What to Know Before Investing in Precious Metals
Precious metals have been highly valued for thousands of years because of their appearance and their rarity. The scarcity of these metals drives their value. The three main precious metals most often traded globally are gold, platinum and silver. A fourth precious metal, palladium, is also available for investing and is sold in bar form.
As an investment, precious metals often retain their value and can be tangible commodities, even when the market is volatile. Precious metals can thus play a key role in your investment portfolio. When other traditional investment markets start to resemble a rollercoaster ride, at least the portion of your portfolio that contains precious metals investments often remains stable, even during periods of market fluctuation. Similarly, especially compared to current non-traditional investments like cryptocurrencies, investments in precious metals usually carry much lower risk.
Precious metals can therefore be a good hedge or addition to investment portfolios. There are four primary reasons why investing in precious metals can make sense:
- Historically, precious metals have kept their values in times when investors have lost faith in asset markets and paper currencies, so they are a good way to keep wealth during economically uncertain times.
- Precious metals may be useful to help people escape political upheaval or survive periods of hyperinflation.
- Precious metals have a long history of being highly valued, while paper currency has existed for a significantly shorter period of time.
- Precious metals are fungible, which means that they are both valuable in and of themselves or can be used as money; gold is a conductor, silver and platinum can be used in a variety of metal/electrical objects, or by themselves to make jewelry more valuable (especially when used along with gems).
If you decide to invest in precious metals, you have several different options to consider.
Precious metal Exchange-Traded Funds are one popular investment choice for people who want to invest in precious metals. Precious metal ETFs exist for all of the three primary precious metals. There are also precious metal ETFs for copper, nickel and, to a lesser extent, palladium.
ETFs assign a monetary amount to a precious metal through market valuation, and this metal cost-per- unit is traded by companies on stock exchanges, usually in fractions of an ounce. ETFs valuations are fluid, but commonly accepted like the Stock Market, making the purchase and sale of precious metals convenient, through commonly accepted value. Some ETFs track specific precious metal values only, while others track precious metal commodities and futures collectively, as well.
Collective Precious Metal ETFs
Well-known ETFs that track precious metals collectively include the following:
- PowerShares DB Precious Metals Fund (DBP)
- ETFS Physical Precious Metal Basket Shares (GLTR)
- PowerShares Global Gold and Precious Metals Portfolio (PSAU)
- SPDR S&P Metals & Mining ETF (XME)
Gold is malleable, it conducts electricity and heat, and it does not rust. It is widely used in jewelry, electronics and dentistry, and as a type of currency. Gold is the most popular precious metal in the world. If you want to invest in a Gold ETF, either to hedge against risk or to gain some exposure to it, there are many different Gold ETFs from which you can choose. Some popular Gold ETFs include the following:
- StreetTracks Gold Shares (GLD)
- Global X Gold Explorers ETF (GOEX)
- ProShares UltraShort Gold (GLL)
- Direxion Daily Gold Miners Bear 3x Shares ETF (DUST)
- FactorShares 2X Gold Bull/S&P500 Bear ETF (FSG)
Platinum is not as popular as gold, but it is still a good investment, as it is historically more valuable per ounce than gold. This precious metal is used in many industrial applications, as well as automotive catalysts, computers and jewelry. As with gold, there are several platinum ETFs, some of which are a type of ETF called ETN. An ETN is an Exchange-Traded Note, similar to a bond. Some of the available platinum ETFs and ETNs include the following:
- ETFS Physical Platinum Shares (PPLT)
- First Trust ISE Global Platinum Index Fund (PLTM)
- ETRACS CMCI Long Platinum Total Return ETN (PTM)
- iPath Bloomberg Platinum Subindex ETN (PGM)
- 2X Long Platinum ETN (LPLT)
Like gold, silver has been used as currency and in jewelry for thousands of years. Recently, silver has been growing in popularity as an investment vehicle. There are many different ETFs that track silver, some of which include the following:
- PowerShares DB Silver Fund (DBS)
- Horizons Beta Pro COMEX Silver ETF (HUZ)
- ProShares Ultra Silver ETF (AGQ)
- PureFunds ISE Junior Silver ETF (SILJ)
- ETFS Physical Silver Shares (SIVR)
In addition to these ETFs, there are also ETFs for copper, palladium and nickel. As with any investment, it is important for you to do your own research into the different ETFs that are available. The funds listed here are for example purposes only and should not be treated as recommendations.
Common Stocks and Mutual Funds
Investing in common stocks or mutual funds is another way to add precious metals to your portfolio. One important consideration is how mining stocks are valued. If you don’t understand how these stocks are valued, focus on managed funds that have strong performance track records.
In many funds, the allocations are primarily made to gold mining stocks. However, many also make significant allocations to platinum, silver and other precious metals. The funds may also make small purchases of bullion. Companies that specialize in precious metals can be found around the world. Some major precious metals companies are headquartered in the U.S., South Africa, Australia and Canada. In general, precious metal funds have significantly more volatility than equity funds. Some major precious metals funds include the following:
- Vanguard Precious Metals and Mining Fund (VGPMX)
- Wells Fargo Advantage Precious Metals Fund (EKWAX)
- Fidelity Select Gold Portfolio (FSAGX)
- Gabelli Gold Fund (GOLDX)
- USAA Precious Metals and Minerals Fund (USAGX)
Some people choose to purchase stocks of precious metals mining companies. These shares tend to have volatility similar to the value of the precious metals themselves, so when the prices of the mining companies shares climb or fall, it can mirror the volatility of the metals values. In addition to the metal prices, people who purchase mining shares have other risks.
When you buy stock in a precious metal mining company, you are placing a bet on the production capabilities and the management of the company, not just the value of the metal being mined. If something happens to the management or to the company’s production, your stock may underperform the price action of the precious metals.
Futures and Options
Precious metals futures and options on futures are commonly called “derivatives,” which are highly risky, complex and stressful investments. “Futures” are essentially contracts to purchase a certain amount of precious metals at some agreed-upon time in the future. The contracts, rather than the metals themselves, are traded on the exchanges. They have built-in delivery mechanisms for both the sellers and buyers alike, which means that a futures position can later turn into a physical one at delivery. Buyers and sellers are able to make a margin or a small down payment in order to control a position in precious metals.
Having an option on futures means that you will have the right to buy or sell the precious metals, but you will not be obligated to do so. The relationship between buyers and sellers of options on futures is akin to that between insureds and their insurance companies.
Investors who can withstand a high degree of risk when they are making large bets may enjoy the liquidity and leveraging that is offered by these markets. Beware that investors in futures and options on futures have the greatest risk-to-reward ratio. Because of the high degree of risk involved in futures and options on futures, investment advice should normally be left to professionals who have years of investment experience in this market, rather than a casual investor, or worse, someone with no knowledge of this market who wants to invest in something without doing research.
The most straightforward method of investing in precious metals is to purchase the metal directly, which means that when the transaction is complete, you will actually be holding metal in your hand. Coin dealers around the world offer coins and bars that are made out of silver, gold, platinum and palladium. Gold bars are sold in sizes ranging from one gram up to 400 troy-ounces. Other precious metals are also available in a range of weights and sizes. Governments around the world mint coins out of precious metals that range in weight. The value of these coins changes along with the prices of the metals from which they are minted.
Coins and bars can be traded at discounts or at premiums related to the metal prices, depending on the demand for and the supply of the coins and bars. If you want to purchase precious metals bars or coins, it is very important to make certain that you are dealing with a reputable company, and that pricing is clearly understandable. You should compare prices in other markets, and be especially cautious about any company that is offering the metals at prices substantially below market as this can be an indication that the offer is fraudulent. Avoid any dealer who makes you feel uncomfortable. Research the companies and select one that will sell precious metals to you and will also buy them back if you choose to sell.
A major drawback of investing in bullion directly is storage. Precious metals bars need significant storage space and security. If you believe that something bad might happen which would make coins and bullion even more valuable, like a catastrophic collapse of society rendering paper money worthless, purchasing bars and coins may be a good option. If you are instead looking for a long-term investment that doesn’t depend on an Armageddon, consider other investment vehicles for owning precious metals instead of actual bars and coins.
The inconvenience of handling and storing precious metals leads some investors to turn to certificates. Some companies will store the precious metals for you, in exchange for you taking an ownership certificate. Typically, these companies pool all of the assets owned by all of their investors. These pooled accounts involve storing precious metals in bulk. For example, a pooled account may hold many gold bars. A single investor does not own a particular bar. Rather, all of the account holders have percentages of interest in the bulk precious metals that correspond to their investments. Less commonly, owners may have allocated portions that are stored separately, which may offer a little more protection.
Many risks are involved in owning certificates of silver or gold in allocated or pooled accounts. If the company declares bankruptcy or is sued, the metals that the company holds may have to be sold in order to satisfy the judgment or creditors. Owners of these certificate accounts may lose all of their holdings if the company is forced to go out of business.
Over the years, a large number of companies that have established certificate programs have declared bankruptcy, which has left little metal to honor the certificates. Today there are more safeguards than ever before, but it is much safer for the buyers to have the physical metal delivered to them. When you choose to take possession of your precious metals, you eliminate the risk involved with third parties. You also won’t have to be concerned about the company’s viability or integrity.
While certificates give you the benefits of owning precious metals without the worries of storage and handling, they are no different than paper currency in that they are simply papers that indicate your ownership, much like the gold standard that we had in the United States until the 1960s. Further limiting, the certificates might be limited in value to the facility in which you participate. This means you will be unable to trade your certificates for anything of value elsewhere.
Whether you are trying to choose an investment vehicle to purchase precious metals, or the precious metal itself, conduct careful research to gain a better understanding of the various pros and cons of each. Accessing the physical market is the most direct method to invest in precious metals, but as we discovered above, is far from the only way to invest. Other instruments offer benefits like liquidity and ease of ownership in varying degrees. Ultimately, the most important considerations will be managing the risks of both the possibly volatile, intrinsic value of the metal, and the issues specific to metal ownership, or put simply, understanding exactly what you are buying and selling.