Thinking about buying gold or silver as an investment? Gold and silver traditionally have been seen as stable investments that are particularly suited for times of financial uncertainty. The old wisdom goes that when the stock market or economy is in turmoil, investors put their money in commodities like gold and silver.
But some people also borrow money to buy gold and silver. If you’re wondering how that works and whether it a good choice for you, read on to find out.
Using a Personal Loan to Buy Gold and Silver
The reason some people use a personal loan to buy gold and silver is that when interest rates are low and the price of gold and silver is going up quickly, the price of gold and silver could increase at a higher rate than the amount you’ll pay in interest on your loans.
Of course, this isn’t a good investment strategy for everyone for obvious reasons. The first is that not everyone would be able to qualify for a personal loan at an interest rate that’s low enough to ensure they come out ahead after factoring in the increase in value of gold or silver.
Another reason is that this investment strategy involves a lot of risk. If the price of gold or silver goes down, then you might not end up making money. Therefore, it wouldn’t be a good investment for anyone who can’t afford to lose part of their investment. One of the benefits of buying gold and silver is that, unlike stocks, the price of either metal tends not to be as volatile as other investments. Although you might lose less than if you bought a growth stock that flopped, you could still face serious losses.
If you intend to do this, consider getting a fixed-rate loan to ensure you have a stable interest rate. That way, if interest rates go up, the loan payment amount won’t also go up. In addition, you might want to get a secured personal loan, as that could give you a lower interest rate. This can help with your strategy of borrowing at a low rate to invest the money for a higher return.
Current Interest Rates
If you’re intrigued by the idea of borrowing to buy gold or silver, you’re probably wondering just how low the interest rates currently are compared to the increasing value of gold or silver.
Let’s start with the first part of that question. Interest rates are low, with the prime rate currently at 4.5 percent. Popular online lenders currently offer various rates, starting as low as 3.09 percent at LightStream, 5.49 percent at SoFi, and 6.99 percent at Marcus.
But those are the lowest rates they give to the best borrowers with near-perfect credit. It might not be what you’ll actually pay, since your interest rate will be set based on your personal financial and credit situation.
What Are the Returns on Gold?
Given those interest rates, would you be likely to make money borrowing to invest in gold? Gold returns can vary greatly depending on the time period.
For example, in the past year, gold has increased in price by more than 8 percent. That might make you want to rush out and buy gold, but you should know that in the past three years, gold has increased in price by 13.5 percent, which works out to an annual return of 4.3 percent – less than the amount you would have likely paid to borrow money over those three years.
More concerning is the fact that, in the past five years, gold decreased in price by 15.5 percent – or 3.3 percent per year. That doesn’t necessarily inspire confidence in an investor to take a risk and borrow in order to invest in gold.
What Are the Returns on Silver?
Did silver fare better over these same time periods? Unfortunately, it fared worse. In the past year, silver decreased in price by just under 6 percent. In the past three years, silver increased in price by just 4.5 percent or 1.5 percent per year.
But probably the most concerning is that in the last five years silver lost 43 percent of its value – or 10.5 percent annual loss.
When it comes to whether or not you should borrow a personal loan to buy gold and silver, the answer is that you can, but you might want to reconsider. Unless you’re a sophisticated investor, you’ll likely end up losing money. Furthermore, you’d still have to keep paying your loan, even if you have no profit to show for it.
But even if you are a sophisticated investor and think you can predict when the price of gold or silver is set to skyrocket – remember that no one can time the market.
Author: Jeff Gitlen
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