Because they are uncommon, precious metals are valuable. These minerals are produced in small quantities each year, which accounts for their high value. Gold, silver, and platinum are the three main precious metals that are traded on futures exchanges all over the world.
- The most widely used precious metal is gold, although there are also significant, easily traded markets for silver and platinum.
- The purest approach to investing in these precious metals is to purchase genuine bars and coins, but there are problems with storing and authenticating physical metals.
- Through futures, ETFs, and other similar financial products, purchasing precious metals may be simpler.
- You can also put money into the businesses that mine these precious metals, although doing so entails additional risks connected to the underlying mining industry.
Since people and governments have placed such a high value on this metal that reflects light like no other for hundreds of years, gold is the most widely used precious metal in the world. Gold serves two purposes: it has financial and industrial applications.
Gold is malleable, conducts electricity, and has great resistance to heat. Therefore, industrial users—including those in the electronics, dental, and medical fields—consume 10% of the gold mine supply annually. Gold has a long history of use as an ornamental metal, and demand for jewelry-making or fabricated items makes up 50% of annual production. Last but not least, many investors hold gold rather than other investment assets since it is money.
Every year, 40% of the gold produced finds its way into the holdings and stockpiles of investors and governments all around the world. Prices tend to increase when there is a great demand for investments. Over 30% of the gold created throughout history is held by nations as part of their foreign exchange reserves.
Over 70% of the silver produced globally is a secondary output, whereas gold production is primary, meaning that businesses explore for and extract gold from the earth’s crust as their major business. Silver is a byproduct of the manufacturing of copper, zinc, lead, and other metals. Silver, meanwhile, is a commodity that draws demand from investors. Also used in industry, silver is a necessary component of solar panels, phones, laptops, and other electronic gadgets.
While there are over 2,800 tons of gold produced each year, only about 250 tons of platinum are produced. Platinum is a rare metal. Due to its great heat resistance, platinum is used in a wide variety of industrial applications. The metal serves as a valuable asset that many investors own as well.
The three precious metals are distinct from other commodities as investment assets. Precious metals frequently compete against currencies as assets, although the prices of other raw resources fluctuate in terms of money. The paper money that governments print and mint for use as legal tender is known as a currency around the world.
Government decrees mandate that currency notes have value, thus they do. As a result, a country’s currency has value only to the full faith and credit of that country.The amount of currency that enters the market is controlled by a nation. But when it comes to precious metals, availability is determined by mine output and stocks. Therefore, precious metals typically appreciate in value when public confidence in governments that print money falls.
For savers, precious metals can be a fantastic addition or a hedge in their portfolios. They frequently counteract the catastrophic impact that inflation can have on nest eggs. Precious metals ought to be included in every savings or investment plan for four key reasons:
Gold and other precious metals have typically held their values when investors lose faith in fiat money and other asset markets. As a result, precious metals frequently have a negative correlation with other asset classes and serve as a store of wealth during uncertain or turbulent economic periods.
Precious metals have historically been assets that act as flight capital during times of hyperinflation or political unrest. Many people bought their way out of Nazi Germany in the 1930s by offering bribes or paying for their travel with gold and other precious metals. There are numerous instances in history where paper money was supplanted by precious metals as the only acceptable medium of exchange.
While the majority of paper money has only been in use for a considerably shorter period of time, precious metals have been used as money for thousands of years. These metals have a lengthy history of worth, which speaks to their tenacity.
Similar to money, precious metals are fungible; they can be used interchangeably. As a result, precious metals are the world’s oldest form of money.
There are various options when it comes to investing in precious metals.
Coins and physical bars
Purchasing the actual metals is the purest approach to investing in precious metals. Coin merchants all over the world sell bars and coins made of precious metals like gold, silver, platinum, and palladium. Gold bars range in size from 400 ounces down to one gram.
The sizes and weights of silver, platinum, and palladium bars are likewise incredibly varied. When it comes to coins, numerous nations all over the world manufacture legal tender coins that typically range in size from one-tenth of an ounce to one ounce.
The cost of these coins fluctuates nevertheless, along with the cost of precious metals. Bars and coins made of precious metals can trade at a premium or a discount to the actual metal price. The supply and demand for the actual bars and coins is what causes these differences.
Finding a trustworthy company is crucial when purchasing actual precious metals. On the internet, a lot of dealers and banks advertise physical metals for the retail market. Comparing pricing amongst dealers is a good idea, but you should be wary of anyone selling precious metals for significantly less than the going rate or for a very long time. Avoid dealing with a dealer if it makes you uneasy. Building a partnership with a business that can both provide precious metals and purchase them from you when you decide to sell them is always preferable.
Although buying and selling actual precious metals has its drawbacks, it is the only direct path to asset ownership. Some dealers will offer to sell you these metals and hold or store them for you in either allocated or unallocated accounts as an alternative to accepting delivery.
An unallocated account is only a book entry of ownership, whereas an allocated account will assign you a specific bar or coin. The allocated account will protect your investment if the dealer goes out of business or goes bankrupt because it is a separate account, whereas an unallocated investment could cause a credit problem and cause the dealer to default on your purchase. Consider the market for precious metals as a pyramid. The physical market is at the top, while instruments that attempt to imitate or move in tandem with the physical metals are at the bottom, increasing risk.
Options and Futures
Derivatives include precious metals futures and options on those futures. The pyramid continues its ascent with these cars. Futures contracts have a delivery method for buyers and sellers and are traded on exchanges. As a result, during the delivery period, a futures holding could change into a physical position in the metals. For a nominal down payment or margin, a buyer or seller can take possession of a position in precious metals.
Derivatives that provide buyers the option but not the obligation to buy or sell precious metals include options on futures. Options are comparable in cost to insurance policies. While purchasers are the insured party, option sellers operate as the insurance company.
ETN and ETF products
ETFs and ETNs seek to replicate the price movement of a precious metal.The GLD and IAU ETFs, which mimic gold’s price movement, are the most widely used options for this asset class. An ETF called SLV tracks the price of silver, whereas PPLT tracks the price of platinum. Additionally, the field of precious metals has a wide variety of ETN products.
Some will increase in value as the price of certain metals increases, while others will increase in value when those metals’ prices decline. ETN products with leverage amplify the price movement of the underlying precious metals. As derivative products are built on other derivatives like futures and options contracts in precious metals, these vehicles are at the bottom of the pyramid.
Buying stock in companies involved in the extraction and manufacturing of real metals is another way to participate in the precious metals markets. These stocks typically increase when metal prices increase and decrease when they decline. Buyers of mining stocks, however, also take on risks unrelated to metal prices.
Investing in precious metal mining stocks involves making a wager on a company’s management and particular producing assets. The stock price may deviate from the movement of the underlying metals if either of these factors is problematic. Mining stocks can both outperform and underperform the price movement of precious metals.
It’s crucial to complete your research before choosing a tool in the realm of precious metals. The physical market is the most direct method of investment, although other methods vary in their convenience and liquidity for entering and leaving holdings. Understanding your purchases and sales as well as the risk involved with your counterpart is important to keep in mind.