Precious Metals Investing: All You Need to Know

When it comes to portfolio management, diversification is important step that you need to get right. Therefore, having an allocation of precious metals in your portfolio is an important component of diversification that minimizes risk.

Contents

  1. Reasons to Invest in Precious Metals
  2. What Precious Metals are Available for Investing?
  3. Options for Investing in Precious Metals
  4. Conclusion

You can leverage precious metals as a hedge against inflation, currency devaluation, and deflation. Thereby, reducing the overall volatility of your portfolio. There are many ways to buy into precious metals. But before we get there, let’s take a look at some of the reasons why you should invest in precious metals.

Reasons to Invest in Precious Metals

As stated above, precious metals are excellent additions to a savvy investor’s portfolio. They tend to offset the devastating effects that inflation can have on any portfolio. Below are four reasons why you may want to consider investing in precious metals. They include:

  1. Precious metals have a negative correlation with other asset classes. Therefore, they are great stores of wealth in times of economic uncertainty or turmoil.
  2. Precious metals serve as excellent flight capital. For instance, during the movement of people from Nazi Germany in the 1930s, people had to pay or bribe their way out of the country via gold or other precious metals.
  3. Precious metals have been around for thousands of years. Paper money, on the other hand, hasn’t been around for a long time. Therefore, the long-term value that these metals is a testament to their staying power.
  4. Precious metals are fungible. This means they are mutually interchangeable. They are also the oldest form of currency in the world.

What Precious Metals are Available for Investing?

There are a variety of precious metals to invest in such as gold, silver, and platinum. If you are just starting out, read on to learn how each of these precious metals work and how you can invest in each.

Gold

Gold is known for its durability, malleability, and ability to conduct heat and electricity. It also has some industrial applications in dentistry and electronics. Popularly it’s known as a base for jewelry and as a form of currency. Gold’s value is determined by the market forces of demand ad supply. Thus, whenever gold holders sell, the price tends to drop. When they want to purchase gold, supply is quickly absorbed which drives the prices higher.

There are several reasons why people desire to hold gold. These reasons include:

  • Inflation Hedge: When the bond or stock markets are down, people tend to flock to gold as a hedging asset. Gold has an inverse relationship with the stock market. When stocks are down, gold prices are high and vice versa.
  • War or Political Upheavals: In times of war or political instability, people always turn to gold as a store of wealth. This is largely attributed to the fact that a lifetime’s worth of saving can be converted into gold and stored.
  • Financial Concern: Gold is often sort out as a store of value when banks or currencies are perceived as unstable.
  • Silver

    Unlike gold, the price of silver is more volatile. This is largely attributed to the fact that its price swings depending on its perceived role: store of value or its role as an industrial metal. Its significant growth in value can be attributed to:

    • An explosive demand for electronic devices and products that require silver inputs. Thus, this demand makes silver a desired commodity.
    • Its continued use in batteries, microcircuit markets, and superconductor applications.
    • Its application in fashion and jewelry and as a store of value.

    Platinum

    Just like the other two precious metals, platinum is traded globally on commodities markets. From time to time, it tends to fetch higher prices than gold during times of stability as it’s rarer than gold. Other factors that determine its value include:

    • Platinum is an industrial metal. Platinum is used in a variety of industries. The fashion industry as a form of jewelry, the oil industry as a petroleum and chemical refining catalyst, the automotive industry to reduce the harmfulness of emissions, and in the computer industry.
    • The auto-industry heavily relies on Platinum. Therefore, to a large extent, Platinum prices are determined by the industry. Clean air legislation requires auto-makers to install more catalytic converters which push up demand for the metal.
    • Platinum is heavily mined from two countries: South Africa and Russia. This creates a greater chance for cartels to artificially reduce supply or raise platinum prices.
    • Options for Investing in Precious Metals

      These are some of the options available to investors who want to invest in precious metals. They include:

      • Commodity ETFs (Exchange-Traded Funds): ETFs are convenient and liquid methods of buying and selling precious metals. You don’t acquire access to the physical commodity, therefore, you don’t have any claim on any physical gold, silver, or platinum.
      • Mutual Funds and Common Stocks: You can either purchase stocks directly from companies that mine any of the precious metals available or, you can invest indirectly through a mutual fund.
      • Futures and Options: These investments offer leverage and liquidity to investors who want to make large bets on precious metals.
      • Bullions: Precious metal coins and bars are also available for investors who wish to hold them in their physical form. The downside is that holding precious metal bullions is illiquid and downright bothersome.
      • Certificates: Certificates offer you all the advantages of physical ownership of precious metals without the hassles of storage, transportation, or insurance.
      • Conclusion

        Metal investing is a useful and effective means of portfolio diversification. Precious metals are a separate asset class from the common stocks and bonds. Thus, they have their own unique sets of rewards and risks. The key to achieving success with them is to understand your goals and risk profile before investing. As much as they can bring in profit, left unchecked, they can also lead to ruin.

Read more