Making Money

Return Potential For Precious Metals

My analysis of precious metals spot prices over the past 100 years suggests an average yearly return of 3-4%, with 10 year bursts seeing average yearly returns as high as 15-20%.

If you’d like to see return potential for other types of investments, check out my other posts:

Precious metals are somewhat unique in the world of investing. They have historically been tied to fiat currency, but also use in manufacturing.

Precious metals as an investment vehicle are very different from investments like stocks, real estate and business. Once upon a time, a country’s gold supply determined the value of it’s currency, but that hasn’t been true for decades. Today, owning gold and other precious metals is a little bit like owning crops, the value is determined primarily by their demand for use in the economy.

Owning stocks, real estate and business have their values mostly set by their ability to make money (for stocks it’s the businesses behind the stock’s ability to make money). The value of precious metals is in their usefulness for building various products, and the perceived worth of those who consider the metals to be a sign of wealth.

I’m not much of a fan of precious metals, because they don’t produce cash flow. The only way to profit off them is to sell them.

Bars of gold

Return Potential For Gold

When most people think precious metals, they think about Gold. We’ve all heard of the Gold Standard, and as such it’s natural to think gold has some inherent value to the world.

There is still gold being mined and added to the available pool, but there’s a limit to how much is out there. Gold has a limited supply and because of this it has the natural behavior to retain value over time.

Take for example the American dollar (or any other paper currency for that matter). In practice, there’s nothing keeping the government from printing billions of dollars and devaluing the dollars in your bank account. The last time I checked the Federal Reserve reported $1.93 trillion in cash circulating in the U.S.

Gold is different though. It can’t be created in a lab, at least not in a cost effective way. So it’s supply is pretty much set.

This means as long as gold has value in the world, it’s pretty much guaranteed to keep up with inflation over long periods of time.

History of the Gold spot price

The easiest way to track the value of gold over the last several decades is the spot price. The spot price is just the current market price for one ounce of gold.

Since gold and other precious metals have a market created around them with specialty coins, the spot price ends up being the minimum price for an ounce. Either way it’s a reasonably good way to measure the value of gold over time.

The oldest recorded spot price (without adjusting for inflation) according to macrotrends is $19.25 in July 1915. And the spot price today, July 30, 2020 is $1,956.

Average return for Gold

Using my handy formula for calculating average return:

Return equals end close value divided by start close value to the power of one over the number of years

I can calculate the average return during the last 105 years to be 4.5%

Wait, that can’t be right.

Michael seeing the 100 year gold return for the first time
I’m taking this information pretty hard.

There’s something very interesting about the value chart, though. There are 33 years where the price of gold doesn’t change. Starting in 1970 the chart looks a lot more like the chart for a company’s stock price.

100 year Gold spot price history
I got this data from macrotrends.com

So what happened?

In 1934, the U.S. Congress passed the gold reserve act prohibiting the private ownership of gold in the U.S. I don’t want to get into a history lesson, but you can read more if you’d like. Basically, the price of gold was controlled by the government. At the end of 1974 it again became legal for U.S. citizens to purchase and own gold.

This is where we start to see the graph behave more like a stock. So what’s the average return been since 1974?

The spot price in July 1974 was $144. If we plug the numbers back into our handy dandy formula we get about a 5.8% average yearly return.

A bit better, but still quite low when compared to the stock market.

Best returns for Gold

We have an average return, but let’s say we were pretty good at timing the market (or we just got lucky). What’s the best we could do over say a 10 year period of time?

In April 2001 the gold spot price was about $260, and in April 2011 the price was $1536. Our return formula says if you bought in April 2001 and sold exactly 10 years later, you would have realized a 19.4% yearly return average (pretax of course).

So we can call our absolute best of the best return potential 20%.

Return Potential For Silver

Silver has a very similar story to gold. It’s not had the same connection with fiat currency, but it has been viewed as a measure of value and wealth. And in my opinion the actual value in silver is not as a form of currency, but in its use in industry.

Average return for Silver

Let’s head back to macrotrends and get a chart of the silver spot price’s history.

100 year Silver spot price history
I got this data from macrotrends.com

Silver never had the same restrictions on purchase and ownership that gold did, but silver and gold have always been tightly coupled in their prices. I’ve often heard that silver prices follow gold.

So I want to see how the two behaved over the same time frames. In July 1915 the spot price for silver was $0.51 and in July 2020 it’s $23.35.

Plugging these numbers in gives us an average yearly return of just 3.7%. That’s not very good. According to inflationdata.com the historic average rate of inflation is 3.22%. So silver has basically just retained it’s same value for the past 105 years.

Now let’s look at the return for silver after the restrictions on gold were released:

In July 1974 the silver spot price was $26.11. This is actually less than it’s worth today! Over 46 years that’s an average yearly return of -0.3%, wow.

Best return for Silver

Let’s see if that 2001-2011 time period can create better returns for our silver.

In July 2001 the value of silver was $4.23 and by July 2011 it was up to $35. That’s an average yearly return of 23.5%!

This is very interesting. Gold has outperformed silver in the long run, but silver seems to have higher volatility and thus, a high potential for returns over the short term.

Return Potential For Other Metals

We’ve got our process down. So let’s just run some numbers on a few other precious metals that are being traded.

MetalAverage return10 year best
Platinum2.8%13.2%
Palladium8.6%28.1%
Copper3.8%18.2%

Taxation

The buying and selling of precious metals owned for more than one year will be taxed at the collectibles rate, which is 28%.

In almost every other investing type, you’re better off holding onto an asset for longer than one year, but with precious metals, it can be better to sell in less than one year.

That’s because if you sell the asset in less than one year it’s taxed as regular income. So if you’re income tax bracket puts you at a rate lower than 28%, you could be better of selling every year and buying again. Just make sure you do your math and consider all the fees of buying and selling.

So if we assume we’re getting taxed at the collectibles rate of 28%, how does this affect our return values?

Well they take a pretty big hit.

Here’s what our precious metals yearly returns look like after getting hit with a 28% tax.

MetalAvg ReturnAvg After TaxBest Return (10 years)Best After Tax (10 years)
Gold5.8%4.2%19.414.0%
Silver3.7%2.7%23.5%16.9%
Platinum2.8%2.0%13.2%9.5%
Palladium8.6%6.2%28.1%20.2%
Copper3.8%2.7%18.2%13.1%
All the average returns are based on at least 30 years of data. The best returns are the one year average return for that metals best 10 year period.

Conclusion

These numbers are a difficult to make strong conclusions on. We can see that the average return numbers for precious metals are well below 10% after tax. In fact, only Palladium had an average annual return of better than 5%.

Precious metals are often advertised as a protection against inflation, and Gold has done that quite well.

Silver has been an interesting case. It is worth less today than it was 46 years ago. And yet if you bought in and sold at the right time during those 46 years you would have realized a yearly return of at least 17%. If you could gain a specialized knowledge of the silver market it could be a great investment, otherwise it seems more like gambling to me.

In the end, the volatility and unpredictability of precious metals makes me want to steer clear.

Happy investing.

Michael

I'm living the path to financial success and sharing everything I learn in this blog. I believe in the power of cash flowing investments, due diligence and time. This is my journey so far.

I learned everything I know from books, podcasts, conversations with friends and family and of course through real world experience as a cash flow investor. And I'm always pushing to learn more.

To see my investing timeline, check out our about page

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