Gold and silver have long been recognized as valuable metals and have been coveted. Even today, precious metals have their place in the portfolio of savvy investors gold ira company. But which precious metal is best for investment purposes? And why are they so volatile?
There are many ways to buy precious metals like gold, silver, and platinum, and a number of good reasons why you should give in to your treasure hunt. So if you’re just getting started with precious metals, read on to learn more about how they work and how you can invest in them.
Gold
We’ll start with everyone’s grandfather: gold. Gold is unique in its durability (it does not rust or corrode), 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 currency.
The value of gold is determined by the market 24 hours a day, seven days a week. Gold is primarily traded based on sentiment – its price is less affected by the laws of supply and demand. This is because the supply from the new mine is vastly outstripped by the size of the accumulated gold on the ground. Simply put, when hoarders feel like selling, the price goes down. When they want to buy, a new supply is quickly absorbed and gold prices rise.
Several factors explain a greater desire to hoard the bright yellow metal:
- Systemic Financial Concerns – When banks and money are perceived as unstable and / or political stability is questionable, gold is often sought out as a safe store of value.
- Inflation: When real rates of return in the stock, bond, or real estate markets are negative, people often flock to gold as an asset that will hold its value.
- Political War or Crisis: War and political turmoil have always led people to hoard gold. Lifetime savings can be made portable and stored until they need to be exchanged for food, shelter, or safe passage to a less dangerous destination. How to store gold and silver?
Silver
Unlike gold, the price of silver oscillates between its perceived function as a store of value and its function as an industrial metal. For this reason, price fluctuations in the silver market are more volatile than those of gold.
Thus, while silver will trade roughly in line with gold as an accumulating item, the metal’s industrial supply / demand equation exerts an equally strong influence on its price. That equation has always fluctuated with new innovations, including:
- Silver’s once predominant role in the photography industry, silver-based photographic film, has been overshadowed by the advent of the digital camera.
- The rise of a vast middle class in the emerging market economies of the East, which created an explosive demand for electrical appliances, medical products, and other industrial items that require silver inputs. From bearings to electrical connections, the properties of silver made it a desired commodity.
- The use of silver in batteries, superconductor 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 store of value.
Platinum
Like gold and silver, platinum is traded 24 hours a day on global commodity markets. It often tends to command a higher price (per troy ounce) than gold during routine periods of political and market stability simply because it is so much rarer. In reality, much less metal is extracted from the ground annually.
There are also other factors that determine the price of platinum:
- Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalysts, which are used to reduce harmful emissions. After this, jewelry accounts for most of the demand. Oil and chemical refining catalysts and the computer industry consume the rest.
- Due to the auto industry’s heavy reliance on the metal, platinum prices are largely determined by car sales and production figures. “Clean air” legislation could require automakers to install more catalytic converters, increasing demand. But in 2009, American and Japanese automakers began turning to recycled car catalysts or using more of the reliable (and generally less expensive) metal from platinum’s sister group, palladium.
- Platinum mines are heavily concentrated in just two countries: South Africa and Russia. This creates greater potential for cartel-like actions that would support or even artificially raise platinum prices.
Investors should consider that all of these factors make platinum the most volatile of the precious metals.
Palladium
Less known than the previous three metals is palladium, which has more industrial uses. Palladium is a shiny silver 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 located 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 government of Tonga issued circulating palladium coins promoting the coronation of King Taufa Ahau Tupou IV. This is the first recorded case of palladium used in minting.
Metal workers can create thin sheets of palladium up to two hundred and fifty thousandths of an inch. Pure palladium is malleable, but it gets stronger and harder once someone works with the metal at room temperature. The films are then used in applications such as solar energy and fuel cells.
Palladium’s largest industrial use is in catalytic converters because the metal serves as a great catalyst that speeds up chemical reactions. This shiny metal is 12.6% harder than platinum, making the element more durable than platinum as well.
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)
There are exchange-traded funds 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 the physical product, so you have no rights to the metal in the fund. You will not receive the actual delivery of a gold bar or a silver coin.
Common stocks and mutual funds
Precious metal miners’ shares take advantage of precious metal price movements. Unless you know how mining stocks are valued, it may be wiser to stick with funds with managers with strong performance records.
Futures and options
The futures and options markets offer liquidity and leverage to investors who want to make big bets on metals. The greatest potential gains and losses can be made with derivative products.
Silver bullion
Coins and bars are strictly for those who have a place to store them like a lock box or safe. Certainly, for those who expect the worst, the bullion is the only option, but for investors with a time horizon, the bullion is not liquid and is very troublesome to hold.
Certificates
The certificates offer investors all the benefits of physical gold ownership without the hassles of transportation and storage. That said, if you are looking for insurance in a real disaster, the certificates are on paper only. Don’t expect anyone to take them in exchange for something of value.
Are precious metals a good investment for you?
Precious metals offer unique inflation protection: they have intrinsic value, carry no credit risk, and cannot be inflated. That means it cannot print any more. They also offer genuine “seizure insurance” against financial or political / military seizures.
From an investment theory point of view, precious metals also provide 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 Metal Risks
Each investment carries its own set of risks. Although they may come with a degree of security, there is always some risk when investing in precious metals. Metal prices can go down due to technical imbalances (more sellers than buyers). That said, in times of economic uncertainty, sellers benefit as prices tend to skyrocket.
The bottom line
Precious metals provide a useful and efficient 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 harnessed to build wealth. Left unchecked, it can also lead to ruin.