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Why Buy Precious Metals?

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Why Buy Precious Metals?

When you think of buying precious metals, such as gold and silver, the first thing that comes to mind is probably jewelry, like wedding rings or tennis bracelets. Jewelry accounts for the majority of precious metals purchases each year, particularly gold. However precious metals also serve an important function as an investment tool. Throughout history, and well into the 20th century, gold was used as money in the form of coins, or as backing for paper money. In 1933 gold coins were discontinued and confiscated in the US, and in 1972 paper money ceased to be backed by gold. Since that time, gold, silver and other precious metals have become an important investment tool for consumers.

  1. Long Term Protection from Inflation: Inflation is a reality that everyone trying to save for the future must contend with. It’s no secret that today’s dollar isn’t worth as much as it was 20, 10, or even 5 years ago. Overall, inflation in the United States has averaged about 3% annually over the last 3 decades. To illustrate the significance of this, imagine you set aside $100,000 in 1989 into non-interest bearing assets such as cash. In today’s world that $100,000 would only buy roughly 25% of the goods and services that it could have purchased when you initially set it aside in 1989. To avoid this harsh reality, many people choose to invest their money in other financial assets such as stocks, bonds, mutual funds, or precious metals. These types of financial assets have a tendency to retain purchasing power over time, helping investors circumvent the weathering effects of inflation, and acting as a store of value.
  2. Protection Against Stock/Bond Market Loss: Most financial experts would advise the average investor to diversify 70-75% of their portfolio holdings into a combination of treasury bills as well as government and corporate bonds, 10-15% in equities such as stocks and mutual funds, and 5-10% in cash equivalents and tangible assets (such as precious metals). The reason for allocating a portion of your portfolio into tangible assets, such as gold, is to offset the inherent risk of holding assets such as stocks, bonds, and mutual funds. While these assets serve to grow your wealth, and protect it from inflation, there is always the inherent risk that the company you purchase these product in may default or fail altogether, rendering them worthless. This is a reality that can be all too common in today’s economic climate. Unlike bonds, stocks, and mutual funds, the value of gold is based on the intrinsic value of the metal itself, and not on the projected future performance of a business or corporation. Precious metals can help bring investment portfolios into balance, and offer a degree of protection from the default risk associated with stocks, bonds, and mutual funds. Businesses may come and go, but precious metals never default, go out of business, or surreptitiously engage in dishonest accounting practices.
  3. Collections and Heirlooms: Coin collecting (numismatics) is a practice that goes as far back as the Roman Empire, when scholars collected coins for the purpose of studying them. Over the millennia since then, coin collecting has evolved quite a bit; it has become more codified and sophisticated. Coins are collected primarily for two reasons, as a hobby, or as an investment. Collecting coins as a hobby usually involves collecting antique (or numismatic) coins. These coins may originate from as far back as antiquity, such as the Roman or Greek empires, or as recently as 20th century America. Collecting as an investment usually involves collecting modern bullion coins such as American Eagles or Chinese Pandas. Oftentimes, people will build numismatic or bullion coin collections as heirlooms that can be passed down through generations.

Knowing which precious metals products are right for your portfolio, and how much you should purchase is an important decision that carries benefits as well as risks. Every investor's goals are different, so these risks and benefits should be carefully considered between you and your financial advisor.

Key Terms

  • Precious Metal: Rare, naturally occurring, metals that are valued for their inherent qualities, such as conductivity, malleability, and appearance. Precious metals, such as gold and silver, are less chemically reactive than base metals, such as copper and tin.
  • Investment: Money or assets that are set aside with the expectation of capital appreciation, to help offset inflation.
  • Inflation: The depreciation of the value of monetary currencies, such as dollars, pesos, or pounds that typically occurs slowly over time.
  • Portfolio: An individual's total and current collection of assets that have accrued through investment.
  • Intrinsic Value: The inherent value of an object or substance which is based on tangible qualities rather than subjective qualities.
  • Numismatics: The study and collection of coins for academic purposes, or as a hobby.
  • Bullion Coins: Coins that are valued for the intrinsic value of the metals they are composed of, such as gold, silver, or platinum
  • View Other Terms

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