Precious metals are attractive – both aesthetically and as investment assets. Trading precious metals as investment assets has gained prominence recently, with global economies still sputtering from the coronavirus’s effects.
In this piece, we’ll look at some of the most prominent precious metals available and how you can begin investing in them today.
Table of contents
What are Precious Metals?
Precious metals are rare metals with high economic value. Their value hinges on several factors, including their use in industrial and technological activities, their rarity, and their history of serving as hedge assets.
Trading in precious metals has become popular over the past few years, with many investors looking to diversify their portfolios and avoid the broader effects of economic crises.
As expected, gold is the most high-profile precious metal available. It has consistently generated attention from media and market participants, delivering sizable returns for investors over decades. Gold’s peak inflation-adjusted price came in February 1980, when it sold for $2,200 an ounce. The asset eventually dropped to lows around $400 in 2001, although it has steadily risen since then. Now, it sells around the $1,800 mark.
A Quick History of Precious Metals and Their Utility
For decades, precious metals have played significant roles in the global economy. Fiat currencies are either minted using these metals or backed up by them in some way. However, more investors today consider precious metals as an investment or financial assets.
As an investment, precious metals are sought for their diversification properties. They function as relatively stable stores of value, primarily in periods of economic uncertainty. There is also the fact that precious metals remain in high demand due to their use in jewelry, consumer electronics like microchips.
Gold is the most popular precious metal available, followed by silver. There are other options – including iridium and palladium – which have seen significant use in industrial processes.
The Most Prominent Precious Metals
To no one’s surprise, gold is the father of all precious metals. Gold is unique for its sturdiness as it doesn’t rust or corrode. The metal is also highly malleable, and it functions as an excellent conductor of electricity and heat.
While gold has industrial applications (in electronics, dentistry, and more), it is primarily known as a material for jewelry and a reserve currency. Gold’s value is determined by a number of factors that can be summed up in two words—demand and supply.
It’s worth noting that gold trades more on sentiment than the conventional laws of demand and supply. Since the size of above-ground gold vastly outweighs the value of gold yet to be mined, hoarders can easily choose not to sell and cause a hike in gold’s price.
Silver functions more as an industrial metal than gold. So, its perceived value swings between its demand for industrial purposes and as a store of value. For this reason, price volatility in the silver market is more than in gold.
So, while silver can trade roughly in tandem with gold, its price is also determined significantly by the industrial demand and supply equation. Thanks to increased demand for electronics and medical products (many of which have silver inputs), silver has become a desirable commodity.
Like silver and gold, platinum is also traded on global commodity markets. It’s rarer and less mined than gold, so it tends to fetch a higher price in periods of market uncertainty and political instability.
The metal is also probably more of an industrial item than gold and silver. Platinum is used in several industries, including automotive, petroleum and refining, electronics, and jewelry manufacturing.
Palladium isn’t quite as popular as the first three. However, it has more industrial uses than all of them. Palladium is a silvery, shiny metal with applications in various manufacturing processes – especially for industrial products and electronics.
Demand for palladium is also high in medicine, dentistry, jewelry, and chemical fields. The metal has found significant use in the alternative energy field, with solar energy and fuel cell manufacturers relying heavily on it. Metalworkers can create thin palladium sheets down to one-two hundred and fifty-thousandths of an inch. In its purest form, palladium is malleable – but challenging once you put it under room temperature.
The Different Ways to Trade Precious Metals
Trading in precious metals has become rather popular today. Investors looking to increase their exposure to these metals can easily do so through any of the following products:
Holding Physical Assets
The oldest method of trading metals is to purchase some physical units of the metals in question.
This approach is the safest and least complicated means of increasing your exposure to the assets. You could just get some units of gold or silver from a reputable vendor and store them with you. Since the assets aren’t dangerous to your health or the environment, this should be relatively easy.
The primary problem with this method is the issue of custody. Where do you store your physical gold or silver after you’ve bought it?
Many experts will recommend that you keep your physical metals in your house. At the end of the day, owning some precious metals can be a tremendous off-the-grid value storage method. In cases of economic unrest, having hard assets around might help a great deal. Sometimes, banks and electronic asset transfer methods fail, and you could use precious metals to avoid getting stranded.
However, this becomes unsafe with larger quantities of precious metals. If you’re looking to hold substantial amounts of precious metals, it’s recommended that you work with a third-party service with top-notch security. This won’t come cheap, but it’s worth it in the long run.
Commodity Exchange-Traded Funds
ETFs are available for gold, silver, and platinum. These investment products are top-rated because they are highly liquid and more convenient to operate. Instead of storing the asset in question, you can invest in an instrument that tracks its performance instead. Buying an ETF also means you won’t have access to the commodity itself.
Some notable ETFs available include:
- iShares Gold Trust (IAU)
- SPDR Gold Trust (GLD)
- Aberdeen Physical Gold Shares ETF (SGOL)
- Perth Mint Physical Gold ETH (AAAU)
- Sprott Physical Gold Trust (PHYS)
- Aberdeen Physical Silver Shares ETF (SIVR)
- iShares Silver Trust (SLV)
- Sprott Physical Silver Trust (PSLV)
ETFs have become more common these days, and the general trend is for them to get cheaper. However, unlike holding physical assets, these ones don’t have that insurance feeling that you get in the case of market disasters. Since most ETFs aren’t redeemable for tangible assets, you’re out of luck if the markets go dark.
However, there are some exceptions. The Perth Mint Gold Fund and the Sprott funds store their metals in physical bullion. So, their funds are redeemable for gold and silver. So, they are relatively safer.
Futures and Options
Options and futures on precious metals are primarily derivatives. Futures contracts are traded on exchanges, and they come with specific delivery mechanisms for buyers and sellers. They can easily be converted into precious metals when delivery is due.
On the other hand, options on futures are derivatives that offer investors the right to trade metals. They essentially function like insurance policies on the asset’s price – options sellers act as insurance companies, while buyers are the insured party.
The options and futures market is primarily for investors looking to make huge bets on precious metals. The instruments provide effective leverage and liquidity, allowing you to maximize your profits on trades.
Certificates provide the benefits of gold ownership without the burden of storage and transportation. They are essentially certificates of ownership of the precious metal, and they can either be allocated (fully reserved) or unallocated (pooled). The issued certificates usually correspond with specific numbered bars, while unallocated ones don’t.
With certificates, issuers (usually a bullion bank) promise to exchange them for bullion at the investors’ request. The banks charge premiums on the asset’s spot price, and there are usually minimum buy-in amounts for certificates.
That said, certificates aren’t ideal options in case of problems like natural disasters and political upheavals. They essentially become pieces of paper in cases of disasters, and you can’t expect anyone to take them in for anything valuable.
There is also the counterparty risk involved. If your issuer goes bankrupt, you could become an uninsured creditor, and there’s a low chance you’ll get your entire investment back.
Exploring the Crypto Option
Cryptocurrencies have become a part of the global economy, growing in prominence over the past few years. These assets work for pretty much everything. While they’ve been compared with precious metals (especially from the investment perspective), they also provide an alternative means of investing in these metals.
Here are some ways you could try this:
Crypto-Based Bullion Dealers
Essentially, these are platforms that provide opportunities to use cryptocurrencies to trade precious metals. Like regular crypto-to-crypto exchanges, these platforms offer the chance to pay for your precious metals in cryptocurrencies and get your metals custodied with partnering companies and banks.
Examples of these services include Bitpanda Metals, GoldMoney, and Vaultoro.
In the crypto world, there are assets known as stablecoins. These assets provide all the benefits of cryptocurrencies (quicker transactions, decentralization, and more), but certain underlying assets back their values.
Examples of stablecoins include the USD Coin – a cryptocurrency backed 1:1 by dollar deposits. There are also true USD, Paxos Standard, Binance USD, and more. Likewise, you can find gold-backed stablecoins as well. There’s Gold Coin, Tether Gold, and Perth Mint Gold Token, among others.
Perth Mint Gold Token is especially prominent among gold-backed stablecoins. Actual gold blocks from Perth Mint in Western Australia back the asset. The Australian government itself guarantees the gold’s purity and weight, and Perth mint issues digital certificates as proof of ownership to investors. Traders can exchange gold tokens on exchanges like KuCoin.
It would be best if you were careful when investing in a precious metal-backed stablecoin. You can start by studying the website, of the project launching the asset. This is to confirm if they have audited bullion reserves to back their assets. You should also ensure that the project has a bullion redemption process that is economically viable and fair. You don’t want to invest in a company or a project and be left in the cold when things go bust.
Are Precious Metals a Good Investment?
Precious metals offer an exciting investment option. They are ideal for inflationary protection since they carry no risk and hold a significant amount of intrinsic value. As explained earlier, having some hard assets also provides an opportunity for “insurance,” especially when there are periods of military upheavals and other unrest. You can count on your hard assets to help you out when you’re in a jam – which is more than can be said for several other options.
From an investment perspective, to trade metals also provides a low correlation to other assets like government bonds or stocks. So, while you can enjoy high rewards (and risk) with stocks – and low risk (and rewards) with government bonds – precious metals provide a healthy mix of both.
The world is rapidly changing as investment decisions tend towards assets that can deliver high gains with minimal risk. Along with cryptocurrencies and other alternative assets, precious metals have also seen a jump in demand.
While there are several avenues that you can use to get into the precious metals market, you want to ensure that you understand why you’re purchasing a precious metal and what the investment product you chose will offer you in the long run.
What is a hedge?
What is a certificate?
What is an ETF?
Why is gold a hedge against inflation?
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