Since the beginning of time, gold and silver have been recognized as valuable. And even today, precious metals have their place in a savvy investor's portfolio. But which precious metal is best for investment purposes? And why are they so volatile? If you're just getting started with precious metals, read on to learn more about how they work and how you can invest in them. There are many ways to buy precious metals like gold ira, silver and platinum and a number of good reasons why you should give in to treasure hunting.
All that glitters is gold
We'll start with the granddaddy of them all: gold. Gold is unique in its durability (it does not rust or corrode), malleability, and its ability to conduct heat and electricity. It has some industrial applications in dentistry and electronics, but we know it primarily as a base for jewelry and as a form of currency.
The value of gold is determined by the market 24 hours a day, almost seven days a week. Gold predominantly trades based on sentiment; its price is less affected by the laws of supply and demand. This is because the new supply from the mine is vastly outweighed by the size of the gold accumulated above ground. Simply put, when hoarders feel like selling, the price goes down. When they want to buy, the new supply is quickly absorbed and gold prices rise. (Learn more at Does it still pay to invest in gold?)
Several factors explain a greater desire to accumulate the yellow metal:
- Systemic Financial Concerns: When banks and money are perceived as unstable and/or political stability is in question, gold has often been sought after as a safe store of value.
- Inflation: When real rates of return in the stock, bond, or real estate markets are negative, people regularly turn to gold as an asset that will hold its value.
- War or political crisis: War and political turmoil have always sent people into gold hoarding mode. A lifetime's savings can be transported and stored until they need to be exchanged for food, shelter, or safe passage to a less dangerous destination.
The Silver Bullet
Unlike gold, silver's price swings between its perceived role as a store of value and its very tangible role as an industrial metal. For this reason, price fluctuations in the silver market are more volatile than gold.
So while silver will trade roughly in line with gold as an item to be accumulated (investment demand), the industrial supply/demand equation for the metal exerts an equally strong influence on price. That equation has always fluctuated with new innovations, including:
- Silver's once predominant role in the photography industry (silver-based photographic film), which was overshadowed by the advent of the digital camera.
- The rise of a vast middle class in the emerging economies of the East, which created an explosive demand for household appliances, medical products, and other industrial items that require silver inputs. From bearings to electrical connections, silver's properties made it a desired product.
- Silver's use in battery, superconductor applications, and microcircuit markets.
It is unclear if (or to what extent) these developments will affect overall non-investment demand for silver. One fact remains; the price of silver is affected by its applications and it is not only used in fashion or as a store of value. (Find out how the everyday items you use can affect your Market Moving Commodities investments.)
Like gold and silver, platinum trades 24 hours a day on global commodity markets. It tends to fetch a higher price than gold during periods of market rut and political stability, simply because it is so much rarer; much less metal is thrown out of the ground annually. Other factors that determine the price of platinum include:
- Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalysts, which are used to reduce the harmfulness of emissions. After this, jewelry accounts for the most demand. Petroleum and chemical refining catalysts and the computer industry use the rest.
- Due to the auto industry's heavy reliance on the metal, platinum prices are largely determined by car sales and production numbers. "Clean air" legislation could require manufacturers to install more catalytic converters, increasing demand. However, in 2009, American and Japanese automakers began turning to recycled auto catalysts or the use of palladium, the more reliable (and usually less expensive) sister group metal to platinum.
- Platinum mines are highly concentrated in just two countries: South Africa and Russia. This creates further potential for cartel-like action that would support, or even artificially increase, platinum prices.
Investors should consider that all of the above factors serve to make platinum the most volatile metal. (For more on this entire industry, see The Industry Handbook: Precious Metals.)
How to fill your treasure chest
Let's take a look at the options available to those who want to invest in precious metals.
- Commodity ETFs – Exchange-traded funds exist for all three precious metals. ETFs are a convenient and liquid means of buying and selling gold, silver or platinum.
- Common Stocks and Mutual Funds – Shares of precious metal miners take advantage of price movements in precious metals. Unless you know how mining stocks are valued, it may be wiser to stick to funds with managers with strong performance records. (For related reading, see Strike Gold with Junior Mining.)
- Futures and Options – Futures and options markets offer liquidity and leverage to investors who want to place large bets on metals. The greatest potential gains and losses can be made with derivative products.
- Bullion – Coins and Bullion are strictly for those who have a place to put them. Certainly, for those who expect the worst, bullion is the only option, but for investors with a time horizon, bullion is illiquid and downright annoying.
- Certificates – Certificates offer investors all the benefits of physical gold ownership minus the hassle of transportation and storage. That said, if you're looking for insurance in a real disaster, certificates are paper only. Don't expect anyone to take them for something of value.
Will precious metals shine for you?
Precious metals offer unique inflation protection: they have intrinsic value, carry no credit risk, and cannot be inflated (cannot be further printed). They also offer genuine "disruption insurance" against financial or political/military disruption.
From an investment theory point of view, precious metals also provide a low or negative correlation with other asset classes such as stocks and bonds. This means that even a small percentage of precious metals in a portfolio will reduce both volatility and risk.
Precious metals provide a useful and effective means of diversifying a portfolio. The trick to achieving success with them is knowing your goals and risk profile before you jump in. The volatility of precious metals can be harnessed to build wealth, but left unchecked, it can also lead to ruin.