While the TSP gives investors great low-cost exposure to diversified stocks and bonds, some investors like to hold a bit of gold or silver on the side.
Back in March, I wrote about how to complement your TSP with other asset classes, and this article will zoom in on one asset class in particular: precious metals.
Gold and Silver: Pros and Cons
One of the main draws towards modern precious metal investing is that it serves as a form of catastrophe insurance. Gold and silver have been used as currencies and stores of wealth for thousands of years thanks to their inherent rarity, and gold in particular due to its long-lasting qualities.
• Helps protect against inflation
• Often goes up when stocks and other things go down
• Serves as a last-resort store of wealth and method of exchange
However, gold and silver do not produce cashflow. They just sit there and incur transportation and storage costs. Over the very long-term, equities tend to outperform precious metals.
Historical Gold Returns
Gold had two big price peaks: one around 1980 and one around 2011:
The late 1970’s was a time of political uncertainty and high inflation, which led to a brief gold price spike. In 2011, the world was still recovering from the global financial crisis, and the European sovereign debt crisis was in full swing, which resulted in a second major gold peak.
But over some long periods, gold outperformed. Gold was incredibly cheap in the late 1990’s and early 2000’s. If you had bought then, you would have roughly quadrupled your investment over the next 15-25 years, which is a much better rate of return than what stock investors got during that long stretch of time.
Right now, gold’s price is modestly elevated compared to its historical inflation-adjusted price; neither at a clear peak or at a screaming buy. Bearish investors may find the current price more appealing, if they distrust the stability of global financial systems.
Here’s a chart I like to follow, that shows the ratio of the S&P 500 to the price of gold. The result shows how many ounces of gold it would take to buy the S&P 500 index price level:
S&P 500 to Gold Price Ratio Chart
In addition to gold, silver is another investable metal. Silver is a bit different than gold, because it has more industrial applications. Glass windows, photovoltaics, certain medical supplies, and electronics in general use quite a bit of silver, in addition to its widely-known usage in jewelry and bullion.
A second chart I like to follow is the gold-to-silver ratio, which measures how many ounces of silver it would take to buy an ounce of gold:
Gold to Silver Price Ratio Chart
The gold-to-silver ratio was historically under 20, but in modern history has averaged more like 50. Right now, the ratio is at about 80, indicating that silver is unusually inexpensive compared to gold. Indeed, silver is currently relatively inexpensive compared to its inflation-adjusted historical average, but not by much.
Should TSP Investors Invest in Precious Metals?
It mostly comes down to preference. There are times when gold or silver or both become unusually cheap, which makes for strong buying opportunities relative to stocks.
They provide some diversification and catastrophe insurance, and if bought at the right price can give great returns. But over very long stretches of time, money-making investments like stocks and real estate historically outperform precious metals.
Kevin O’Leary, the multimillionaire businessman, investor, and television personality well-known from Shark Tank, has a policy of keeping 5% of his portfolio in gold, which seems sensible. If gold goes up compared to his other assets, he sells a bit of it to reduce its allocation back down to 5%. If gold declines, he buys a bit of it to get his allocation back up to 5%.