Best Way to Invest in Gold and Precious Metals
Gold has been the subject of dreams for thousands of years. Today precious metals remain a part of the smart investor’s portfolio. If you are interested in precious metal investing, after a little research, you will realize that there are several methods to invest in gold, silver, and other valuable metals. You will also want to know which is the best metal to invest in and why metals would have such high volatility.
We will go through some of the most common options and let you know why we think that for the long-term investor, setting up a Gold IRA is their best option.
The Four Precious Metals
Four metals are utilized for nearly all precious metal trading; they are considered excellent for portfolio diversification and can hedge against inflation.
Gold makes up the majority of all precious metal trading. The yellow metal does not corrode, can be shaped easily, conducts heat and electricity, and beyond jewelry, and as a currency, gold is used in dentistry and industry. Gold is traded on international markets 24 hours s day, seven days a week. And because gold jewelry often has a sentimental value, supply and demand laws affect gold less. The above-ground gold supply is much greater than what can be mined. When current owners want to sell, the price can drop, and if they desire to buy, supply is absorbed, and prices go up.
Factors affecting the gold price:
- Economic concerns– if money is considered unstable, gold is a safe haven
- Geopolitical concerns– political unrest and wars have resulted in gold hoarding. Gold’s value by weight means that a small fortune can be easily moved to and stored in a less dangerous area.
- Inflation– When other investments (stocks, bonds, real estate) are down, or a currency is losing its value, then investors will move to gold.
Siver’s price is related to its use as a store of value and in industry on nearly equal terms, resulting in more volatility than gold.
Silver’s use in industry has fluctuated greatly. It was used in film and photography but has been replaced with digital cameras. Electrical appliances from medical to home use, batteries, superconductors, and microchips use silver for connections, and catalytic converters in motors use silver to reduce harmful emissions. The future of silver for industrial use is never certain with possible replacements (to catalysis with electric motors) like seen with film.
Platinum is usually priced higher per ounce than gold due to its rarer nature. It is also used for industrial applications; its largest use is, like silver, in emission catalysis, followed by jewelry and the computer industry. Platinum is predominantly mined in Russia and South Africa, and monopolies attempt to artificially raise its price. With the auto industry’s reliance on platinum, its prices are related to auto sales and production. Clean air legislation has helped increase demand; however, our much cheaper next metal has been used by automakers as a substitute for platinum, all of which leads it to have the most volatility of the precious metals.
Palladium is less known but used in several industrial applications, from medicine to water treatment, solar energy, and fuel cells. It is mined in Russia, South Africa, Canada, and the US and has been combined with gold in jewelry to make the pieces stronger as an alloy. The auto industry uses the most palladium because it is a great catalyst, cheaper, and more durable than platinum. Because it has almost exclusive industrial use and is not kept as a store of value, it relies on these industries, and its price can fluctuate greatly.
Precious Metal Investment
Coins and Bars (Bullion)
You can purchase them at a local shop or online, but you will need a place to store them, and if you have a limited time horizon, this option is illiquid and difficult to hold.
Stock and Mutual Funds
You can search out publically traded precious metal miners to invest with who are leveraged with price movements. If you are unaware of proper mining stock valuation, this can be very risky, and you are better off investing in a fund with a manager (but you are paying their management fee, reducing your return)
Exchange-Traded Funds (ETFs)
These are convenient and liquid ways to buy and sell gold with reasonably low fees, but you don’t have access to the physical commodity and no claim to it. It can’t be picked up or delivered to your home.
You can gain both liquidity and leverage with futures and options, making large profits on bets, but you have losses that can be great with these derivatives, and most companies do not allow delivery of the metal, closing any orders before contract completion.
You gain all the benefits of gold ownership without needing to transport or store it, but you will be paying taxes on the sale.
Similar to certificates but you gain the tax breaks provided with an IRA. Additionally, with gold IRAs, some companies will allow fractional ownership, which means you can buy a portion of a gold bar rather than the entire bar—allowing you to take advantage of significant quantity pricing but only having to purchase a desired smaller amount.
Are Precious Metals a Good Investment?
Precious metals are excellent for a diversified portfolio, providing inflationary protections with a limited supply, have use as a store of value and in industry, and carry no credit risks. They can protect in economic and geopolitical upheaval and have hedging properties with a low correlation to stocks and bonds. Their liquidity is also a benefit if funds are needed quickly.
What is the best way to invest in precious metals?
This will depend on your needs:
- If you have enough funds for a coin or bar purchase, the capability to store the metal safely, and need access to it quickly, buying it outright is a good option.
- If you have a long time horizon and will invest in small amounts on an ongoing basis, a gold IRA will provide tax benefits, and a hedge against your other investments. Gold has the lowest volatility of all metals, and IRA fractional buying will be the cheapest way to obtain gold.
- If you are a risk-taker, have a short-term horizon, and understand the markets but can afford to lose significantly, then futures and options are the way to go.
A combination of 2 and 3 allows for both short and long-term success.
Precious metals are an effective tool for portfolio diversification. Know your needs, goals, and risk tolerance before buying. Precious metal volatility can be used to increase wealth just be sure to make sound investing decisions.