Are you interested in investing in precious metals but aren’t sure how to get started?
Many people choose to invest in precious metals because they offer unique inflationary protection. They have intrinsic value, don’t come with any credit risk, and can’t be inflated. Unlike money, you can’t print more precious metals.
Their market value also isn’t correlated with how stocks and bonds are doing, so they offer a good way to diversify your portfolio. However, to achieve success with precious metal investments, you need to know your goals and the risk of your profile before you jump in.
Let’s talk about everything you need to know about investing in precious metals.
Know Your Options
When most people think of investing in precious metals, they think of investing in gold. However, gold isn’t the only precious metal worth investing in. Here are your top options:
There’s a reason gold is one of the most popular precious metals to invest in – it’s durable, malleable, and has some industrial applications. Gold’s value is determined by the market 24 hours a day, 7 days a week.
Unlike other assets, gold’s value isn’t totally affected by the laws of supplies and demand. Its primary function is sentiment, which is why it often doesn’t follow the same fluctuations as stocks and bonds. Often, when hoarders feel like selling their gold, the price drops. When they want to buy more gold, the new supply gets quickly absorbed.
Many people choose to invest in gold because when banks and other financial institutions appear to be unstable, gold is considered a safe store of value.
Silver operates differently than gold, as its price fluctuates according to its perceived value and the role it has as an industrial metal. Because of this, silver is more volatile than gold.
Silver used to be a much more popular investment option when it had more industrial uses. For example, photographers used to use silver to create film. But, thanks to the creation of the digital camera, it’s not used nearly as often in this capacity.
Just like gold and silver, platinum coins are also traded on the global commodities market. It often fetches a higher price than gold during periods of political instability. However, far less platinum is pulled from the ground annually than gold.
Like silver, platinum is an industrial metal. Demand for platinum is tied to the automotive market and jewelry market. Often, platinum prices are determined by production numbers and auto sales.
Understand the Challenges
Just like any other type of investment, precious metal investing comes with its challenges. One of the biggest challenges with precious metal investing is the lack of cash flow.
When you invest in precious metal, it just sits there. All you can do is hope the precious metal goes up in price. Additionally, you have to deal with transaction costs when investing in precious metals.
If you purchase physical gold, there’s a company in the middle making a profit. The company buys the gold at wholesale prices, turns it into fine-investment grade gold, then sells it at retail prices.
You also have to deal with shipping costs, storage costs, security costs, and the risk of theft. However, you can avoid this issue somewhat by investing in precious metal ETFs (exchange-traded funds). Precious metal ETFs come with an expense ratio that covers the administrative and security costs of managing the fund.
Know the Ways to Invest
There are several different ways to invest in precious metals, and it’s important to understand the benefits and drawbacks of each option before you make any moves:
Buying Physical Metal
The oldest method for investing in precious metals is to buy some physical coins or bars. This is the safest, least complex way to invest in precious metals. All you need to do is buy the metals from a reputable vendor and then store them in a safe place.
However, figuring out where to store your metals and how to keep them safe can become tricky, especially if you’re investing in large amounts. Many people choose to store their precious metals in an offsite location with 24/7 security but keep in mind, you’ll need to pay regular storage fees that will eat away at your investment.
ETFs and Options
If you don’t want to deal with physically keeping track of your precious metals, ETFs and options make a great alternative. The great thing about ETFs is that they’re extremely liquid, meaning you can easily buy and sell them within your brokerage account.
This allows you to rebalance your portfolio in an easy and hassle-free way. However, keep in mind that most ETFs aren’t redeemable for physical gold or silver, and you’ll never be able to physically hold them in your hand. If you want the assurance of actually owning the metal, ETFs may not be your best bet.
Invest in Mining Companies
Another way to dip your toes into the precious metal market is to invest in a mining company. The biggest advantage of investing in a mining company is that you’ll receive dividends for your profits and therefore, have access to cash flow.
However, investing in mining companies comes with its own unique set of risks. If you own physical gold and the price drops dramatically, you can simply wait out the dry spell. But if you invest in a mining company and the price of gold stays low for long enough, the company might go bankrupt, and you could lose out on all of your money.
Are You Ready to Invest in Precious Metals?
Now that you’ve read this guide on investing in precious metals, it’s time to start making moves. If you’re completely new to the game, we recommend investing in small amounts until you get the hang of things.
And, check back in with our blog for more investment tips!