Investing in Precious Metals

Gold and silver have been used for business transactions and as store of value and for a very long time. Nowadays you can invest in a number of ways in precious metals. But it is easy to lose money, you need to have a strategy in place before you start investing. Here is an introduction to precious metal investing.

First, let’s define what metals are called precious metals. In chemistry, base metals are metals which oxidize or corrode relatively easily, such as iron, copper and nickel. Precious metals on the other hand, don’t oxidize or corrode easily. In the investment world, precious metals include gold, silver, platinum and palladium. Sometimes also uranium is counted as a precious metal.

In the good old days, if you wanted to invest in precious metals, you had to buy physical gold or silver. But nowadays, it is possible to invest in precious metals in a number of ways. Obviously, you can still buy physical gold or silver. But in most cases, you probably prefer to buy paper assets rather than the physical metal itself.

If you buy physical precious metals, you can choose between bullions, ingots, numismatic coins, jewelry and collectibles (containing precious metals). Unless you really know what you are doing, you should not buy numismatic coins as investments. They typically have a much higher price than the pure metal value. The same can be true for jewelry collectibles so make sure that you know what you are really paying for. It is very common that commemoratives are very overpriced, the price is often at least ten times higher than the metal value.

By buying shares in mining companies you get an investment with a potential growth component. Other ways of investing in precious metals without buying physical metal are mutual funds, ETFs, futures and options.

If you are buying precious metals as protection against hyperinflation or financial meltdowns, then the only the real thing will be good enough, paper assets could turn out to be virtually worthless if the financial markets crash. The main drawback with owning physical metals is the problem of secure storage. Owning precious metals in paper form does not involve such problems

If you are not worried about financial meltdowns, buying precious metals in paper format is much more convenient. The classic solution has been to buy shares in mining companies. The advantage of investing in shares in mining companies is that you may get paid dividends and enjoy capital gains. The main disadvantage of buying shares in mining companies is that you can’t be sure that the share price will follow the price of precious metals.

Mutual funds and ETFs (Exchange Traded Funds) are both convenient ways of investing in precious metals. The number of mutual funds and ETFs which focus precious metals has increased a lot lately but it can still be difficult to find a suitable fund or ETF. Mutual funds can have high fees, make sure to check the fees before you invest. ETFs typically have low management costs but many ETFs have low liquidity. Note that just because an ETF specialize in a specific metal, like gold, does not guarantee that the ETF actually owns any metal. This could be a potential problem in case of extreme price movements.

Futures and options are derivatives. This means that you can make big money even with small investments. Unfortunately the opposite is also true, you can lose a lot of money. Unless you really know what you are doing, it is best to avoid futures and options.

Leave a Reply