Gold and silver have long been recognized as precious metals and have long been coveted. Even today, precious metals have their place in the portfolio of a savvy investor goldco review. But which precious metal is best for investment? And why are they so volatile?
There are many ways to buy precious metals like gold, silver, and platinum, and many good reasons why treasure hunters should give up. So if you've just started working with precious metals, read on to learn more about how they work and how to invest in them.
- Precious metals are considered a good portfolio diversification and inflation hedge, but gold, perhaps the most well-known metal, is not the only one available to investors.
- Silver, platinum and palladium are commodities that can be added to your precious metals portfolio and each have their own unique risks and opportunities.
- In addition to owning physical metal, investors can gain access through the derivatives market, metal ETFs and mutual funds, and shares of mining companies.
We will start with the grandfather of all: gold. Gold is unique in its durability (it does not rust or corrode), its malleability, and its ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, but we know it primarily as a base for jewelry and as a form of currency.
The value of gold is determined by the market 24 hours a day, seven days a week. Gold trades primarily on sentiment: its price is less affected by the laws of supply and demand. This is due to the fact that the new mine supply is much larger than the size of the accumulated gold on the surface. Simply put, when hoarders want to sell, the price goes down. When they want to buy, new supply is quickly absorbed and gold prices rise.
Several factors explain a growing desire to hoard the bright yellow metal:
- Systemic financial concerns: When banks and money are perceived as unstable and/or political stability is in question, gold is often sought out as a safe deposit.
- Inflation: When real rates of return in the stock, bond, or real estate markets are negative, people regularly turn to gold as an asset that will hold its value.
- Wars or Political Crises: Wars and political upheavals have always sent people into a state of hoarding gold. Life savings can be portable and stored until they need to be exchanged for food, shelter, or a safe move to a less dangerous destination.
Unlike gold, silver's price fluctuates between its perceived role as a valuable deposit and its role as an industrial metal. For this reason, fluctuations in the market prices of silver are more volatile than those of gold.
Thus, while silver will trade roughly in line with gold as treasure, the metal's industrial supply/demand equation has an equally strong influence on its price. This equation has always fluctuated with new innovations, including:
- The predominant role of silver in the photography industry (silver-based photographic films) has been overshadowed by the advent of the digital camera.
- The rise of a large middle class in the emerging market economies of the East, which has created an explosive demand for electrical appliances, medical products, and other industrial items that require silver inputs. From bearings to electrical connections, silver's properties have made it a desirable product.
- The use of silver in batteries, superconducting applications, and microcircuit markets.
It is unclear if or to what extent these developments will affect overall non-investment demand for silver. One fact remains: the price of silver is affected by its applications and is not only used in fashion or as a valuable deposit.
Like gold and silver, platinum trades endlessly on world commodity markets. It often tends to fetch a higher price (per troy ounce) than gold in routine periods of market and political stability simply because it is so much rarer. In reality, much less metal is extracted from the ground each year.
There are other factors that determine the price of platinum:
- Like silver, platinum is considered an industrial metal. The largest demand for platinum comes from automobile catalysts, which are used to reduce emissions. After that, jewelry makes up most of the demand. Petroleum and chemical refining catalysts and the computer industry use the rest.
- Due to the auto industry's heavy reliance on the metal, platinum prices are largely driven by auto sales and production. Clean air legislation could require automakers to install more catalytic converters, increasing demand. But in 2009, American and Japanese automakers began to focus on recycled auto catalysts or to use more of the reliable, and generally less expensive, metallic platinum from the group of metals, palladium.
- Platinum mines are highly concentrated in just two countries: South Africa and Russia. This creates greater potential for cartel-like actions that would support or even artificially increase platinum prices.
Investors should note that all of these factors contribute to platinum being the most volatile precious metal.
Less well known than the previous three metals is palladium, which has various industrial uses. Palladium is a shiny, silvery metal that is used in many types of manufacturing processes, especially for electronic and industrial products. It can also be used in dentistry, medicine, chemical applications, jewelry, and groundwater treatment. Most of the world's supply of this rare metal, which has atomic number 46 on the periodic table of elements, comes from mines in the United States, Russia, South Africa and Canada.
Jewelers first incorporated palladium into jewelry in 1939. When mixed with yellow gold, the alloy forms a stronger metal than white gold. In 1967, the Tongan government issued palladium coins into circulation, claiming the coronation of King Taufa'ahau Tupou IV. This is the first recorded example of palladium used in currency.
Metallurgists can create thin sheets of palladium as small as two hundred and fifty thousandths of an inch. Pure palladium is malleable, but it becomes stronger and harder once someone works with the metal at room temperature. The sheets are then used in applications such as solar power and fuel cells.
The largest industrial use of palladium is in catalytic converters, as the metal serves as an excellent catalyst that speeds up chemical reactions. This shiny metal is 12.6% harder than platinum, making it more durable than platinum.
Fill your treasure chest
Let's take a look at the options available to those who want to invest in precious metals.
Commodity Exchange Traded Funds (ETFs)
Exchange traded funds exist for all three precious metals. ETFs are a convenient and liquid means of buying and selling gold, silver or platinum. However, investing in ETFs does not give you access to physical commodities, so you do not have any rights to the underlying metal. You will not receive the actual delivery of a gold bullion or silver coin.
Joint Stocks and Mutual Funds
The actions of precious metal miners are influenced by the price movements of precious metals. If you don't know how mining is valued, it may be wiser to stick to funds with managers with strong performance records.
Flooding and Options
Futures and options markets offer liquidity and leverage to investors who want to place big bets on metals. The highest potential gains and losses can be made with derivatives.
Coins and bullion are strictly for those who have a place to store them, such as a safe or a safe. Sure, for those who expect the worst, bullion is the only option, but for investors with a time horizon, bullion is illiquid and downright annoying to hold.
Certificates offer investors all the benefits of physically owning gold without the hassles of transportation and storage. That said, if you're looking for insurance in a real disaster, certificates are just paper. Don't expect anyone to take them for granted.
Are precious metals a good investment for you?
Precious metals offer unique inflation protection: they are inherently valuable, carry no credit risk, and cannot be inflated. That means you can't print more of them. It also offers true "reversal insurance" against financial or political/military reversals.
In terms of investment theory, precious metals also have a low or negative correlation with other asset classes, such as stocks and bonds. This means that 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. Although they may come with a certain degree of security, there is always a certain risk that comes with investing in precious metals. Metal prices can fall due to technical imbalances (more sellers than buyers). That said, in times of economic uncertainty, sellers benefit because prices tend to rise.
Precious metals provide a useful and effective means of diversifying a portfolio. The trick to being successful with them is knowing your goals and risk profile before you jump in. The volatility of precious metals can be capitalized on to build wealth. If left unchecked, it can lead to ruin.