A Beginners Guide To Investing Precious Metals

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Money Wise

Since the beginning of time, silver, gold, platinum and palladium have been recognized as valuable. Even today, many precious metals hold their own place in an investor’s portfolio. However, which of these precious metals is best for investment purposes and why are they so volatile? If you find precious metals interesting and you want to try your hand in investments, read on to learn more about how precious metals work and how you can invest in them successfully. There are many ways you can buy into precious metals and even more good reasons why you should give in to the treasure hunt.

Is all That Glitters Gold?

The granddaddy of all precious metals is gold. It is unique for its durability since it doesn’t corrode or rust, its malleability and its ability to conduct electricity and heat. While it does have some applications in industries including electronics and dentistry, many people are most familiar with it as a form of currency and a base for jewelry.

So, how can you tell what your gold is worth? The value of gold is continuously determined by a market for 24 hours every day and almost seven days per week. However, gold trading functions more from sentiment; in other words, the average price of gold is not necessarily affected by the traditional laws of supply and demand. The supply of gold found in new mines is greatly outweighed by the size of gold that exists above ground. To put it in another way, when gold hoarders feel it is time to sell their gold, the price drops; on the other hand, when they want to buy, the new supply of gold is absorbed rapidly, thus driving the price of gold higher.

What accounts for an increased desire for individuals to hoard gold? First, when consumers perceive money and banks as unstable or politics in general are questionable, consumers may search out gold as a safe store of value. Additionally, when rates of return in the bond, equity or real estate markets are more negative than positive, people will flock to the precious metal as an asset that will maintain its value over time. Finally, political crises or war almost always send people rushing frantically to hoard more gold. In fact, an investor can put an entire lifetime’s savings into a portable supply until the time comes to trade it for food, housing or as fare to travel to a safer destination.

Understanding the Silver Bullet

Price fluctuations in the silver market are more unstable than gold; the price of silver fluctuates between its tangible role as an industrial metal and its perceived role as a store of value. While silver will often trade similarly to gold in terms of consumers’ need to hoard the metal, the supply and demand of silver also greatly influences the value of silver.

The particular supply and demand equation often fluctuates with new innovations including the advent of the digital camera, as silver was always used in the photography industry; the photographic film was originally silver-based. Additionally, silver has been used in microcircuit markets, superconductor applications and batteries. Finally, there has been an increase of the middle class in the East, creating an enormous demand for industrial items that demand silver inputs such as medical products and electrical appliances. Because silver has these properties, it has become a desired commodity for many.

It is not yet clear if or to what extent these current developments will affect the demand for silver for those who are not interested in investing the precious metal. However, the price of silver is greatly influenced by how it is used and not just for fashion or as a store of value.

A Platinum Bombshell

Like silver and gold, platinum is also traded on global commodities markets around the clock. Platinum tends to fetch a higher price tag than gold during period of political and market stability, only because it is much rarer than gold; there is not as much platinum pulled from the ground every year as gold. Other factors that may influence the price of silver include the fact that it is an industrial metal. The greatest demand comes from automotive catalysts; these catalysts are used to reduce the amount of harmful emissions escaping into the atmosphere. Platinum jewelry is the second highest in terms of demand, with chemical refining catalysts and petroleum rounding out the bottom.

Moreover, because the auto industry relies heavily on platinum, prices are determined largely by production numbers and auto sales. Additionally, “clean air” legislation could require manufacturers to use more catalytic converters in their vehicles, thus increasing the demand for platinum. However, in 2009, both Japanese and American carmakers were using recycle auto catalysts instead; they also turned to palladium, a less expensive sister metal of platinum.

If you are looking to invest your platinum, consider that all of these factors are what make platinum the most unstable out of all the precious metals.

Precious Palladium

The sister metal to platinum, palladium is a lustrous silver-white metal; it has similar chemical properties as platinum, yet palladium has a lower melting point and is less dense than the other metals. Over half the supply of palladium is put into catalytic converters. Additionally, the metal is used in groundwater treatment, chemical applications, jewelry, hydrogen purification, medicine, dentistry and electronics.

Smart Finance

If you are looking to invest your palladium, the factors are somewhat similar as platinum. Ore deposits of this metal are rare. If you are unsure where to obtain palladium, consider recycling as a valuable source of the metal; oftentimes, auto mechanics and manufacturers will dispose of their scrapped catalytic converters.

The most traditional way that individuals invest palladium is buy buying bars and bullion coins made of the metal. The liquidity of palladium bullion investments is not as high as silver or gold, however, due to a wider difference between the selling and buying price and a lower circulation of palladium coins. Investors looking to invest solely in palladium should consider purchasing bullion coins instead of collectible coins, which are more expensive because they carry more value. However, bars are available sold at very little premium above the true value of palladium, yet they are not as easily obtainable as palladium coins.

Filling Your Treasure Chest with Investments

Now that you understand the basics behind these precious metals and what makes them volatile or stable in certain conditions, you can focus on how you wish to invest them. Your first option is commodity ETFs, or exchange traded funds. These exist for all precious metals and are a liquid and convenient means of selling and purchasing platinum, silver, gold and palladium.

Shares of precious metals are adjusted to price movements in the metals themselves. In other words, unless you know the value of mining stocks, it may be smarter for you to stick to funds and work with managers with solid, reliable performance records.

For investors who want to make big, risky bets on metals, the futures and options markets offer leverage and liquidity. In these markets, you often have the chance to make the greatest potential profit; then again, you also stand to lose everything.

Bars and coins are only for those who have a safe, secure place to house them. However, for those who are expecting the worst, bullion is the only option. For investors with a time horizon who plan on holding onto their metals for years ahead, bullion is bothersome to hold.

Certificates offer all investors the benefits of physically owning gold minus the hassle of storage and transportation. With that being said, certificates are merely pieces of paper; it is not always best to rely on someone to take them in exchange for anything if you are looking for insurance in an emergency.

Will These Precious Metals Shine?

Precious metals such as gold, silver, platinum and palladium have intrinsic value, do not provide a credit risk and cannot be inflated. In other words, you cannot print more of them. Additionally, they offer upheaval insurance against political, military or financial upheavals.

From an investment standpoint, these metals provide negative or low correlation to other assets such as stocks or bonds. Even holding a small percentage of precious metals will reduce your risk and volatility in today’s markets.

Final Thoughts

Precious metals are an excellent, useful and effective way to diversify your investment portfolio. However, the trick to achieving success in your investments is to know your risk profile and map out your goals before you take the plunge. While the stability of these metals may not be particularly dangerous if you are attempting to accumulate wealth, if you are not careful and do not have a full understanding of the current markets, you could be looking at financial ruin in the near future.