One way of creating a solid retirement plan is by diversifying your IRA portfolio. When you include multiple assets in your retirement account, you minimize the risk of having your entire portfolio wiped out by one negative event that affects a single holding.
While stocks, options and bonds are common holdings in an IRA, they are not the only available options. You can also add precious metals to your retirement portfolio. Gold and silver make the best bet.
These two generally offer higher liquidity and better immunity from inflation. That’s what you want in a retirement plan. But which is the better metal for your IRA portfolio?
Below is a detailed look at gold vs silver as a retirement investment.
What is a precious metal IRA?
A precious metal IRA is a self-directed individual retirement account that allows you to hold precious metals. This is the outstanding feature of self-directed accounts. They let you invest in unconventional assets like gold and silver.
By including precious metals in your portfolio, you essentially add an extra layer of protection to your retirement account. That’s because assets like gold and silver typically grow in value over the long term. As such, they minimize your investment’s volatility and risk.
Something to keep in mind is that you can only hold a gold & silver IRA through a third-party custodian. But just like a traditional IRA account, all the gains in the value of these metals are tax-deferred. This is what makes a strong case for rolling over your pension to an IRA of any kind.
In fact, IRS Publication 575 allows you to invest your pension in a traditional or self-directed IRA. Doing so won’t attract any taxes or penalties. Yet, your money will grow over time.
When you reach the retirement age of 59.5, you can start to withdraw from the IRA account without any penalties. You will only pay taxes on the amounts you withdraw.
Beyond tax benefits, a silver and gold IRA comes with additional advantages. It has a hedge against inflation and enjoys intrinsic value. Additionally, the account has no credit risks, is highly liquid, and has asset diversity.
Is gold or silver a better long term investment?
Although you can add both gold and silver to your retirement portfolio, they are not equal investment assets. Here is how they compare:
- Cost and performance
Silver is significantly cheaper than gold. At the time of writing, an ounce of silver traded at $19.69, compared to $1,647.00 for gold.
Due to its affordability, silver is more accessible to small investors who are just starting to build their retirement portfolios. You can buy more of it for less money. Gold, on the other hand, is ideal for people with larger sums to work with.
That said, gold is a better performer than silver. In the period from 1925 to date, gold has gained an average of 4.87 per cent annually. This is a better return than the 3.46 per cent that silver has earned.
Therefore, if you are judging the two strictly on their potential return on investment, then gold is the better option. It will add more value on your retirement portfolio than silver.
About half of all traded silver that is used commercially. By contrast, gold doesn’t have as many applications. It’s only used in jewelry.
Because of its expanding industrial application, silver has a strong potential for growth. However, it’s also prone to short-term fluctuations. This combination makes it great for speculative investment.
But that’s not the kind of asset you want to hold in your retirement portfolio. Rather, you want a stable asset that is less likely to fluctuate based on market speculations.
That’s where gold gets an edge over silver. Only about 10 per cent of it is used for industrial activities8. This makes it a more stable store of long-term value.
Silver is typically two to three times more volatile than gold. That’s a good thing for short-term trading because it presents a high risk/high reward situation. But for long-term investment, the volatility may pose a challenge, particularly when you are trying to manage portfolio risk.
Gold tends to be more stable. And since a good retirement plan is generally risk-averse, it makes more sense to consider gold more than silver.
- Inflation hedge
As mentioned, about half of all the available silver is used for commercial purposes. For this reason, it’s more sensitive to inflation.
This close attachment to the global economy means that the value of silver can grow massively when economies take off. The converse is also true. It can lose value rapidly and uncontrollably when things are bad7.
The latter scenario is what causes the most concern because it can devalue your retirement portfolio almost instantly. Nonetheless, silver makes a good metal for your portfolio if you anticipate long-term economic growth around the world.
Gold is countercyclical. In other words, its value tends to grow when there is inflation6. As a result, it makes a better asset for your IRA if you anticipate a long-term economic decline.
- Correlation with other assets
Since it’s closely related to the global economy, silver is positively correlated to other investment assets like stocks, options and bonds7. This makes it a good investment because of the ever-growing application. However, it’s not exactly a strong diversifier compared to gold.
The yellow metal is largely uncorrelated with other types of assets7. If you already have those other assets on your portfolio, it may make more sense to add gold over silver. That will not only spread your risk, but it will also shield a portion of your retirement plan from inflation.
The bottom line: should you add gold or silver in your retirement investment?
Generally, a gold IRA is more stable and secure because gold is countercyclical, less volatile, and less prone to inflation.
A silver IRA, on the other hand, is affordable because of the low cost of the metal. Its strong correlation with other assets, combined with price fluctuations, means you can make big gains on your retirement portfolio. But it’s a risky investment because market forces can devalue your silver and thus your IRA.
That said, you can include both gold and silver in your retirement plan. A gold and silver IRA will offer the benefits of both metals. Experts recommend the 2:1 rule.
In other words, buy an ounce of silver for every two ounces of gold2. This ratio provides your IRA portfolio with the stability of gold combined with the growth potential of silver. Ideally, the total value of your precious metals should fall between 5 per cent and 10 per cent of your entire retirement portfolio3.
There are multiple reasons behind this seemingly low value. First off, a good IRA is one that’s properly diverse. No single class of asset should be extensively dominant in your portfolio.
Secondly, these precious metals are not entire resistant to inflation and volatility. And as long as they are not fully immune to market forces, they pose as much risk as any other tools of investment.
Finally, precious metals – particularly gold – are not the best performers. Holding too much of them would mean that your retirement account will lag in terms of gains.