Investing In Precious Metals: Is It Right For You?

Are you looking for a hedge against inflation? Or do you need to diversify your holdings? If so, then investing in precious metals could be the solution. There are many different ways to invest in this commodity – but which one is right for you? Gold is the most well-known precious metal, but it’s not the only one out there that can be added to your portfolio. Silver, platinum, and palladium all have unique risks and opportunities that investors should consider when deciding how much of each metal they own in their portfolios. We’ll look at each of these metals individually so you can decide which ones make sense for you as an investor.

The 4 Most Common Precious Metals In A Portfolio

Gold

An investment in gold might be suitable for you if you are looking to hedge against inflation. Gold is the most well-known precious metal with a long history. Jewelry made from gold can be traced back to 3200 BC, when Egyptians wore them during celebrations.

Gold has also been used for centuries as an effective medium of trade and storage due to its durability. It can easily be shaped into any form desired without the risk of damage or corrosion from moisture in the air. All these characteristics of gold have made it a historically great generational wealth transfer tool.

Gold has always been a valuable metal, and people realize that it may be their best bet for financial security. In fact: 

1) When banks or money is perceived as unstable – like during times of economic or political crisis- people flock towards gold. Gold is also a great store of value when trying to escape persecution and needs to flee a country with their wealth. Jews in WWII Germany or Vietnamese escaping the communist regime have traveled with their entire net worth in gold.

2 ) With negative real rates people due to inflation; people often decide to invest in gold because at least you know your savings will maintain value over time no matter what happens with the economy (and this also includes bonds).

Silver

Silver has been called the “poor man’s gold” due to the lower price. Also, the cost of silver is more volatile than that of gold, making the metal less ideal for storing value. But it also means the industrial usage ensures a constant demand.

Increased usage of silver in batteries, superconductor applications, electrical appliances, medical products, microcircuits has resulted in greater demand.

Platinum

Platinum is a precious metal that tends to fetch higher prices than gold since it is much rarer.

Platinum has been used for jewelry, but like silver, it also has industrial uses such as petroleum and chemical refining catalysts.

Platinum has also been used in automotive catalysts to reduce harmful emissions. With the increasing focus by consumers and governments on ESG factors, I expect the demand to rise in the coming years.

Palladium

Palladium also has usage in making jewelry, coins, or industrial applications. A critical application for palladium includes catalytic converters. Palladium also has used such as solar energy and fuel cells which makes this element very versatile indeed!

Increased focus on clean energy production should result in increased demand for palladium.

Why Invest In Precious Metals

Long History

Gold and silver have been around since the dawn of humanity, but they are still used in modern portfolios. Although several new income-producing assets are now available, precious metals have a long history.

Diversification

Precious metals are a good way to diversify your portfolio and hedge against inflation. They don’t typically move in line with other assets, so owning some can help balance your holdings.

Usage

Precious metals also have legacy industrial uses, and with the increasing emphasis on the environment and clean energy, the usage of precious metals has increased.

Availability

Precious metals are available to anyone for investment. One does not need to meet accredited investor qualifications for buying gold or silver.

How To Invest In Precious Metals

Physical Form

Retail investors will never be disappointed with the selection and variety at their fingertips when buying coins. There are several options perfect for every budget: American Eagles, Canadian Maple Leafs, South African Krugerrand, Australian Kangaroo, English Britannia, or even Mexican Libertads.

Retail investors can also buy gold bars or jewelry from their local dealers.

While you can buy gold and silver in the form of bars, coins, or jewelry, for buyers with a more significant investment, it is best to purchase bullion.

Bullion refers to bulk quantities of precious metals like 10 oz bars available through several different dealers. This way, you will get more metal at a lower price per ounce than buying coins.

The biggest challenge with buying precious metals in physical form is storage. You need to securely store your holdings in a vault or a bank for safekeeping.

The advantage of owning precious metals in physical form is the ease of accessibility in times of political or economic turmoil. The other forms of holding precious metals would not help in dire situations.

Also, you can transfer physical gold with total privacy.

Commodity ETFs

An easier way to get exposure to gold and silver is through an ETF. An exchange-traded fund (ETF) holds a basket of assets like stocks or bonds to track a specific index’s performance; commodity ETFs do this for commodities such as precious metals.

Commodity ETFs are highly liquid to buy and sell since they trade on all major exchanges. 

The other advantage of investing in a commodity ETF is the ability to dollar cost average your purchases. Since prices of precious metals are volatile and it is hard to buy physical gold in smaller quantities, you can automate your purchases. You could use a no-fee investment platform like M1Finance to dollar cost your purchases. Refer to details in my M1 Finance review.

The drawback with commodity ETFs, however, is that you need to pay a management fee. The SPDR Gold Trust (GLD) is the most common gold ETF and currently has an expense ratio of 0.40% fee. The fee is not too high, considering that you do not need to pay for physically storing the gold.

As ETFs become more common, the fee is expected to drop. The iShares Gold Trust ETF has an expense ratio of 0.25%.

Also, investing in precious metals using an ETF does not give you access to the physical metal. If you are investing in precious metals anticipating economic or political turmoil in your country, the paper asset route might not be the best option.

Mining Stocks

If you are looking for more risk and potentially better returns, then investing in mining stocks might be the route to go. Mining companies mine gold or silver ore from the ground before producing it into bars that sell to wholesalers.

Growth is not guaranteed, though, since there can be operational challenges due to fluctuating metal prices which could cause the mining companies to be unprofitable and close operations. Also, most of the precious metal mines are located in geographies with unstable governments. The risk of a new government seizing the mines cannot be ruled out.

The advantage of investing in mining stocks is the leverage obtained. Depending on if the company is in the exploratory phase or a junior miner, the price can increase (or decrease) exponentially compared to the actual cost of the underlying commodity. For example, if gold price doubles, the gold mining share price could increase by 5 to 10 times.

But if the price of gold drops, it becomes unprofitable to mine. The miner loses money, and the debt could lead to bankruptcy.

When gold prices drop, it’s essential to watch how profitable the industry is and whether they have enough money left in their budget for new exploration. Without this investment of funds, mining will decrease, at which point there could be price hikes.

Although Warren Buffet’s gold quote indicates he is not a fan of gold, he does invest in gold mining companies.

Instead of investing in individual mining companies, you can also invest in a basket of mining companies. For example, GDX offers exposure to gold miners in the form of an ETF.

Royalty Companies

Gold and silver mining is a risky business, so it can be appealing to do deals with royalty companies that take on some of those risks for you. They give cash upfront in exchange for getting paid in precious metals at prices far below market value.

Gold and silver miners want to do streaming deals to ensure that their debts grow with the price of gold or silver. This method of financing debt via the commodity is less risky than financing dollar-denominated debt.

Unfortunately, there are not many publicly-traded precious metal royalty companies. Franco-Nevada, Royal Gold, and Wheaton Precious Metals are some of the oldest royalty companies.

Futures Contracts

Of course, there is also the futures market which allows you to buy precious metals in advance at a fixed price for when you want to make delivery on your contract. Futures can be helpful for professional traders who want exposure to precious metals with maximum liquidity and leverage.

When entering into a futures contract, you agree to buy or sell the precious metal at a future date. I would strongly advise against using futures contracts unless you are a professional investor who has experience trading commodity futures.

Pros And Cons Of Investing In Precious Metals

Before adding precious metals to our portfolio, let us look at some advantages and disadvantages

Pros

1. Provides portfolio diversification since they are not correlated with stocks, bonds, or real estate.
2. No credit risk since precious metals hold intrinsic value
3. It can be used as an inflation hedge
4. Increased industrial usage could drive demand
5. Easy to escape political turmoil with some form of precious metals

Cons

1. Slower value growth compared to other assets like stocks or real estate.
2. Do not produce cash flow like stocks or real estate.
3. Storage costs in physical form
4. Prices highly correlated with demand supply

How Much Should You Invest In Precious Metals

Unfortunately, there is no one-size answer which fits everyone. Your level of investment in precious metals depends on your risk profile and tolerance, your reasons for investment (privacy, generational wealth transfer, economic instability, political turmoil, etc.), your income sources and other investments.

I had started with a 5% allocation of my net worth and that included not just precious metals but also cryptocurrencies like Bitcoin. As the price of Bitcoin soared my allocation greatly exceeded my target allocation.

Considering the cons of precious metals I would limit my allocation to 15% of my net worth. If you struggle to automatically calculate your net worth on a daily basis, consider signing up for Personal Capital. It is a free tool I use to track my net worth on a regular basis and as a retirement planner. It also alerts me about hidden fees in my funds and has a budget tracker included. Here is my Personal Capital review.

Final Thoughts On Investing In Precious Metals

Investing in precious metals has many advantages but also some potential drawbacks. When considering investing, you should carefully evaluate your goals and risk tolerance to make the best decision for you. If there is a perfect time to invest in precious metals, it would be now with all of this political turmoil which could lead to economic uncertainty.

In times like these, investors are looking for ways to diversify their portfolio by adding more exposure to commodities such as gold and silver bullion coins that hold intrinsic value no matter what happens with the U.S dollar. Remember that although an investment initially may seem safe, past performance does not guarantee future results, so do your research before making any investment decisions based on market sentiment alone!

Readers, have you started investing in precious metals? Do you prefer to hold the physical metals or prefer the paper asset route?

I wrote this original article for Your Money Geek. It has been republished with permission.