Investing in precious metals is not as easy as it may sound, especially for beginners. When some investors hear about the benefits of precious metals, such as their hedge against inflation, they may want to put their money there quickly. For sensible investors, they may be keen to evaluate the details about precious metals before making any investment.
Just like any other investment, precious metals also require you to make some key considerations. This will determine how successful your investment should be. The goal of any investment is always to make profits, so you should keep this goal in mind when choosing. As earlier stated, beginners could find this challenging at first, but it’ll be seamless with the right resources and guidance.
What To Consider
Precious metals are a good investment and will protect your portfolio during inflationary times. However, to get the most benefits, you need to get it right by taking the following considerations:
1. Investment Providers
Many service providers provide gold individual retirement account (IRA) services that allow investing in gold and other precious metals. The role of the IRA is to diversify your portfolio, offer long-term value protection, and offer several tax benefits as long as you don’t take physical possession of the precious metals.
However, before investing in a gold IRA, you need to look for the right service provider. There are resources and sites such as Learn About Gold that advises picking based on service history, experience, reputation and reviews, and customer service. While the many service providers can make it challenging to pick an excellent one, these factors will help narrow down to a few of them. Then, you can consider other factors such as fees.
2. Investment Options
When investing in precious metals, there are several options to choose from. Each of these investment options will have different benefits and downsides that you should know beforehand. Here are the options:
Physical Precious Metals
All precious metals exist in physical form, and this has been there for centuries and is the oldest investment option available. This is where you purchase the metals in bullions, bars, coins, or jewelry and get them in their physical form.
Investors can choose to get certificates instead of physical precious metals. The certificate represents the amount of physical precious metals held by a company on your behalf. It has all the benefits of physical precious metals without the storage and other logistic hassles. However, certificates can’t be used as securities in cases of insurance or loans.
Futures And Options
Some investors prefer to make bets on the prices of precious metals. This can be done through futures and options where there’s a legally binding agreement for the delivery of precious metals at an agreed-upon price in the future. The trades happen in a centralized exchange that offers flexibility and more financial leverage.
In futures contracts, investors always hold a long position and a short position. In the long position, there’s an obligation to accept the delivery of the precious metal or buy. In the short position, there’s an obligation to make the delivery or sell. However, an investor in the long position can initiate a short position before the delivery date.
Commodity Exchange Traded Funds (ETFs)
Precious metals ETFs work as and trade like individual stocks. The intend of the investors is not to own physical precious metals but to track the prices of the metals. The ETFs’ share prices will change throughout the trading day. Investors can buy and sell to generate more income or hedge or offset risk in the portfolio.
Investors can also pool funds together in a mutual fund scheme managed by a fund manager, who’ll track price movements like in ETF. However, in mutual funds, trades are only made when the market closes at the end of the day.
Investors can actively participate in this scheme by looking into how they can add value to their investment. This is different from ETF, where they only follow price indexes passively.
3. Federal IRA Regulations
When investing in physical precious metals in a self-directed account, some regulations will guide how the precious metals should be a permissible IRA investment. So, as an investor, the following regulations are a key consideration to take:
- Gold should be 99.5% pure, while silver should be 99.9% pure. Platinum and palladium should be 99.95% pure.
- Bullion coins should be in uncirculated form and free from any damage.
- Small bullion bars should be manufactured to the exact weight specifications.
- Refiners and manufacturers for the bars, rounds, and coins must be certified by the federally-recognized bodies or the national government mint. They should also meet the minimum fineness requirements.
- Proof coins should include the certificate of authenticity and must be in original mint packaging.
Once you follow these guidelines, you can make your investment without encountering any challenges.
Before investing in precious metals, or even after investing, you should be aware of costs that may reduce your returns. Here are some of the significant costs you should know about:
- Account Application Costs: An IRA custodian can charge you an application fee during the processing of a new account.
- Transaction Costs: Any transaction such as purchasing or selling precious metals within an IRA account is usually subjected to a transaction cost.
- Annual Account Fee: This is often common in mutual funds and IRA accounts, where the managers can charge an annual fee for maintaining the account and administration costs.
- Taxes: The amount of tax owed in precious metals is based on a cost basis, or the amount you paid for the metal. One main ta implication for the precious metal is capital gain tax.This is the tax subjected mostly to physical precious metals when a capital gain is realized after a sale. For other investment options such as ETF and mutual funds, the income generated is factored into regular income and taxed as normal income.
By considering taxes and other costs, then you’ll know if the investment is worth it or not.
Precious metals are a good investment because they can protect your portfolio and hedge your investment against inflation. However, it’s not as straightforward as many people may assume. There are several factors you should take into consideration before you make a decision. As discussed in this article, those aspects are essential and can determine how successful your investment is.