The demand for precious metals has increased greatly these last few years. Precious metals such as silver and gold are great for introducing a bit of stability into your portfolio, particularly if you’re keen on diversifying it. While traditional currencies tend to fluctuate in value over time, especially during times of economic upheaval when their purchasing power can reduce drastically, precious metals tend to maintain their value.
This means that adding some gold or silver to your portfolio can allow you to retain your purchasing power, even as economic inflation reduces the utility of fiat currencies such as the U.S. dollar and U.K. pound.
If you’re looking to diversify your portfolio and offer some protection to your holdings amid current inflation and projections for even worse economic performance, you should strongly consider adding precious metals to your portfolio. So, how exactly should a relatively green investor go about adding precious metals to their investment portfolios?
Well, the first thing you should do is acquaint yourself with the gold/silver ratio, which is typically expressed as the number of ounces of silver it takes to purchase an ounce of gold. This ratio tends to fluctuate within a broad but discernible range and is often reliant on the emotional state of investors who invest their cash in the precious metals market.
Investors interested in precious metals are more likely to avoid volatile silver in favor of safe and stable gold when they do not foresee monetary disruptions such as inflation. This causes gold prices to rise relative to silver prices, resulting in a high gold/silver ratio.
On the other hand, investors tend to gravitate toward silver due to its greater upside potential when they expect inflation or some other kind of currency instability. In this case, gold and silver prices both rise, but the gold/silver ratio tends to fall as investor interest in silver increases its prices faster than gold prices.
These price fluctuations tend to occur within the 40 to 80 range, meaning 40 to 80 ounces of silver for an ounce of gold. A higher number indicates that silver is fairly affordable relative to gold, while a lower number indicates that gold is fairly affordable relative to silver, with the current ratio of 75 implying that silver is undervalued and should be favored over gold by investors, at least in the near-term.
A gold/silver ratio of 60% to 40% can be beneficial for an investor who wants the security of both gold and silver in their portfolio. If physical gold isn’t appealing, you could add gold stocks after doing your due diligence on leading companies such as Royal Gold Inc. (NASDAQ: RGLD).
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