another important factor is that central banks (the main banks of different countries) around the world have been buying gold regularly in recent years. They are diversifying away from holding mostly dollars in their reserves. Central banks need to hold enough reserves to manage their monetary policy and keep their currencies stable. These purchases of gold and other assets have increased because of greater geopolitical uncertainty and worries about currency stability.

Both metals also benefit from industrial uses, including in electric vehicles, solar panels, and artificial intelligence hardware. This means they play multiple roles: as precious metals, as safe haven assets, and as industrial commodities.

It’s hard to predict when precious metal prices will rise

Looking at history, periods when there was uncertainty about monetary policy have often happened at the same time as strong performance for precious metals. For example, in the 1970s, both gold and silver rose dramatically as stagflation (a combination of slow economic growth and high inflation) affected the economy. Prices peaked around 1980. Similarly, both metals increased from 2008 to 2011 during the global financial crisis, and then again during the 2020 pandemic.

In each of these situations, investors bought precious metals when uncertainty about monetary policy and economic conditions was highest. However, both gold and silver prices started to fall soon after conditions began to get better.

This creates at least two problems for investors who want to buy these investments because of their recent strong performance. First, trying to predict gold and silver prices means predicting the path of interest rates, inflation, and other economic factors. The past several years have shown that these factors are very difficult to forecast accurately. Many concerns among investors and professional economists when inflation increased sharply in 2021 and 2022 did not turn out as expected.

Second, while it makes sense that investors are attracted to assets that have done well recently, history shows that precious metal rallies (periods of rising prices) are very difficult to time correctly. The gold rally of the 1970s, for example, was followed by two decades of falling prices. Gold peaked above $800 in 1980, and it didn’t reach that level again until 2007.

The chart included here shows how gold has performed compared to the S&P 500 (a stock market index that tracks 500 large U.S. companies) since the 2007 market peak. While gold has had periods of strong performance, the stock market has also performed well over these periods. For investors paying attention to recent precious metals rallies, this longer-term view may be surprising. However, it makes sense because the stock market has historically risen over long periods of time.

This pattern also applies to silver. Despite strong demand for silver in industrial uses, silver has experienced long periods of poor performance between rallies. For instance, silver had a strong rally in the late 1970s. During this time, a famous incident occurred when the Hunt brothers tried to control the market by buying large amounts of silver and futures contracts (agreements to buy silver at a future date). While they pushed prices higher for a while, prices eventually dropped sharply as new supply entered the market and regulators introduced restrictions on using borrowed money to buy commodities.

Other precious metals show similar patterns. Between 2016 and early 2022, palladium (another precious metal) gained over 500%. This rally happened because of limited global supply and increased use in applications like catalytic converters for cars. However, after reaching its peak, prices fell sharply over a two-year period.

Precious metals should fit with your financial goals

These examples show that, when it does make sense for investors to own precious metals and commodities, gold and silver are best viewed as parts of a broader commodities allocation (a portion of your portfolio dedicated to commodities) or as part of alternative investments (investments that are different from traditional stocks and bonds). The Bloomberg Commodity Index, for example, currently has 14.9% in gold and 3.9% in silver, along with other commodities such as industrial metals, energy, and agricultural products. This diversified approach to commodities helps manage the ups and downs that come with owning any single commodity.

The reason to include precious metals in portfolios is that they behave differently from stocks and bonds. Their value comes from being scarce, their roles as stores of value, and industrial uses. This means they may react to market and economic events differently than traditional asset classes, which can help stabilize portfolios.

However, precious metals also have important limitations. Most notably, they don’t generate income, unlike bonds or dividend-paying stocks (stocks that pay regular cash distributions to shareholders). This lack of income also makes these assets difficult to value, which is another reason they go through cycles of booms and busts. A portfolio that has too much invested in gold and silver may miss out on the long-term growth potential of stocks and the income from bonds. So, even if precious metals might help in specific market situations, they may not align with long-term goals.

The chart included here shows that many types of investments have contributed to portfolio returns recently, not just precious metals. While gold and silver have certainly done well, there will always be individual investments that perform strongly in particular periods. The key is building portfolios that can benefit from various market conditions rather than putting too much money into recent winners.

The bottom line? Gold and silver have increased in value over the past two years, but long-term investors should think about them in the context of their overall portfolio. Their value comes not from recent performance, but from how they contribute to portfolio balance across different market environments.

DISCLAIMER: This material is for educational and informational purposes only and should not be considered personalized investment advice. Investment decisions should be made based on an individual’s financial situation, objectives, and risk tolerance. Past performance is not indicative of future results. All investing involves risk, including the potential loss of principal.