Investing in Precious Metals: A Beginners Guide

The most common precious metals investments are financial instruments like shares or mutual funds and physical investments such as coins and bars. It is also possible to invest in other financial instruments like the precious metals futures and certificates. These methods vary in their risk and reward profile, the liquidity in the instrument, and the way they are traded.

Physical Precious Metals

Investing in physical precious metals, in general, carries a higher perceived investment value than investing in financial instruments. Physical metal in the form of coins and bars provide a sense of security when investors can actually see and feel their investments. Coins can also be perceived a better investment over bullion.

Gold coins, for example, are perceived to have a higher value than gold bars particularly in times of economic crisis. When confidence in and subsequently value of paper money falls considerably investors start factoring in a broader currency crisis resulting in going back to the gold standard.

Storage can be an issue with owning precious metal coins and bars. Normally banks offer storage facilities for precious metals. However, at times of deeper financial crises like we just experienced in 2008, investors become weary of financial institutions. They start thinking and asking questions: What if the banks fail? Who has claims to the stored precious metals? Is it the creditors or the account holders? What is the role of insurance providers? All these questions should be factored in when considering storing precious metals in banks or other financial institutions.

Precious Metals Mutual Funds

Precious metals mutual funds like other funds are based on specific objectives. Generally mutual funds are classified as growth, income, balanced, or some form of combination. BMO Precious Metals, for example, provides long-term growth. Precious metals funds can invest in companies in the exploration, mining or distribution space. They are also open to investing in financial instruments like certificates or futures or straight metals in the form of coins or bullion. It all depends on the fund objective. A few popular precious mutual funds:

Precious Metals Equities

Investing in the precious metals equities simply involves trading shares of companies engaged in precious metals exploration, mining, or distribution. Investing in equities in general is relatively higher risk because now investors are exposed not only to the precious metals price risk, but they are now exposed to other risks such as labor market risk, organizational risk, and for those engaged in international mining and exploration are exposed to international political and economic risk.

Precious Metals Futures

The futures market is an extremely risky market but the rewards can be enormous. Futures contracts are financial instruments traded on an exchange. In general, a futures contract specifies when and how much of a metal will be delivered on a specified date for a specified price. Investments in the precious metals futures markets are highly speculative as investors effectively guess the future price of the metal. There are numerous ways that investors in the futures market speculate on price action. Precious metals futures traded on the New York Exchange include:

All major stock and metals exchanges provide access to the futures market. Some of the popular exchanges include:

Investing in the precious metals market comes in all shapes and forms. Novice investors should understand the precious metals market as well as their own risk profile before considering entering the market.

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