last updated November 19, 2014

Gold pricesthe price per ounce of gold bullion or gold coins, such as Kruggerand gold coins or American Eagle gold coinshave shot up in the past several years. Silver prices have followed suit (see the current price of silver. for example). If you listen to commercials or read advertisements, prices can only go up.

That means 2014 is a great time to invest in silver or gold. right? Not necessarily.

Why Invest in Gold or Silver?

You might buy a precious metal for two reasons:

• in the hope or belief that prices will continue to increase (desire to gain money)
• in the belief that other investments will decrease in value (desire not to lose money)

Both reasons have to answer one primary question: how do you know what will happen?

What’s Wrong with Precious Metals?

What can you do with a lump of gold or silver?

Gold and silver both have practical uses. It’s pretty. You can admire it. You can make it into jewelry. You can use it as a component in certain industrial processes.

Beyond that, you can’t do much with either. A gold coin sits on your shelf and collects dust. Any value it gains is independent of its existence. It’s just a coin. Due to circumstances outside of your control it could be gaining in value now or it could be losing value.

Compare that to a business. Any good business worth owning will make you money. Even a lemonade stand that costs you $100 to start and makes you $125 every summer produces $25 in profit the first year. Every year you keep running the business, it produces more money. Remember that the money a business produces is the most important metric of success .

At any point you can take your profit, as the owner of that lemonade stand. You can pay yourself a dividend. You can invest back in the business, to serve more customers or build more lemonade stands. You can do a lot with the cash that business generates.

Every year, your gold or silver coin just sits on the shelf and collects more dust. You’re gaining money on it or losing money on it and there’s nothing you can do about either one.

Gold and Silver Can Increase in Value!

Yes, gold and silver prices can continue to increase. They may get more valuable because they get more scarcemining and refining might produce far less gold or silver one yearbut by the same token, they might lose value because the get more common. too. You can’t really predict that.

Gold and silver prices might increase because demand increases. More people want to buy them. (That’s probably why there are so many advertisements to buy gold or silver!) Then again, demand might decrease. and you can’t predict that either.

Maybe they’ll do neither. Maybe they’ll hold their value. Maybe $1000 in gold bullion today will be worth about $1000 in gold bullion in five years, and you’ll only have lost inflation. That’s better than losing everything, right?

Meanwhile, all of those great businesses worth owning are making real money every year and returning it to investors as dividends or buying back stocks or investing in the businesses to help them make even more money in the future.

Gold vs Silver and Silver vs Gold

Does it matter which precious metal you invest in? Not really; the flaws of one are the flaws of the other. If you’ve already figured out why not to invest in silver, the same arguments suggest why not to invest in gold. or platinum or diamonds or whatever! Investing in gold is risky and unpredictable. So is investing in silver or precious art or other commodities which don’t themselves make money.

Do Precious Metals Have Stock Symbols?

You can’t really buy precious metals like gold or silver on the open stock market. There’s no stock symbol for gold, for example. Neither is there a stock market symbol for silver. There are specialty funds you can buy which track the prices of silver, gold, or any other investment, but keep in mind that the underlying commoditythe lump of metal someone dug out of the groundstill has all of the advantages and disadvantages of a lump of inert metal someone dug out of the ground.

Should you Invest in Precious Metals?

Ask yourself this: why do people want to invest in gold. Should I invest in silver. When you understand this, you’ll know whether you should buy precious metals as an investment. If you’re looking for a safe, conservative investment, don’t try to predict what other investors will do or how other investors think. Buy pieces of companies that produce real value.

If you want to have a few gold coins or silver bars around for their aesthetic value, feel freebut you can find much better investments for your portfolio.

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