An investment in precious metals like gold, silver, and platinum can stabilize your investment portfolio during times of economic uncertainty. It is also possible to earn high returns with investing in precious metals if you time your purchases correctly. Even if you buy when prices are high, purchasing silver bullion or gold bars will probably provide you with substantial profits in the long-term.

The economic value of precious metals

James Webb Space Telescope Coated in Gold
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Why do precious metal prices follow a consistently upward trend? It’s essentially a question of supply and demand. Precious metals are relatively scarce. Many of them have high economic value because they are used in various industrial applications. Historically, gold bullion or silver coins can give you a substantial return. In fact, there are several different precious metals that you can think of including in your investment portfolio.

Top 4 precious metals for your portfolio

Investing in Precious Metals
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Here’s a brief description of the most common precious metals to invest in:

Gold

Traditionally, gold has been seen as a safe haven investment. When the economy slows or when the political situation is uncertain, investors turn to this precious metal. At the time of the global financial crisis in 2008, the stock market crashed, leading to large losses for many investors. Between December 2007 and February 2009, the Dow Jones Industrial Average, which is a stock market index that includes 30 of the largest US companies, fell from a level of 13,264 to 7,062. That’s a loss of 47% of its value in a 15-month period.

Gold Price Performance 2000 - 2017
Image Source: Bloomberg

In the same timeframe, gold prices increased by 17%. The chart above illustrates how an investment in gold has provided far superior returns to the stock market since 2000. As mentioned, historically gold is considered a safe haven investment. This precious metal performs especially well in times of:

  • High inflation (or even hyperinflation) where investors use gold as store of value.
  • Economic or financial crisis where banks and regular currencies may become unstable.
  • War or political crisis where people use gold as medium of exchange and store of value.

Silver

Silver Bullion
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As an investment, silver can be considered to be very similar to gold. Both precious metals are regarded as a store of value and a hedge against inflation. However, there is one important difference between gold and silver. Gold has a limited number of practical applications and it’s way more expensive. It is extensively used in making jewelry and gold coins. It is also used in dental fillings and smartphones. But that’s about it.

Silver, on the hand, has a wide range of industrial applications. Before digital cameras became popular, the precious metal was extensively used in the photography industry. Therefore, silver was an important raw material in the manufacture of silver-based photographic film.

Although demand for this application has dropped, a number of other industries require large quantities of this precious metal. It is used in batteries, superconductor applications, and the manufacture of microcircuits. In recent years, there has been an increase in demand from the solar power industry. Silver also has applications in medicine and consumer products. This wide range of industrial applications makes silver an interesting investment.

Platinum

Platinum Nugget
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This precious metal is used extensively in the manufacture of jewelry and as a catalyst in the manufacture of fertilizers and plastics. However, the greatest demand for platinum comes from the auto industry. It is used as an auto-catalyst in diesel vehicles. The precious metal helps to convert diesel exhaust into carbon dioxide and water vapor. However, platinum’s price has seen a steep decline because the auto industry is moving away from diesel as a fuel source.

Platinum prices have been trending downwards for years. In May 2008, spot prices for platinum crossed the $2,000 per ounce mark. Since then, prices have been in decline. Currently, platinum is trading at less than $1,000 per ounce. Some experts think that at the current levels, platinum presents a buying opportunity. However, that could be a contrarian investment. You should invest in this precious metal only if you are willing to take on a high degree of risk.

Palladium

Platinum’s loss has been palladium’s gain. Prices of the precious metal have skyrocketed in recent times. A year ago, palladium was trading at $775 per ounce. Its price in April 2018, is in excess of $1,000, a gain of almost 30% in a year. What has led to this rapid increase? Palladium is a substitute for platinum in the auto industry. Gasoline powered cars, which traditionally used platinum in their catalytic converters, have switched over to palladium. Today, about 78% of the world’s palladium is utilized by auto manufacturers.

How to invest in precious metals

Gold Investment
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New investors are often confused about how to buy precious metals. Is it a good idea to buy bullion coins? Will investing at the current gold price provide a high rate of return? Is it advisable to purchase precious metals online? It’s important that you understand that if you plan to invest in precious metals, you must exercise a certain degree of caution. As with any investment, you need to do your due diligence and understand the potential risks.

If you buy gold coins or any other physical metal like silver, you will be exposing yourself to investment risk. Valuations may fall after you make your purchase. In addition to the possibility of losing money because of a decline in prices, there is another risk that you are exposed to. You could be cheated if you buy, say, physical gold from an unverified source. Here are some precautions that you could consider taking if you plan to buy gold.

Buying gold bullion

If you are planning to invest in physical gold, it’s a good idea to buy from an LMBA (London Bullion Market Association) approved dealer. LMBA sets standards for precious metals trading around the world. LMBA has 144 member companies located in 30 countries around the world.

Gold Bullion
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If you are dealing with a trusted supplier, you don’t even have to take delivery of the physical gold that you buy. It can remain in the custody of the LMBA approved supplier. You can also sell your gold directly to a dealer if it is stored in an LMBA approved vault. But what if you are planning to invest in gold that you plan to purchase from an unfamiliar vendor? How do you ensure that you are getting what you are paying for?

  • You may want to carry your own digital scale with you. Gold is weighed in troy ounces. One troy ounce is equal to 31.1 grams.
  • If you are planning to buy gold coins, restrict your purchases to government-minted bullion coins. You can visit the official website of the coin-issuing authority to check the dimensions of these coins.
  • The price that you will pay for a gold coin to a dealer will be above the gold spot price. Smaller gold coins attract larger mark-ups. Be prepared to pay 1.5% to 10% more than the spot price. If you are offered a rate that is below the spot price, it is likely that you are being cheated.
  • One final check that you can conduct is to verify if the gold that you are buying is attracted to a magnet. Gold is not magnetic. It’s a precious metal that won’t stick to a magnet.

Mining stocks

Gold Mining
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What if you don’t want to go through the trouble of investing in precious metals by buying and storing gold or silver? If you take the route of a physical investment in precious metals, you have to take certain precautions to ensure that you do not get cheated. You also have to arrange to keep your bullion or coins in a safe location and insure them.

One alternative option is to invest in precious metal stocks instead. Buying stocks in a gold mining company or a firm that mines diamonds can be highly profitable if you make the correct choice. Mining stocks like Barrick Gold or Anglo American have one other great advantage. They can pay you a regular dividend. This can give you a steady stream of income. Remember that you will not get this benefit from the physical gold or silver that you buy and store. That’s one of the disadvantages of investing in precious metals in their physical form.

Freeport-McMoRan - Chart 04.2017 - 04.2018
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Take the example of Freeport-McMoRan Copper & Gold Inc. This international mining company headquartered in Phoenix, Arizona is a producer of copper, gold, and molybdenum, which is a brittle silver-grey metal used in some alloy steels. Freeport-McMoRan has seen its share price escalate from $12.51 on April 20, 2017, to $19.57, a year later. That’s an increase of 56% in a year.

Remember that mining stocks are a leveraged play on precious metal prices. If conditions are right, you can make high returns by buying the shares of a company that produces precious metals. But it can work the other way as well. Say, the silver price falls by 10%. A company that produces silver may see a far greater decline than 10% in its share price. That is a risk that you have to take when buying precious metal stocks.

ETFs and mutual funds

Investing / Trading Graph
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Precious metal exchange-traded funds (ETFs) invest in gold, silver, platinum, and palladium. They take futures-based exposure as well as physical exposure. Physical exposure involves the ETF using the funds that it collects to buy a physical precious metal, say gold.

An ETF may also invest in precious metals futures contracts. This involves entering into contracts for delivery of gold or silver at an agreed-upon price in the future. These contracts offer greater financial leverage and therefore can provide higher returns. But they also carry a greater degree of risk.

SPDR Gold Shares is a gold ETF that offers investors a cost-efficient and secure way to invest in the precious metal. It currently owns almost 28 million ounces of gold valued at over $37 billion on behalf of its investors. It has provided a return of 4.82% in the year to April 20, 2018.

You also have the option of investing in precious metal investment funds that are structured as mutual funds. A mutual fund is similar to an ETF but it doesn’t trade on the stock exchange. Therefore, your buy / sell transactions have to be entered into with the mutual fund company.

Why your investment portfolio should include precious metals

Trading Long/Short
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It is absolutely essential that you diversify your investments among different asset classes. Precious metals can prevent your portfolio from losing value when there is a decline in stock market values. Which are the best precious metals to invest in? That can be a difficult choice to make, but it’s prudent to stay with the favorites like gold and silver. If you are willing to take on a greater degree of risk, you can venture into palladium as investment.

If you decide to stay with, say, gold, buying gold stocks could be a good option. But here again, it’s not easy to choose the company that you should invest in. A strategy that you can use is to track a gold index like the NYSE Arca Gold BUGS (Basket of Unhedged Gold Stocks) Index. This is also referred to as the HUI index. The HUI index tracks 16 companies involved in gold mining. The VanEck Vectors Gold Miners ETF is a fund that tracks the HUI index. You can consider investing in this ETF if you want to diversify your gold mining stock holdings.

Alternative metals as interesting investment opportunities

Profit / Bar Chart
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So far we’ve taken a look at investments in common precious metals like gold or silver. However, apart from investing in precious metals, there also are other metals that bring interesting investment opportunities. We’ll now cover a few metals that are chemically not precious metals, but still highly interesting for investors:

Lithium

Tesla Supercharger
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Lithium is a soft silvery-white metal. Under standard conditions, it is the lightest metal and the lightest solid element. This industrial metal has seen a sharp increase in demand as it is used in the manufacture of lithium-ion batteries, the power source for electric cars. The price of lithium has doubled to more than $21,000 a ton in the last two years. If this precious metal had found a place in your investment portfolio, you would have made a significant return.

Cobalt

Cobalt Chart - 04.2018
Image Source: Mining.com

Cobalt is used to make magnets and also finds application in jet engines and gas turbine generators. But in recent times, it has seen an upsurge in demand as lithium batteries utilize the precious metal. In 2006, only 20% of the world’s cobalt production went towards the manufacture of lithium-ion batteries. By 2016, an estimated 51% was being used for this purpose.

According to projections that are based on the expected increase in the production of electric vehicles, 62% of global cobalt output will go into making lithium-ion batteries by 2020. What effect has this had on cobalt prices? Valuations have zoomed upwards in the last two years. Since the beginning of 2016, cobalt prices have increased by over 300%. Currently, prices are in the region of $90,000 per ton.

Conclusion: Investing in precious metals

A final word of caution before you begin investing in precious metals. Valuations can be volatile and it is quite possible that you could see gold market prices move sharply upwards or downwards after you make your purchase. That could be true of other precious metals too. What should you do when that happens? It is advisable to stay calm. Don’t be in a hurry to cash in on your profits or to limit your losses.

Precious metal purchases should be viewed as long-term investments. Look at them as a type of insurance policy. If your other investments, especially your stocks, perform poorly, your gold or other precious metal holdings could serve to cushion your losses. But for this to happen, it is important to stay invested for the long-term. What are your thoughts on precious metals? Have you ever invested in this asset class? Let us know in the comments below!

3 Comments

  1. Nice article and great info. Thanks! I haven’t heard about cobalt as investment before and I was quite surprised. Lithium is widely used in the battery building and as we all know, the batteries of phones and other gadgets are getting bigger with more capacity. So the demand for it will increase.

      • Not only lithium is mined in Kazakhstan. The country has many mining companies. Besides lithium there is silver, gold and other metal ores.

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