Precious metals have been getting a lot of attention lately — inflation is still running at a moderate pace and there’s once again talks about the debt ceiling. This background noise of fearmongering provides a conducive environment for proponents of gold and silver to try and sell others on their investment. Some meme stock investors have even been trying to convince themselves they can create a short squeeze in physical silver since 2021.
Claimed benefits of holding precious metals are that they’re a hedge against inflation, can improve the returns of your portfolio through diversification, and provide a fallback store of value during a potential failure of fiat currencies like the US Dollar.
However, it’s my belief that precious metals are overrated and at times dishonestly misrepresented, and that there is no good reason to include them in your FIRE portfolio or investment strategy — in fact, they will slow down your progress towards building wealth!
Misleading backtesting by goldbugs overstates investment returns
A common claim is that gold is uncorrelated with stocks and bonds, and therefore adding a small amount to one’s portfolio has historically improved total returns by allowing for rebalancing over time. To test this, I headed over to Portfolio Visualizer and constructed 3 portfolios starting with $10k each in 1972 (the furthest historical data point they offer in their free data set).
Portfolio #1 (blue) contains 100% US Total Stock. Portfolio #2 is 95% US Total Stock and 5% gold. Portfolio #3 (yellow) holds 100% gold:
At first glance this claim would appear to be true; Portfolio #2 had the highest ending balance of $1.636 million, versus $1.554 million for Portfolio #1 which contained only stocks. From just this chart, it looks like rebalancing a mostly-stocks portfolio into a small amount of gold improved an investor’s compound annual returns.
The truth, however, requires some historical context. It was actually illegal for US citizens to own more than $100 worth of gold until January 1, 1975 (ending the ban that began in 1933, when President Franklin D. Roosevelt nationalized the gold holdings of private citizens). Many individuals who tried to hold onto their gold were prosecuted. Therefore it is dishonest to include this period of performance in historical backtests of gold, as investors were unable to hold it in their portfolios prior to 1975. So let’s see what happens when we start the comparison in 1975:
Portfolio #2 containing 5% gold now underperforms, resulting in a final balance of $2.067 million versus $2.237 million for Portfolio #1 containing only US Total Equities.
There is no long-term period since 1975 when adding any amount of gold to a portfolio of equities improved returns compared to a pure equities portfolio. Gold had a short period of excess performance in the early 1970’s after President Nixon closed the gold window in 1971, announcing that the United States would no longer exchange currency for a fixed amount of gold. There is some evidence that the gold standard artificially suppressed the price of gold, which was partially causative for the ensuing decline in the valuation of US dollars in international markets and fiat money printing in the 1970’s.
From 1972 through 1974, gold quadrupled in price! This is why proponents of gold love starting their historical backtests from 1971 or 1972. That short period of excess returns in the early 1970’s when gold was depegged from the US Dollar was so incredible that it can muddy backtest results even 50 years later! But again, private citizens could not own gold during this time period, so investors missed out unless they had successfully hidden their gold from the feds for the previous four decades since The Great Depression.
The yellow metal does a pretty mediocre job at preserving wealth, and mainly provides this benefit over very long periods of time. Adjusted for inflation, $10k invested in gold in January 1975 would be worth about $100k today, or nearly $17k in 1975 purchasing power. However, there was a period in the late 1990’s and early 2000’s where the 1975 gold investor would have been down between 40–60% on their initial investment adjusted for inflation. Waiting several decades for your gold to come back to par value isn’t my idea of a stable investment, so it’s more accurate to say that gold preserves wealth over very long periods of time like generations as opposed to individual lifetimes.
Note that Short Term US Treasury Bonds are far less volatile and have arguably done a better job preserving wealth from year to year than gold has over the past 5 decades. Intermediate or Total Bond funds have provided superior returns to gold over most time periods, especially when examining an investor who dollar cost averages into these funds rather than investing a lump sum and letting it sit.
I’m looking to grow wealth, not stagnantly preserve it, and an investment in the Total US Stock Market in 1975 would have grown to an over 22x larger ending balance than gold!
Silver has performed even worse than gold!
Thanks to SilverPrice.org for this chart, showing historical silver prices since 1975:
Nominal silver prices are about 5x higher than they were in 1975, compared to about 10x for gold prices. This means that silver is actually worth slightly less today in inflation-adjusted terms than it was 48 years ago!
Much more of the silver supply (approximately 50%) goes towards manufacturing uses than gold, so “investing” in silver is mostly just a bet on increasing industrial demand for this commodity outpacing the supply-side driven by advances in mining technology and discovery of new deposits.
Less efficient tax treatment of precious metals
For American investors, precious metals are currently considered collectibles by the IRS. This means that long-term capital gains are taxed at 28% for both physical metals and ETFs that hold them. This is an extra tax drag compared to investing in stocks and bonds with a long-term capital gains tax of 0%, 15%, or 20% depending on the investor’s tax bracket.
Additionally, some states charge sales tax on the sale of precious metals. Currently, 12 states always charge sales tax on precious metals. 9 states only charge sales tax on purchases of precious metals below a certain threshold, commonly $1,000. The remaining 29 states never or rarely charge sales tax on precious metals. The list can be found here.
This less efficient tax treatment of precious metals simply adds insult to injury when their historical returns have already been quite poor compared to alternatives.
Holding precious metals for “insurance”
By now we’ve learned that silver and gold are bad investments, but gold at least does an okay job of preserving wealth over generations and acting as a store of value as its fans claim. What about holding it for insurance against a societal crisis such as a potential failure of the US dollar or complete societal collapse?
Precious metals investors are fond of saying “if you don’t hold it, you don’t own it” and this is one area where I fully agree with them. Good luck selling your gold or silver ETF if the world descends into anarchy. Holding the physical metal seems more logical as insurance for this unlikely situation, but I still won’t do so for a variety of reasons.
Downside #1: Premiums are a ripoff
It takes energy to refine ore and form it into bullion, and the distributors selling these products need to make a profit to stay in business. For this reason you will never be able to buy silver or gold for the commodity spot price, and the amount over this that buyers of physical bullion pay is referred to as a premium. The smaller an amount of bullion you are purchasing, the more ridiculous the premium will be.
For example, the spot price of silver at the time of this writing is $23.76 per oz. The cheapest way I can find to purchase 1 oz of silver bullion costs $27.81. If you sell it back to a dealer or local coin shop, they will pay around the spot price. So $4.05, or 14.5% of your investment just evaporated during a single round-trip transaction.
The premiums on a troy ounce of gold are lower, around 4–5%, but that requires ponying up around $2k.
Imagine if when you bought an index fund you paid $100 and got only $85–95 worth of shares? That’s quite a bit of growth required just to break even on one’s initial investment!
Downside #2: Physical fiat money is still better in a lot of scenarios
I can imagine a lot of mild or moderate crises that are far more likely to happen than a complete collapse of society. Maybe hackers compromise the major credit card payment networks and those go offline for a day or two. Maybe there’s a huge blizzard or storm that knocks out power to your area for a week.
In those situations, having a stash of cash will be better than having silver or gold. Most people don’t know what precious metals are worth and aren’t interested in them, and a temporary crisis won’t change that.
Downside #3: Opportunity cost of preparedness
Let’s say I have $2,000 right now to prepare for the collapse of society. I can buy one troy ounce of gold. Or I can buy a gun, ammunition, several months of non-perishable food rations, water storage, and basic gardening tools and supplies. Even if I was convinced society might collapse in my lifetime, the latter seems far more valuable for survival than betting that silver and gold will become the bartering currency of choice in such a situation.
I bet I could even trade a few bricks of coffee, some fresh vegetables, and a couple bottles of alcohol for some sucker’s gold coin!
Don’t get distracted by the shine of silver and gold. It’s very likely that they’ll do nothing other than weigh down your portfolio returns and cause you to accumulate wealth more slowly. Silver in particular has performed worse than cash in a high yield savings account. Even if you’re interested in prepping, there are far more practical ways to spend your money.
Remember that financial independence and early retirement are enabled by assets that build wealth, combined with an overall portfolio strategy that supports one’s withdrawal rate of a steady income stream. Stocks of course blow gold out of the water when it comes to building wealth, and bonds do a better job of reducing portfolio volatility. This leaves no place for silver or gold in your FIRE portfolio, both during accumulation and retirement.