Gold and silver have long been recognized as valuable metals and have been coveted for a long time goldco review. Even today, precious metals have their place in a savvy investor’s portfolio 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 plenty of good reasons why you should give in to treasure hunting. 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.
All that glitters is gold
We’ll start with the granddaddy of them all: 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 form of currency.
The market determines the value of gold 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 because the new supply from the mine is largely offset by the large size of the gold accumulated above ground. Simply put, when accumulators 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 in question, gold has often been sought after as a safe store of value.
- 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.
- War or Political Crises: War and political turmoil have always sent people into gold hoarding mode. A lifetime’s savings can be made portable and stored until they need to be exchanged for food, shelter, or safe passage to a less dangerous destination.
What is a commodity?
Silver Bullet
Unlike gold, silver’s price fluctuates between its perceived role as a store of value and its role as an industrial metal. For this reason, price fluctuations in the silver market are more volatile than gold.
Thus, while silver will trade roughly in line with gold as an item to be hoarded (investment demand), the industrial supply/demand equation for the metal exerts an equally strong influence on its price. That equation has always fluctuated with new innovations, including:
- The predominant role of silver in the photography industry (silver-based photographic film) overshadowed by the advent of the digital camera.
- The rise of a vast middle class in the eastern emerging market economies, which created an explosive demand for household appliances, medical products, and other industrial items that require silver inputs. From bearings to electrical connections, silver’s properties made it a desired product.
- 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 bomb
Like gold and silver, platinum trades 24 hours a day on world commodity markets. it tends to fetch a higher price than gold during periods of market rut and political stability simply because it is so much rarer. 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 the harmfulness of emissions after this, jewelry represents the majority 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 determined by car sales and production numbers. “Clean air” legislation could require automakers to install more catalytic converters, increasing demand. But in 2009, American and Japanese automakers began turning to recycled auto catalysts or using more palladium, the reliable and generally less expensive platinum group metal.
- Platinum mines are highly concentrated in just two countries, South Africa and Russia, creating greater potential for cartel-like actions that would support or even artificially increase platinum prices.
Investors should consider that all of these factors serve to make platinum the most volatile of the precious metals.
Filling your treasure chest
Let’s take a look at the options available to those who want to invest in precious metals.
- Commodities: 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 the physical product, so you have no right to claim the metal in the fund. You will not receive the actual delivery of a gold bar or silver coin.
- Common Stocks and Mutual Funds – The shares of precious metal miners are leveraged for price movements in precious metals. Unless you know how mining stocks are valued, it may be wiser to stick to funds with managers with strong performance records.
- Futures and Options – Futures and options markets offer liquidity and leverage to investors who want to place big bets on metals. The greatest potential gains and losses can be made with derivative products.
- Bullion – Coins and bars are strictly for those who have a place to put them like a safe deposit box or safe. Certainly, 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 – Certificates offer investors all the benefits of physical gold ownership without the hassle of transportation and storage. That said, if you’re looking for insurance in a real disaster, certificates are paper only. Don’t expect anyone to take them for something of value.
Will precious metals shine for you?
Precious metals offer unique inflation protection: they have intrinsic value, carry no credit risk, and cannot be inflated. That means you can’t print more of them. They also offer genuine “shake insurance” against financial or political/military turmoil.
From an investment theory standpoint, 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 has its own set of risks. Although they may have a certain degree of safety, there is always some risk when investing in precious metals. Metal prices can drop in times of economic certainty, which hurts people who like to invest heavily in the precious metals market. Selling can be challenging in times of economic volatility, as prices tend to skyrocket. Finding a buyer for physical metals can be difficult.
Another risk to precious metal prices includes the question of supply. When demand skyrockets, existing supply can begin to run out. And that means producers will have to bring more of each metal to market. If there is a shortage of extractable metals, that could put pressure on prices.
The bottom line
Precious metals provide a useful and effective means of diversifying a portfolio. The trick to achieving success with them is knowing your goals and risk profile before you jump in. The volatility of precious metals can be used to accumulate wealth. If left unchecked, it can also lead to ruin.