Are Precious Metals Good Investments?

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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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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.