Precious metals, which are considered to be gold and silver, among others, have been always on investors’ list of interest. Are they worth investing in? What makes them so volatile? Let’s find the answers.
You can add precious metals to your portfolio in many ways. They can serve well as portfolio diversifier and protection from inflation.
You can buy gold, silver, platinum, palladium or mutual funds, mining company stocks and metal ETFs which are the derivatives markets.
Gold is one of the precious metals very well known to all. It can be characterised as durable, malleable and able to conduct electricity and heat. It is used not only as a currency form and a jewellery base but also in electronics and dentistry.
A gold’s value becomes defined by the market 24 hours a day, seven days a week. It is primarily a function of sentiment. The laws of supply and demand have less influence on its price. The reason behind this is that the quantity of gold deposited above the ground is smaller than the supply of new mines. So the price falls when the gold prospectors want to sell and it rises when they want to purchase.
Why do people want to buy gold?
First, they see it as more stable than money and banks. Second, its value is maintained even when the real rates of return in bond, equity or real estate markets are negative. It is also very much wanted in times of political crisis and wars. It is a convenient way of storing a lifetime’s savings and then trading it for shelter or food supplies.
The silver price is more volatile because it is used as a store of value and as a manufacturing metal. Both have an impact on its price. And the price experience especially great movements when modern innovations are introduced.
For example, silver was used widely in the photography business until the digital camera was created. When the need for electrical appliances and medical products increased, the demand for silver rose as well.
During periods of market and political stability, platinum often reaches a greater price than gold. There is less platinum pulled annually from the ground than gold. It makes it a much rarer metal. What else influenced platinum’s price?
Platinum is likewise utilised in industry. Mostly in autocatalysts that minimise hazardous emissions, also for jewellery making or in computer enterprise.
The price of platinum rises when the demand rises as for instance when clean air legislation led to increased requirements for catalytic converters. This was the case until the carmakers began to use recycles catalysts and less expensive materials such as palladium.
Another thing is that platinum mines are to be found mainly in Russia and South Africa. It gives them some kind of control over the price.
Platinum is the most volatile precious metal because of all the above determinants.
Palladium is less known as the three above, however, it is broadly used in industry. This shiny silvery metal has found application, among others, in electronics, medicine, dentistry or jewellery. The palladium mines are mostly discovered in Russia, the United States, Canada and South Africa.
Palladium was first used in jewellery in 1939. It was discovered that in combination with yellow gold, it produces a stronger metal than white gold.
In 1967 the first palladium coin was issued by the government of Tonga.
Palladium is more durable (12.6% harder) than platinum and so it applies to catalytic converters.
As I mentioned in the beginning, there are a few more ways to buy precious metals. Let’s see what they are.
Mutual Funds and Common Stocks
The price of precious metal mining companies shares is dependent on movements in precious metals prices. It might be a good idea to rely on a solid funds manager.
You can buy gold, silver and platinum through exchange-traded funds. This, however, does not provide you with metal physically so you will not have a silver coin nor gold bar.
Certificates are papers that confirm your ownership of physical gold without the need to worry about shipping and storage.
Futures, Options and CFDs
Great profits can be gained with these. But great losses as well, as liquidity and leverage are granted in the futures, options and CFD markets. So be cautious.
Here you get physical coins or bars. So if you have a safe place to store them, and you expect the worst, that is the option for you.
Pros and cons of investing in precious metals
Investing in precious metals gives you protection against inflation and political or financial upheavals. Precious metals have intrinsic value.
They are a great way to diversify your portfolio as they have a negative or low correlation to the assets from other classes like bonds or stocks.
All kinds of investments carry some risk including precious metals. They are quite secure investments however, the price may change in periods of economic uncertainty and technical imbalances.
Precious metals may become a very profitable investment to you. Think about them if you wish to diversify your portfolio. Nevertheless, you should always consider your risk tolerance and investment objectives.
You can buy precious metals physically or trade them in derivates markets. I hope this article has brought you closer to understanding the subject of investing in them.
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I wish you profitable investments!