Why You Should Own Tangible Precious Metals

- October 27, 2015 -

It appears precious metals are once again enticing investors. After ignoring gold and silver for much of 2015, investors added nearly $400 million to U.S. exchange-traded funds backed by precious metals through October 20th. That figure represents the largest ETF inflow since February. Bullion sales at both the U.S. and Royal Canadian Mints surged over the summer. Gold and silver seem to be gaining favor based on expectations that the Federal Reserve could wait until early 2016 or later to raise interest rates. Statistical data attempting to show a correlation between interest rates and commodity prices are inconclusive. Higher interest rates have historically taken money out of the stock market. Whether those funds go into precious metals or fixed income options often depends on the political climate at the time.

Gold and silver have rallied nearly 10% off their five year lows in July after the Fed kept interest rates unchanged in its September meeting, citing global risks of deflation and lack of economic growth. While numerous Fed officials have suggested a rate increase might be warranted in 2015, traders in Fed-fund futures believe otherwise. Approximately 66% of Fed-fund traders are betting the Fed won’t increase interest rates until early 2016, if at all. If that scenario plays out precious metal prices could appreciate due to fading interest in equities.

However, the price of gold is ultimately not a function of interest rates. Like most commodities it is a function of supply and demand over the long run. Of the two, demand is the stronger component. Rising or higher interest rates may in fact be bullish for gold prices, simply because they are typically bearish for stocks.

From our perspective at Jack Hunt Gold & Silver, owning an ETF or mining shares is not the same as owning tangible precious metals. An ETF is a security indexed to the price of gold and silver, with no real claim to the actual metal. Mining stocks rarely correlate to volatility in metal prices. If you want gold or silver in your portfolio, consider buying the real thing.

A frequent criticism of owning tangible metals is that they don’t offer yields or interest. It should be noted that yield is compensation for risk. Physical metal in your possession does not have third party risk.