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As an investor, a diversified portfolio is an integral part of your success. If you’re a beginner, you might assume investments are limited to stocks, bonds, mutual funds or cryptocurrency. However, investable opportunities exist beyond these equities and other options like real estate. Specifically, investing in precious metals is one of these opportunities that all investors should be familiar with.
Read on to learn why and how investing in precious metals can be a valuable part of a well-diversified and successful portfolio.
Why invest in precious metals?
Investing in precious metals can be a sound financial decision for a few reasons:
- Precious metals tend to hold their value well. They are largely scarce and fixed resources. Because of this scarcity, it's unlikely that the value of precious metals would significantly decrease over time, regardless of economic trends and monetary policies. Historically, these metals have proven to be one of the best stores of value.
- Precious metals can be used in many ways. There's far more to precious metals than jewelry. In fact, there are many industrial applications for these metals. From use in medical devices and vehicles to semiconductors and solar panels, precious metals like gold, silver, platinum and palladium are a part of our everyday lives.
- Precious metals are tangible assets. Unlike non-fungible tokens, stocks and other digital or virtual assets, you can invest in tangible precious metals such as bullion and jewelry.
Before you begin investing, make sure you’re familiar with the different types of precious metals, the various investment strategies you can use and the market factors that help determine their prices.
Types of precious metals
Gold, silver, palladium and platinum are a few of the most common precious metals purchased by investors. The following section provides an overview of each.
When it comes to precious metals, one of the first questions you may ask yourself is how to invest in gold. One of the most common precious metals found in investment portfolios, gold is durable and malleable at high temperatures, making it an attractive choice for both personal and commercial use. Gold bullion can be molded into numerous forms, including coins, bars, rounds and ingots. The precious metal is also highly coveted as a status symbol, which is why it’s commonly found in jewelry.
The price of gold largely depends on how much gold is available on the market, current interest rates and other monetary policies as well as investor sentiment about inflation. The last point is particularly important since one of the primary reasons people invest in gold is because it — and precious metals in general — are viewed as hedges against rising consumer prices.
Like gold, investing in silver is a common practice for investors interested in precious metals. Silver also has uses in both jewelry and as currency, is highly malleable and it can sustain high temperatures, making it useful in many industrial applications. The price of silver is dictated by the market and depends on numerous factors, just like other precious metals. Silver is commonly used in industrial applications, ranging from batteries and appliances to solar panels and medicine. Because of its wide array of uses and lower price point compared to gold, it can be an attractive option to investors new to precious metals.
Looking for a metal commodity that's rarer than gold or silver? If so, platinum investments might be a good choice for you. Platinum — like gold and silver — is priced and traded on the market. However, there's far less of it to go around, and this can drive up the price. However, like gold and silver, platinum is malleable, strong and a good electric conductor.
You can find platinum in everything from semiconductors and cars to wedding rings and necklaces. But because it isn’t as readily available as other precious metals, the price of platinum can be more volatile. Further affecting the price is the fact that the majority of platinum is mined in just two counties: South Africa and Canada. Therefore, sourcing the precious metal can be difficult, which makes the price highly susceptible to geopolitical conditions. By extension, many platinum stocks are in companies located in those two countries.
Outside of the media attention it received during the pandemic, palladium isn't as well-known as gold, silver or platinum. That doesn't mean it's not a viable investment option, though. When palladium hit its all-time high in 2021, catalytic converter thefts skyrocketed as thieves tried to get their hands on the precious metal. The price has since come down, but palladium still has plenty of applications, including currency, fuel cells, jewelry, dental fillings and crowns as well as in the hydrogenation of unsaturated hydrocarbons.
As with platinum, there are a limited number of palladium mines in the world, although the metal is more readily available. Similar to platinum, just two countries produce the bulk of global supply, with Russia and South Africa accounting for 84% of output. Like other precious metals, palladium’s price is driven by the market and is vulnerable to external business, geopolitical and environmental factors. For example, its aforementioned price surge coincided with Russia’s 2022 invasion of Ukraine, over concerns about Russia’s ability to meet global demand.
How to invest in precious metals
There are several ways you can go about Investing in precious metals. This section provides those details:
Coins and bullion
If you want an investment that you can see, touch and hold, purchasing bullion forms of precious metals, such as coins, bars, rounds and ingots, is the best approach. These physical assets can be directly purchased from local currency exchanges or from reputable online dealers. The value of bullion varies depending on the type of metal, its age, rarity and weight, each of which can impact how much you want to invest.
Before you purchase, you'll want to research how to buy gold and other precious metals to make sure you're buying from a reputable dealer.
Mining company stocks and mutual funds
As part of your portfolio, you can invest in mining company stocks and mutual funds. This is a good choice for investors experienced in buying and selling traditional equities and who are aware of the factors driving overall market activity, including macroeconomic trends and natural and political events. Mining company stocks and mutual funds can be purchased and sold just as stocks in other industries and sectors. It’s important to be mindful that the price of these stocks and funds can be influenced more by market pressures than the price of the underlying precious metal.
By using the best investment apps available today, you can find numerous stocks of companies leveraged to gold, as well as gold mutual funds.
Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are a kind of security in which investors pool their money into funds that own financial assets such as stocks, bonds, currencies, futures contracts and/or commodities like gold bullion. For precious metals ETFs, these funds can include holdings of the physical metals, shares of mining and production companies or both physical metals and shares of companies.
To learn more, read our guide to the best gold ETFs.
Investing in futures is a common practice with commodities. Simply put, when you invest in futures, you agree to purchase assets at an agreed-upon price at a later date. If you're willing to take on elevated risk, investing in precious metals futures can result in a lucrative outcome. However, it can also lead to considerable losses stemming from its high-level risk. Trading futures is typically a strategy reserved for experienced or professional investors.
Individual retirement accounts (IRAs)
If you're hoping to use precious metal investments to fund your retirement, you can do so through various individual retirement accounts (IRAs). First learn how to buy gold in an IRA or how precious metal IRAs can help you achieve that goal. These retirement accounts are self-directed, and they’re a common choice for retirement savings because precious metals are historically stable investments that appreciate in value over time. Since IRAs are typically long-term investment accounts, investing in precious metals through IRAs can be an attractive choice for young investors.
Precious metals prices
Precious metals prices are vulnerable to a handful of factors. Consider the following before deciding if investing in precious metals is a good fit for your portfolio:
- Scarcity and availability: As a physical asset that isn't naturally regenerated, there’s a finite supply of precious metals. Furthermore, obtaining the metals isn't easy. They must be extracted from mines, treated, tested, shipped and molded. This intensive process — as well as the limited availability of each metal — contributes to their prices.
- Natural events: Because precious metals are mined, their prices can be impacted by natural events. For example, an earthquake in the location of a mine can cause damage to the mine, ultimately delaying operations. Additionally, natural events not directly related to the mine itself could also have a ripple effect. A hurricane can cause international shipping delays, which can result in market volatility that impacts precious metals’ prices.
- Geopolitical activity: Like natural events, geopolitical activity can impact the price of precious metals. Political unrest, wars, shifts in political leadership and even policy changes can all have far-reaching effects on the market.
- Market trends: Precious metals — like other commodities — are impacted by market swings. Market prices can change dramatically from day to day and hour to hour, and this can impact investments such as stocks, futures, ETFs and IRAs.
- Technology breakthroughs: Precious metals can become more or less valuable as technologists create new ways to solve old problems. If automobile engineers develop a cheaper, more effective alternative to palladium in catalytic converters, for example, the price of palladium may drop as demand for it decreases. Similarly, if human-made materials can replace common commercial use cases for gold and silver, the value of these precious metals could be impacted.
Despite these potential vulnerabilities, precious metals are seen as more stable investments when compared to other commodities and stocks, particularly when looking at holding long-term value.
Benefits of investing in precious metals
There are a few key benefits to investing in precious metals that investors should consider. The following section details some of them:
- Metals are relatively easy to purchase. There are plenty of resources available to teach new investors how to buy silver, gold and other precious metals. Whether you prefer a physical investment through silver coins or gold bars, a mining stock or trading futures, there are many options available for you to add precious metals to your portfolio.
- Precious metal investments generally have a relatively low barrier to entry. First-time or novice investors without much money to invest can enter the precious metals market without significant capital being necessitated. Precious metal investors can start by purchasing a few stocks, opening a small IRA or purchasing gold bullion or platinum jewelry.
- Precious metals are relatively stable. Uses for gold, silver, palladium and platinum are growing. These resources are physical, finite and have a variety of applications. While precious metal investments are not a surefire bet for a positive return, they’re relatively stable in the long term given their manifold uses.
- Precious metals diversify your investments. Adding precious metals to your investment portfolio is a great way to diversify your holdings. Diversification helps you offset losses from other asset classes, which can reduce your overall risk.
As with any financial decision, carefully consider both the pros and cons of precious metals before investing in them.
Investing in precious metals FAQs
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Summary of Money’s Investing in Precious Metals
When building your investment portfolio, considering the addition of precious metals can be a valuable strategy for investors of all experience levels and wealth amounts. Investors new to precious metals should understand the major types of precious metals, the various ways you can invest in them, the benefits and risks of each method and the factors that can cause price fluctuations. Precious metals can be a valuable part of your portfolio, and adding them can help you hedge against inflation and diversify your holdings, thereby reducing your overall risk.