Since ancient times, precious metals (specifically gold) have had a lot of value among various cultures and civilizations. Even now, precious metals are highly valuable and are becoming a popular choice for investment portfolios. Because of their rare nature, they have a high economic value and are considered a good investment.
But what are these precious metals and how can one invest in them? What are the potential benefits and drawbacks of investing in precious metals?
If you too have similar questions, then this article will come in handy for people like you.
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Some of the facts might change from the time of writing, and nothing written here is financial, legal, tax or any kind of individual advice, nor a solicitation to invest.
What are Precious Metals?
In contrast to most people’s belief, multiple metals fall under this category. Let us have a look at each of them individually and why they are so valuable.
Gold investment
Since ages, gold is one of the most popular and investable precious metals. It gained fame for its exceptional durability, malleability, and capacity to conduct heat and electricity.
Although it serves some industrial purposes in fields like dentistry and electronics, it’s primarily used in jewelry and as a form of currency.
For centuries, it has been a reliable store of value, attracting investors during economic or political turmoil. It is also known to be the best asset that acts as a hedge against rising inflation.
Gold investments come in multiple methods. The first method is where you can acquire physical gold in the form of coins, bars, or jewelry.
No matter which method of gold investment you choose, each has its own set of advantages and disadvantages.
Challenges include the costs associated with storing and insuring physical gold and the potential under performance of gold stocks and ETFs compared to the price of gold.
On the flip side, physical gold closely tracks the precious metal’s price, and gold stocks and ETFs hold the potential to outperform the market.
Silver investment
Silver is the second most prevalent metal and holds a crucial role in various industries like electronics, electricity, and photography. For instance, its electrical properties make silver an indispensable component in manufacturing solar panels.
Alongside its industrial significance, silver also serves as a store of value, employed in the creation of jewelry, silverware, coins, and bars.
The dual nature of silver as both an industrial metal and a store of value makes it more prone to price fluctuations compared to gold. This heightened volatility can significantly influence the stock prices of silver.
On certain occasions, silver prices can surpass those of gold, especially during periods marked by substantial industrial and investor demand.
Investing in Platinum Group Metals (PGMs)
There are six different metals under the group of PGMs, which are comparatively rare.
Only 400 tons (approx.) of PGMs are collectively produced per year, which is lower than individual production of gold or silver.
The PGMs are extracted in the following percentages on average:
- Platinum (40%)
- Palladium (50%)
- Rhodium (5.75%)
- Ruthenium (3.75%)
- Iridium (0.875%)
- Osmium (0.375%)
This helps us understand the extreme rarity of these metals compared to traditional precious metals, i.e., gold and silver.
PGMs have varied uses, which include fine jewelry, coins, bars, catalysts, corrosion-resistant metals, etc. To most people’s surprise, these are also used in battery cells, cancer treatment, car safety, medical products, personal care products, etc. These PGMs are resistant to wear and tear, tarnish, chemical interference, and high temperatures.
Of the PGMs, platinum is known to have a larger demand as an investment asset because of its use in jewelry and industrial purposes.
How to Invest in precious metals
On a broader scale, investments in precious metals can be done through two different methods.
Physical Precious Metals
This approach involves purchasing tangible items like bars, coins, and jewelry crafted from precious metals, which are held as investments.
These physical investments in precious metals are expected to appreciate as the price of the underlying precious metal rises. Note that bullion investments are apt for people who have the necessary storage facilities.
– Advantages of Bullion
Bullion investments, i.e., buying bars and coins, provide direct ownership of the commodity. These are available for purchase in varying amounts, both large and small, and are easy to transfer between owners.
However, one drawback of bullion is its tax treatment as a collectible in many countries. If held for over a year, you may incur a capital gains tax on any net profit from selling bullion.
Gold bullion held for less than a year is taxed as regular income in most cases.
Related content: BullionVault Review – should you own physical gold and silver?
Precious Metals Investment Products
Alternatively, you can opt for investment products centered around precious metals. These may include shares in companies involved in precious metals mining, streaming, or royalty arrangements.
Another option is investing in exchange-traded funds (ETFs) or mutual funds that are specifically tailored to precious metals.
Additionally, futures contracts can be used for investment purposes.
All of these investment products are designed to increase in value in sync with the rise in the price of the underlying precious metal.
– Advantages of ETFs (Exchange-Traded Funds)
ETFs involved with precious metals offer enhanced liquidity and are convenient for buying and selling. You are even able to purchase in small increments, which is a fraction of the total amount.
ETFs of precious metals are traded at the net asset value of the underlying asset.
Bullion ETFs offer access to precious metals with the added benefit of liquidity. As exchange-traded securities, gold ETFs can be easily bought and sold, representing the equivalent value of the physical metal.
Nonetheless, for certain investors and entrepreneurs, precious metals ETFs may not be as attractive as their physical counterparts. The main reason behind this is because of the lack of the physical ownership of the underlying asset. With ETFs, the actual bullion is held by a bullion bank, introducing counterparty risk if the bank defaults or fails to meet its obligations.
As a result, investors in gold or silver ETFs do not possess full ownership rights over their investments and cannot use their bullion or coins as currency in the event of economic crises or disasters.
Related content: 12 Top Gold ETFs
Buying Bullion vs Alternative Methods
Numerous sources offer physical gold bullion, including local exchanges and online platforms that sell coins and bars.
When purchasing gold or precious metal bullion, exercise caution and ensure that bars or coins display:
- Manufacturer’s name
- Weight
- Purity grade
Legitimate gold bullion typically bears a “99.99%” purity marking on its face.
Acquiring gold and precious metals-backed ETFs is a more straightforward and relatively lower-risk process. ETFs are publicly traded on exchanges and can be brokered through third-party vendors or financial institutions.
Before initiating investments in precious metals, it is advisable to consult your financial advisor regarding popular, low-risk gold or precious metals ETFs.
Related content:
Physical gold vs ETFs vs gold mining stocks
5 Best Investments to Consider as Gold Alternatives
Factors Impacting Precious Metal Prices and Optimal Investment Selection
Influential Economic Indicators
Multiple factors exert an influence on the prices of precious metals such as gold and silver. Among these, two key economic indicators are of significant importance:
- Interest rates: Low interest rates tend to drive investors toward precious metals as a secure investment option. This is due to the reduced attractiveness of bonds and other fixed-income investments in low-interest rate environments. Conversely, when interest rates climb, there may be a decrease in demand for precious metals.
- Currency values: Fluctuations in currency values can have a notable impact on precious metal prices. For example, a decline in the value of the US dollar compared to other currencies often results in an upswing in gold prices.
Supply and Demand Dynamics
The dynamics of supply and demand play a pivotal role in shaping the prices of precious metals:
- Investor demand: In times characterized by economic uncertainty or political turmoil, the demand from investors for safe-haven assets like gold typically experiences an upsurge. This heightened demand can lead to an escalation in the prices of precious metals.
- Market supply: The availability of precious metals in the market also exerts influence on their prices. If there is a supply shortage due to factors such as disruptions in mining operations or geopolitical tensions, it can result in higher prices.
Comparative Analysis of Precious Metals and Stock Investments: Risk and Investment Approaches
Risk Characteristics: Stocks vs. Precious Metals
When assessing the advantages of investing in precious metals, it is vital to make a comparison between their risk attributes and those of stocks.
Several fundamental distinctions exist between these two asset classes:
- Market volatility: Stocks are generally more susceptible to market fluctuations and economic conditions compared to precious metals. In times of uncertainty, investors may turn to precious metals as a refuge from turbulence.
- Credit risk: Stocks carry credit risk, signifying the potential for a company to default on its obligations or declare bankruptcy. Precious metals are immune to this issue as they possess intrinsic value.
- Inflation protection: Precious metals like gold tend to perform well during periods of inflation, while stocks may face challenges.
Portfolio Allocation Strategies
Efficient allocation of your investments between stocks and precious metals is imperative for portfolio diversification and risk management.
A widely embraced strategy involves dividing your investments into different asset classes based on your risk tolerance. For instance:
Conservative investors – Allocate 10% of investments to precious metals and 90% to stocks.
Moderate investors – Assign 20% of investments to precious metals and 80% to stocks.
Aggressive investors – Dedicate 30% of investments to precious metals and 70% to stocks.
It is important to recognize that these percentages can be tailored according to your specific objectives and preferences.
Pros and Cons of Investing in Precious Metals
Advantages of Investing in Precious Metals
– Hedge Against Inflation Risks
- Inflation Protection: Precious metals like gold and silver bullion coins are historically trusted as a safeguard against inflation, preserving their value even as currency’s purchasing power erodes.
- Central Banks and Investors: Central banks often hold gold bullion to shield against currency fluctuations. During high inflation, individuals turn to precious metals, such as physical gold, bullion, gold ETFs, and gold IRAs, as a haven for their wealth.
- Asset Protection: Investing in precious metals like bullion shields assets and money from inflation’s detrimental effects and provides an alternative to government-backed investments.
– Value During Economic Uncertainty
- Value Retention: Precious metals, including bullion, maintain value in times of economic uncertainty, offering a level of security unmatched by money or IRAs.
- Gold’s Legacy: Gold bullion, with thousands of years of use as a store of value and in precious metals IRAs, stands as a symbol of financial security.
- Risks and Value Preservation: Bullion and precious metals remain resistant to such risks, safeguarding your portfolio. On the other hand, fiat currencies are susceptible to devaluation due to government actions or economic events.
– Historical Performance as a Long-term Investment
- Strong Performance: Precious metals, like bullion, possess a history of robust performance due to their unique properties and industrial applications.
- Industrial Demand: Gold is widely used in various industries, including electronics, jewelry, dentistry, and aerospace. Silver has applications in solar panels, batteries, medical devices, and water purification. Platinum and palladium are essential in catalytic converters.
- Stable Demand: Industrial use ensures a steady demand for precious metals while limited supply secures their long-term investment viability.
- Independent Price Movements: Precious metals prices often move independently of stock market trends, making them appealing during economic downturns and geopolitical tensions. They also offer portfolio diversification, reducing overall risk.
– Diversification Benefits and Liquidity Advantages of Precious Metal Investments
- Reducing Portfolio Volatility: Precious metals can help mitigate volatility by responding differently to market events and serving as a hedge against inflation, currency devaluation, and economic uncertainty.
- Low Correlation: Precious metals generally have low or negative correlations with traditional assets, making them valuable for diversification.
- Asset Variety: Options like gold, silver, platinum, and palladium provide diversified choices.
- Stability and Wealth Protection: Including precious metals enhances your portfolio’s ability to weather market fluctuations and protect your wealth over time.
- Easy Conversion to Cash: Precious metals’ liquidity ensures swift and efficient conversion into cash, an ideal feature for investors seeking quick access to funds without sacrificing value.
- Global Acceptance and Demand: Gold and silver’s global recognition as currency, demand during economic turmoil, central bank reserves, and industrial applications such as silver, platinum, and palladium underscore their universal appeal. The global acceptance and demand for precious metals make them an attractive addition to any investment portfolio.
– Direct Ownership Benefits
- Control: Owning physical precious metals provides complete control over your investment, allowing you to decide when to buy, sell, or hold your assets.
- Privacy: Physical possession offers a level of privacy that is unavailable with other investments, as you can choose not to disclose your holdings unless you wish to do so.
Drawbacks of Investing in Precious Metals
– Higher Expenses
When investing in precious metals, you’ll face increased costs. These include commissions to the seller, which can vary based on the seller’s rates.
Shopping online for the best rates can help you save money.
Additionally, the type of precious metal you choose affects the cost; for instance, intricately designed coins tend to be more expensive.
Be prepared for higher initial expenses when you opt to invest in precious metals.
– Difficulty in Selling
If you possess physical precious metals, it may take some time to sell them, and not all states consider them legal tender. Finding a buyer at market prices can be a waiting game.
To expedite the process, consider investing in online storage accounts, which make selling your investment quicker.
– Storage Expenses
Unlike stocks and bonds, physical metals require storage. Storing valuable metals at home can risk theft and necessitate expensive insurance.
An alternative is renting storage spaces or safety deposit boxes from banks, but these come with fees that vary by the bank.
Weigh your options for cost-effectiveness and consider professional services such as insurance and security.
– Higher Tax Rate
Selling your precious metals to realize income might trigger capital gains taxes in most countries, which are generally higher.
– fraud risk
When dealing with physical precious metals, you need to be cautious about counterfeiting and fraud. Counterfeit gold and silver bars or coins can look genuine but lack the same value as authentic ones.
Unscrupulous dealers may try to deceive inexperienced buyers with counterfeit products or by charging excessive prices.
– No Income
Unlike some other investment vehicles, precious metals have no cash flow, and therefore, they don’t offer any income.
– Underperformance
When you select a poor investment vehicle, you may experience irrelevance in the performance on par with the underlying asset. For example, even when the gold price increases, the ETF you’ve purchased may not offer the same value.
– Volatility
In general, price volatility is common in precious metals as they keep changing on a daily basis.
Precious metals are influenced by several contributing factors such as economic changes, geopolitical issues, and supply and demand fluctuations.
– Regulatory Risks
Regulations like mining regulations and taxation policies apply to the precious metals industry, which impacts the value of precious metals.
Bottom Line
Investing in precious metals isn’t suitable for everyone. You should clarify your reasons, whether it’s to hedge against inflation, store value, portfolio diversification, or benefit from price increases.
Carefully choose the type of metal and investment method that aligns with your goals.
Each investment method comes with its advantages and disadvantages.
One significant risk is choosing an investment that underperforms despite your correct view on precious metal price movements. Make sure to thoroughly comprehend the risks associated with your chosen investment.
One of the most significant attractions of precious metals lies in their ability to protect investments from inflation. Unlike fiat currencies, precious metals possess intrinsic value, are not subject to credit risks, and cannot be artificially inflated. In essence, you can’t simply print more gold or palladium.
This intrinsic value and insulation against economic and political turbulence makes them appealing to those seeking financial security.
From an investment theory perspective, precious metals exhibit a low or negative correlation with other asset classes such as stocks and bonds. Even a small allocation of precious metals within a portfolio can substantially reduce volatility and risk enhancing their appeal for risk-conscious investors.
Despite their advantages, investing in precious metals is not without risks. Their prices can experience fluctuations due to factors like technical imbalances, shifts in supply and demand, geopolitical instability, and various other market-related influences.
It is also important to remember that precious metals generate no income, as they lack cash flow.
Additionally, holding physical metals may incur storage costs, impacting the overall return on investment.
When weighing the benefits of precious metals against traditional stocks, several advantages stand out.
Investing in precious metals typically involves purchasing the physical metal itself or opting for exchange-traded funds (ETFs) with substantial exposure to precious metals or associated companies. The decision depends on individual preferences, objectives, and risk tolerance.
Precious metals offer a unique way to mitigate risks and enhance a portfolio’s stability, provided they are approached with careful consideration and a clear investment strategy.
Pained by financial indecision?
Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.
