A beginner’s guide to precious metals

Gold and silver are recognized as valuable metals and have long been coveted by people. Even today, precious metals have a place in the portfolio of savvy investors. But which precious metal is most suitable for investment purposes? Why are they so changeable?

There are many ways to buy precious metals such as gold, silver and platinum, and there are many good reasons for you to hunt for treasures. Therefore, if you are new to precious metals, read on to learn more about how they work and how to invest in them.

Key points

  • Precious metals are considered a good tool for portfolio diversification and inflation-but gold, perhaps the most famous metal of this kind, is not the only choice for investors.
  • Silver, platinum and palladium are all commodities that can be added to the precious metal portfolio, and each has its own unique risks and opportunities.
  • In addition to owning physical metals, investors can also gain access through derivatives markets, metal ETFs and mutual funds, and mining company stocks.

Gold

We will start with their grandfather: gold. The uniqueness of gold lies in its durability (will not rust or corrode), ductility, and its ability to conduct heat and electricity. It has some industrial applications in dentistry and electronics, but we know that it is mainly used as the basis of jewelry and as a form of currency.

The value of gold is determined by the market, 7 days a week, 24 hours a day. The trading of gold mainly depends on emotions-its price is less affected by the laws of supply and demand. This is because the supply of new mines far exceeds the scale of gold hoarding on the ground. In short, when hoarders want to sell, the price drops. When they want to buy, the new supply is quickly absorbed and the price of gold is pushed up.

There are several factors that make people increasingly want to hoard shiny yellow metal:

  • Systemic financial problems: When banks and currencies are considered unstable and/or political stability is problematic, gold is often seen as a safe store of value.
  • Inflation: When the real return on stocks, bonds or real estate markets is negative, people often flock to gold as an asset that can maintain its value.
  • War or political crisis: Wars and political turmoil always make people fall into a pattern of hoarding gold. Life savings can be carried with you and stored until you need to use it in exchange for food, shelter, or safe passage to less dangerous destinations.

silver

Unlike gold, the price of silver fluctuates between its role as a store of value and its role as an industrial metal. Therefore, price fluctuations in the silver market are more volatile than gold.

Therefore, although silver as an item that needs to be hoarded, its transaction price is roughly the same as that of gold, but the industrial supply and demand equation of metal has an equally strong impact on its price. This equation always fluctuates with new innovations, including​​:

  • Silver’s once dominance in the photography industry-silver-based photographic film-has been eclipsed by the advent of digital cameras.
  • The rise of the huge middle class in the eastern emerging market economies has created explosive demand for electrical appliances, medical products, and other industrial products that require the import of silver. From bearings to electrical connections, the characteristics of silver make it an ideal commodity.
  • Silver is used in the battery, superconductor applications, and microcircuit markets.

It is unclear whether or to what extent these developments will affect overall non-investment demand for silver. One fact still exists: the price of silver is affected by its application, not just for fashion or as a means of holding value.

platinum

Like gold and silver, platinum is traded around the clock on the global commodity market. During regular periods of market and political stability, it tends to get a higher price (per troy ounce) than gold because it is very rare. Much less metal is actually excavated from the ground every year.

There are 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 the harmfulness of emissions. Since then, jewelry has accounted for most of the demand. Petroleum and chemical refining catalysts and the computer industry used up the rest.
  • As the automotive industry relies heavily on metals, the price of platinum depends to a large extent on car sales and production. “Clean air” legislation may require automakers to install more catalytic converters, thereby increasing demand. But in 2009, American and Japanese automakers began to turn to recycled car catalysts or use more platinum, the reliable (and often cheaper) sister metal palladium.
  • Platinum mines are mainly concentrated in two countries-South Africa and Russia. This creates greater potential for cartel-like actions to support and even artificially increase platinum prices.

Investors should take into account that all these factors make platinum the most volatile precious metal.

palladium

Lesser known than the three metals mentioned above is palladium, which has more industrial uses. Palladium is a shiny silver metal that can be used in a variety of manufacturing processes, especially electronics and industrial products. It can also be used in dentistry, medicine, chemical applications, jewelry and groundwater treatment. Most of the supply of this rare metal with atomic number 46 in the periodic table comes from mines located in the United States, Russia, South Africa and Canada.

Jewelers first incorporated palladium into jewelry in 1939. When mixed with gold, this alloy forms a stronger metal than platinum. In 1967, the Tongan government issued circulating palladium coins to promote the coronation of King Taufaahao Tupou IV. This is the first recorded example of palladium used in coin minting.

Metalworkers can produce palladium flakes as low as 25-thousandths of an inch. Pure palladium is malleable, but once someone uses this metal at room temperature, it becomes stronger and harder. These sheets are then used in applications such as solar and fuel cells.

The largest industrial use of palladium is a catalytic converter because it is an excellent catalyst that can accelerate chemical reactions. This shiny metal is 12.6% harder than platinum, making the element more durable than platinum.

Fill up your treasure chest

Let’s take a look at the options available to those who want to invest in precious metals.

Commodity Exchange Traded Fund (ETF)

All three types of precious metals exist in exchange-traded funds. ETF is a convenient and liquid way to buy and sell gold, silver or platinum. However, investing in ETFs does not give you access to physical commodities, so you have no ownership of the metals in the fund. You will not get the actual delivery of gold bars or silver coins.

Common stocks and mutual funds

The stocks of precious metal miners are used to influence the price movements of precious metals. Unless you understand how mining stocks are valued, it is best to choose a fund manager with a good track record.

Futures and options

The futures and options markets provide liquidity and leverage for investors who want to place large bets on metals. Derivative products can generate the greatest potential profits and losses.

bullion

Coins and gold bars are only suitable for those who have a safe or a safe place to put them. Of course, for those who anticipate the worst-case scenario, gold is the only option, but for investors who have a time horizon, gold has poor liquidity and is very troublesome to hold.

Certificate

Certificates provide investors with all the benefits of physical gold ownership without the hassle of transportation and storage. In other words, if you are looking for insurance in a real disaster, the certificate is just a matter of paper. Don’t expect someone to exchange them for anything of value.

Are precious metals right for you?

Precious metals provide unique inflation protection-they have intrinsic value, have no credit risk, and cannot be inflationary. This means you cannot print more. They also provide real “turbulence insurance” against financial or political/military turmoil.

From the perspective of investment theory, precious metals also provide low or negative correlations with other asset classes such as stocks and bonds. This means that even a small portion of precious metals in the portfolio will reduce volatility and risk.

Precious metals risk

Every investment has its own risks. Although they may have a certain degree of security, there is always some risk in investing in precious metals. Due to technological imbalance (more sellers than buyers), metal prices may fall. In other words, in times of economic uncertainty, sellers benefit because prices tend to soar.

Bottom line

Precious metals provide useful and effective means for diversifying investment portfolios. The trick to success with them is to understand your goals and risk profile before you enter. The fluctuation of precious metals can be used to accumulate wealth. Let it go, it can also lead to destruction.

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