Are Precious Metals Good Investments?

precious metals - gold & silver coins

Gold, Silver, platinum, and palladium are all commodities that can be added to your precious metals portfolio, and each has its own unique risks and opportunities.

In addition to owning physical metal, investors can gain access through the derivatives market, metal ETFs and mutual funds, and mining company stocks.

Using precious metals as an investment has been a trend for ages. The trick to achieving success with precious metals investment is to know your goals and risk profile before jumping in.

The volatility of precious metals can be harnessed to accumulate wealth. Left unchecked, it can also lead to ruin.

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Precious metals provide a useful and effective means of diversifying a portfolio. They are thought to be a good portfolio diversifier and hedge against inflation. It all depends on your market position and the state of your portfolio.

Buy silver if you're investing for when times are good. Silver is a semi-predictable speculation asset that can make you some real money. This is because of its limited supply and an unprecedented demand from industries all over the globe.

Considering the rise in prices, silver investment can be a good option for long-term investors. Silver is more volatile, cheaper and more tightly linked with the industrial economy.

Buy gold if you're investing for when times are bad. Gold is more expensive and better for diversifying your portfolio overall.

The price of gold tends to move inversely to the stock market. Many investors hold gold in their portfolio specifically for if they need liquidity during a downturn.

Having a pre-existing investment in gold can give you a valuable asset to sell during a recession. Historically, the worse the stock market does the more investors flock to gold. You can use that to buy other people's undervalued assets without selling your own.

Gold and silver are popular commodity investments, in large part because of their historic relationship with money. Governments once used gold and silver to make their currency.

Silver has much more industrial and commercial use than gold. Approximately half of all silver bought and sold on the market is used commercially, with applications ranging from dentistry to electronics. By contrast, gold has very few commercial applications aside from jewelry.

Gold

Gold is unique for its durability, malleability, and ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, and as a base for jewelry and as a form of currency.

The value of gold is determined by the market. Gold trades and price is less affected by the laws of supply and demand. This is because the new mine supply is vastly outweighed by the sheer size of above-ground, hoarded gold.

Put simply, when hoarders feel like selling, the price drops. When they want to buy, a new supply is quickly absorbed and gold prices are driven higher.

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gold bars

Several factors account for an increased desire to hoard gold including:

Systemic financial concerns: When banks and money are perceived as unstable and or political stability is questionable, gold has often been used as a safe store of value.

Inflation: When real rates of return in the equity, bond, or real estate markets are negative, people buy gold as an asset that will maintain its value.

War or political crises: War and political upheaval have always sent people into buying and hoarding gold.

Silver

Unlike gold, the price of silver swings between its perceived role as a store of value and its role as an industrial metal. Price fluctuations in the silver market are more volatile than gold.

While silver will trade roughly in line with gold as an item to be hoarded, the industrial supply and demand equation for the metal exerts an equally strong influence on its price.

From bearings to electrical connections, silver's properties made it a desired commodity. Silver is used in batteries, superconductor applications, and microcircuit markets. These uses affect overall non-investment demand and price of silver.

Platinum

Like gold and silver, platinum is traded around the clock on global commodities markets. It often tends to fetch a higher price (per troy ounce) than gold because it's much rarer.

Far less of the metal is actually mined annually. There are also other factors that determine platinum's price:

Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalysts, which are used to reduce the harmfulness of emissions.

Jewelry also accounts for most of the demand. Petroleum and chemical refining catalysts and the computer industry also use platinum.

Platinum prices are determined in large part by auto sales and production numbers. Platinum mines are heavily concentrated in only two countries that is South Africa and Russia.

This creates greater potential for cartel-like action that would support or even artificially raise platinum prices. Investors should consider that all of these factors make platinum the most volatile of most of the precious metals.

platinum bars
palladium bars

Palladium

Palladium is a shiny, silvery metal used in many types of manufacturing processes, particularly for electronics and industrial products. It can also be used in dentistry, medicine, chemical applications, jewelry, and groundwater treatment.

The majority of the world's supply of this rare metal, comes from mines located in the United States, Russia, South Africa, and Canada. Pure palladium is malleable, but it becomes stronger and harder once someone works with the metal at room temperature.

The sheets are used in applications like solar energy and fuel cells. The largest industrial use for palladium is in catalytic converters because the metal serves as a great catalyst that speeds up chemical reactions. Palladium is 12.6% harder than platinum, making it more durable than platinum.

Cost and Volatility

Gold is historically much more expensive than silver. This is in part because silver deposits are nearly 20 times as common as gold. As an investor, it's much easier to invest in silver than gold.

You can buy more of it for less money. As with all financial assets this can expose your portfolio of silver to greater potential gains and losses, since you're likely to see more change relative to the scope of your investment.

Low-cost assets tend to also be highly volatile specifically because small price changes have outsized effects on the underlying investment.

Volatility isn't necessarily a bad thing but it is something to watch out for, especially if you're seeking a long-term investment.

precious metals
precious metals including gold bullions and silver coins

Which Should You Buy?

It all depends on your market position and the state of your portfolio. Buy silver if you're investing for when times are good. Silver is a semi-predictable speculation asset that can make you some real money.

Buy gold if you're investing for when times are bad. A good S&P 500 index fund will do you better than gold in the long run, but gold can be a good countercyclical asset if you want to ensure liquidity in the event of a recession.

Precious Metal Investing Tips

The best use for gold as an investment is to mitigate portfolio risk. Gold is a good asset for market downturns, since it can give you a source of value at a time when other investments are failing.

A financial advisor can help you decide if gold or silver would be a good part of your portfolio. Investors can invest in gold through exchange-traded funds (ETFs), buying stock in gold miners and associated companies, and buying a physical product.

Investors are encouraged to own precious metal as part of a diversified long term investment portfolio. Gold is seen as a hedge against inflation and a store of value. Holding gold, however, comes with unique costs and risks.

precious metals

Gold Preserves Wealth

Gold has successfully preserved wealth throughout thousands of generations. The same, however, cannot be said about Fiat paper-denominated currencies.

For example, In the early 1970s, one ounce of gold was worth $35.9 Let's say that at that time, you had a choice of either holding an ounce of gold or simply keeping the $35.

Both would buy you the same things. However, if you had an ounce of gold today and converted it for today's prices, it would be worth more than the $35 because the value of gold has increased, while the value of a dollar has been eroded by inflation.

gold bar and silver bars

Gold As a Dividend-Paying Asset

Gold stocks are more appealing to growth investors than to income investors. Gold stocks often rise and fall with the price of gold, but there are well-managed mining companies that are profitable even when the price of gold is down.

Increases in the price of gold are often magnified in gold-stock prices. A small increase in the price of gold can lead to significant gains in the best gold stocks, and owners of gold stocks often get a much higher return on investment than owners of physical gold.

Even those investors focused primarily on growth rather than steady income can benefit from choosing gold stocks that demonstrate strong historical dividend performance.

Gold As a Hedge Against the Dollar

Historically, with rising inflation, gold typically appreciates. When investors realize that their fiat money is losing value, they will start positioning their investments in a hard asset that has traditionally maintained its value.

The reason gold benefits from a declining U.S. dollar is because gold is priced in U.S. dollars globally. Investors who are looking at buying gold must sell their U.S. dollars to make this transaction.

This ultimately drives the U.S. dollar lower as global investors seek to diversify out of the dollar. A weakening dollar also makes gold cheaper for investors who hold other currencies.

This results in greater demand from investors who hold currencies that have appreciated relative to the U.S. dollar.

Gold As a Safe Haven

Investors will often buy gold as a safe haven during times of political and economic uncertainty. During such times, investors who hold gold are able to successfully protect their wealth.

Gold As a Diversifying Investment

Gold is seen as a diversifying investment. It has historically served as an investment that can add a diversifying component to your investment portfolio.

The Gold Mining Sector

This includes companies that extract gold. When evaluating the dividend performance of gold stocks, consider the company's performance over time in regard to dividends.

Factors such as the company's history of paying dividends and the sustainability of its dividend payout ratio, are the two key elements to examine in the company's balance sheet and other financial statements.

A company's ability to sustain healthy dividend payouts is greatly enhanced if it has consistently low debt levels and strong cash flows, and the historical trend of the company's performance shows improving debt and cash flow figures.

Any company goes through growth and expansion cycles when it takes on more debt and has a lower cash on hand balance, it's imperative to analyze the long-term figures rather than a shorter financial picture timeframe.

precious metals
gold bars and silver coins

Certificates

Certificates offer investors all the benefits of physical gold ownership without the hassle of transportation and storage. If you're looking for insurance in a real disaster, certificates are just paper. Don't expect anyone to take them in exchange for anything of value.

Physical Metals

Unlike stocks and bonds, gold and silver can be purchased as physical assets, as either bars and coins or as American Eagle coins held in a retirement account.

The metals would be held by a third-party depository, though investors can take physical delivery if they want to store it themselves. Owning gold or silver in physical form can provide satisfaction to investors who want to own something tangible that they can take possession of.

Holding bars and coins can have a downside. Investors often pay a premium over the metal spot price on gold and silver coins because of manufacturing and distribution markups. Storage and even insurance costs should also be considered.

Mining Stocks and Funds

Some investors see opportunity in owning shares of companies that mine for gold and silver, or mutual funds that hold portfolios of these miners.

Jewelry


How You Can Invest in Gold and Silver

The best ways to invest in precious metals is either to buy the metal outright and hold the physical form, or to purchase exchange traded funds (ETFs) that have a significant exposure to precious metals, or buy shares of mining companies involved in the precious metals business.

There are many more investment options, such as:

Commodity Exchange-Traded Funds (ETFs)

ETFs are a convenient and liquid means of purchasing and selling gold, silver, palladium, or platinum. Investing in ETFs, doesn't give you access to the physical commodity, so you don't have a claim on the metal in the fund.

You will not get the actual delivery of a gold bar or silver coin. ETFs have become a popular way for investors to gain exposure to gold and silver, without having the responsibility of storing the physical asset.

You can buy shares and keep them in a traditional brokerage account. The fund’s operator is responsible for handling the costs of holding a physical supply of gold or silver and charging an expense ratio.

Some precious-metal ETFs are taxed as collectibles and don’t benefit from lower long-term capital gains rates.

Common Stocks and Mutual Funds

Shares of precious metals miners are leveraged to price movements in the precious metals. Unless you're aware of how mining stocks are valued, it may be wise to stick to mutual funds with managers with solid market performance records.

Futures and Options

The futures and options markets offer liquidity and leverage to investors who want to make big bets on metals. The greatest potential profits and losses can be had with derivative products.

Bullion

Coins and bars are for those who have a place to put them like a safety deposit box or safe. For those who are expecting the worst, bullion is the only option, but for investors with a time horizon, bullion is illiquid and downright bothersome to hold.

Is it A Bad Time to Invest in Gold?

Gold has outperformed compared to the S&P 500, with the S&P index generating about 10.4% in total returns compared to gold, which returned 18.9%.

The best time to invest in almost any asset is when there is negative sentiment and the asset is inexpensive, providing substantial upside potential when it returns to favor.

gold bullions, gold coins, silver coins
gold bars, gold coins and silver coins

You can also buy silver bullions. These bullions may be found in shapes such as bar, round, or triangle, and can be bought depending upon the weight of silver.

Silver as coins is expensive and can be obtained from banks, jewelry shops, or private dealers.

Owing to its quality or purity, banks charge a higher premium for selling coins. Coins are measured in ounces, grams, or other metrics.

Should You Invest in Silver or Gold?

From an investment point of view, silver and gold are highly sought-after not only because of their lustrous beauty, but also because they are a lucrative investment option.

Silver is not as popular as gold, it is in fact, a smart and practical investment nowadays.

However, as it is under the constant shadow of gold, price of silver is influenced by every single move in the gold market and the currency.

If you are considering silver as an investment option, it has the potential to yield handsome returns. In recent years, a significant increase in supply and demand has been noticed for this precious metal.

Investing in silver can be a wise choice. Owing to its astounding features like high conductivity of electricity and heat, ductility, malleability and the fact that it is comparatively cheaper. Silver also has many uses in trade as well as industries.

Silver, as an investment option, can be availed as silver coins, bars, jewelry, utensils, ornaments etc. Silver bars are the best bet in terms of purity.

They trade at the basic price of silver and are available at a lower cost than the other forms of silver like coins or jewelry.

Which Investment is Right for you?

When it comes to diversifying an existing investment portfolio to mitigate against risk, investment-grade precious metals offer a reliable hedge against volatility of investment markets for the long term.

Two of the most traded commodities that professional investors look to are both gold and silver bullion.

Investing for the Long Term

People often choose gold bullion as a long term investment, given the steady rise in value over the years. Silver generally follows gold in terms of relative values. Silver prices are significantly lower than gold.

Gold and Silver Prices

Market prices for precious metals can move very quickly. Silver prices are much more ‘volatile’ than those of gold in the short term. This means that it’s more likely that the price of silver can increase or decrease by 20% or more in a short period of time.

It is important for an investor to understand the market and why perceptions of value for different commodities can change when buying and selling gold and silver, in order to maximize returns on investment.

gold and silver bars

Adding Value to Investments

Many investors are looking for ways to prepare for future uncertainties. A solution for some may include investing in precious metals, such as gold and silver.

Both metals may provide a hedge in a potential economic and or market downturn, as well as during sustained periods of rising inflation.

gold bars and silver coins

Gold Has Been a More Powerful Diversifier than Silver

Silver can be considered a good portfolio diversifier with moderately weak positive correlation to stocks, bonds and commodities. However, gold is considered a more powerful diversifier.

Gold has been consistently uncorrelated to stocks and has had very low correlations with other major asset classes.

Unlike silver and industrial base metals, gold is less affected by economic declines because its industrial uses are fairly limited.

Silver Is Cheaper than Gold

Silver is much cheaper than gold, making it more accessible to small retail investors. For those who are just starting to build their investment portfolios, the cost of silver may make it a better investment choice.

Factors to Consider When Investing in Gold or Silver

Silver May Be More Tied to the Global Economy

Half of all silver is used in heavy industry and high technology, including smartphones, tablets, automobile electrical systems, solar-panel cells and many other products and applications.

Silver is more sensitive to economic changes than gold, which has limited uses beyond jewelry and investment purposes. When economies take off, demand tends to grow for silver.

Silver May Be a Better Inflation Hedge

Historically, both gold and silver have made solid gains when U.S. inflation is rising, in part because the increased costs of goods and services often coincides with a weaker U.S. dollar.

Both metals are valued in U.S. dollars, so when the dollar falls in value, gold and silver usually rise because they become less expensive to buy using other currencies.

Given greater industrial demand, silver tends to rise more than gold with rising inflation and a falling U.S dollar.

Silver Is More Volatile than Gold

The volatility in the price of silver can be two to three times greater than that of gold on a given day. While traders may benefit, such volatility can be challenging when managing portfolio risk.

That volatility can translate to larger short-term gains, but it often carries the risk of greater downside.

Are Precious Metals a Good Investment for You?

Precious metals offer unique inflationary protection. They have intrinsic value, carry no credit risk, and cannot be inflated. That means you can't print more of them. They also offer genuine "upheaval insurance" against financial or political instability.

Precious metals also provide a low or negative correlation to other asset classes like stocks and bonds. This means even a small percentage of precious metals in a portfolio will reduce both volatility and risk.

Precious Metals Risks

Every investment comes with its own set of risks. There is always some risk that comes with investing in precious metals. Prices for metals can drop due to technical imbalances. During times of economic uncertainty, sellers benefit, as prices tend to shoot up.

What Is a Disadvantage of Investing in Precious Metals?

Precious metals have no cash flow so an individual will receive no income. If an individual holds the physical metal, there is also a storage cost associated with the investment.

gold and silver

What Are the Benefits of Investing in Precious Metals Over Stocks?

Investing in precious metals comes with some benefits over investing in stocks, such as being a hedge against inflation, having intrinsic value, no credit risk, a high level of liquidity, bringing diversity to a portfolio, and ease of purchasing.

If you are opposed to holding physical gold, buying shares in a gold mining company may be a much safer alternative. If your primary interest is in using leverage to profit from rising gold prices, the futures market might be your answer.

Gold and silver have been recognized as valuable metals and have been coveted for a long time. There are many ways to buy precious metals like gold, silver, and platinum, and a host of good reasons why you should give in to the treasure hunt.