Markets can be volatile – that should come as no surprise for any who has ever considered investing in stocks or bonds. Even the rocket-like value acceleration of Bitcoin (and other digital currencies with some notable exceptions) has provided investors with some heart-stopping moments – and that thrill ride doesn’t seem to stop anytime soon.
But savvy investors tend to favor diversification – it’s a sort of ‘what you lose on the roundabout, you gain on the swings’ mentality. In other words, when a particular asset in a portfolio underperforms, other assets can soften the blow by performing well – and this strategy has stood them in good stead for generations. But there is a particular asset class that the best investors in the world will almost inevitably have padding out their portfolios – and that is precious metals.
But why are precious metals so attractive to investors? Here are some quick facts for those considering dipping their toes into the waters of precious metals.
Firstly, what exactly are precious metals?
Most people are familiar with gold and silver – even if it is because of their use in the fashion and jewelry industry. But other metals are worthy of consideration when it comes to investing. Metals such as Palladium and Platinum are also worthy of consideration by those who want to plump up their portfolios. Which of these represents the best investment, and how does the investor get their foot in the door when investing in precious metals?
Let’s start with an investment that has been coveted for thousands of years – gold. Gold has many uses, it’s a great conductor of electricity, and it doesn’t tarnish or corrode (two reasons it has stood the test of time). However, most people know gold as either jewelry or currency. Gold is traded on stock exchanges worldwide- part of its attraction is that its value is driven primarily by sentiment. Supply and demand play a role in its value, but it is less affected by these classic value drivers than other assets. Even if mines find it difficult going, there is so much gold in stock above the ground – and when those who hold gold decide to sell, the price drops. When they want more – it’s available, and the price goes up.
So what are the other reasons that gold is so attractive?
Market sentiment towards currencies is one. When the market gets the jitters about a specific currency, the safe haven of a physical asset is sought. When real rates of return come under pressure (think real estate and equity markets), gold is seen as an asset that will retain value.
In times of crisis – natural disasters or war and political upheaval, gold shines as a safe haven for investors. After all – you can flee a country with physical gold.
Silver is a bit different. Yes, it is used in jewelry – it is beautiful. But it is also used in a variety of industrial processes. It can be more volatile than gold. It’s another tremendous physical asset (collectible silver coins are attractive, as are gold). But its value also depends on industrial demand. It’s used in superconductor manufacture, batteries, and microcircuitry. It also has uses in household goods such as electrical appliances. When times are good, and people have disposable income, especially in the developing world, demand for silver surges – but the converse is also true.
Platinum is are – so it trades at a premium compared to gold. It also has a variety of uses. It is essential for the manufacture of catalytic converters and is used in the petrochemical industry, again as a catalyst. The automobile industry sets the price of platinum – more car sales equal higher demand.
Then there’s palladium. It’s the more mysterious of the precious metals – at least as far as neophyte investors are concerned. Its price tends to be driven by industry, where it is used in industrial catalytic converters. It is also used in the manufacture of electronics, medicine, and various chemical applications (among many others). It is also used in jewelry, and sheets of the metal are used in solar energy panel manufacture and fuel cells.
So those are the primary precious metals. Here’s a short video from Dave Ramsey discussing the topic further and gives his best gold investment companies to consider.
So how does one invest in these?
The first option is Commodity Exchange Traded Funds (ETFs). The ETF will hold the physical asset (gold bars are a great example), and its value will track that asset’s value. You purchase shares in the ETF (and you will attract a nominal annual service fee). Remember – you will not own the physical asset.
The second option is purchasing stocks and investing in Mutual Funds. Here you will be buying shares in mining operations that leverage the price movements of the precious metals they are extracting from the ground. This can be a tricky investment for the beginner. It’s often best to invest in a fund under an experienced manager’s stewardship.
Next, we have futures. You are going to need nerves of steel for this option. To put it simplistically, you will be betting on whether the price of precious metal will rise or fall over a set period.
Next, we have a favorite with those with access to a safe. That is bullion. Think bars. As attractive an option as this may seem (who doesn’t want to hold a gold bar?), there is a downside. It can be time-consuming to convert that gold (other precious metal) into cold, hard cash. For those who have time constraints or may require quick access to cash, this option should be treated with extreme caution. But for those with a long-term investment mindset, it can offer incredible rewards.
There are also certificates. These offer the advantages of owning physical metal without the potential headaches of owning it. The certificate states that you hold ‘x’ ounces of the metal. But remember. It’s a piece of paper. If the company that issues it goes under, you have an asset that will be extremely useful for constructing a paper airplane – but very little else.
Investing in precious metals can be a complex business. However, for the patient investor willing to do their research or partner with an investment professional, it can be enriching (at least for those with a long-term mindset).