Ultimate Guide to Investing In Precious Metals

Ultimate Guide To Investing In Precious Metals

We live in a world of scarcity.

Everything rare is precious, and rarity is often associated with a high economic value. When it comes to metals, several metals are considered metallic assets due to their rarity and difficulty to accessing them.

Gold, silver, platinum, and palladium are some of the rare metals used for investment.

These precious metals have long been used as currency, and overtime, as paper and plastic money substituted metals, they are still considered valuable because of their investment and industrial uses.

But what is the best precious metal to invest in? Should you go for investing in a physical asset or paper metal? What are some of the pros and cons of investing in precious metals?

These are some of the questions that haunt investors as they head out to fill their treasure chest. If you are planning to invest in precious metals or are just exploring investment options, this post is for you.

Here, you will find out some of the advantages and disadvantages of investing in precious metals and learn about four precious metals worth investing in. So, let’s get started.

What Metals Are Considered Precious Metals?

The word ‘precious metals’ is used to classify metals that have a high economic value associated with them. They are expensive because they are rare or not easily accessible.

Moreover, their high demand and use as an investment product to diversify and hedge risks are some of the reasons why precious metals have a high monetary value associated with them.

There are several precious metals; however, investors’ most popular choices include gold, silver, platinum, and palladium. Let’s take a closer look at each investment option, so you are better equipped to make a more informed investment decision.

Gold

Perhaps, the most sought-after precious metal is gold. Its unique physical and chemical properties (non-reactivity, durability, malleability, and conductivity) along with industrial and economic applications make it one of the most sought-after metals in the world.

And given its demand, it is one of the most highly-priced precious metals.

Here, it is important to note that gold prices are not determined solely based on the principles of demand and supply. While demand and supply play an essential role, gold retains additional value because of several reasons.

  • Gold is used by the central banks of many countries around the world for risk diversification.
  • The precious metal is widely used as jewelry, with India, China, and the U.S., being the largest consumer. Moreover, it has industrial applications in medicine and electronics.
  • During times of economic uncertainty, gold is used as a store of value because it hedges against inflation.
  • “Easy gold” has already been mined, and now gold mining companies need to dig deeper to access high-quality reserves.

No investment in precious metals is considered complete without investing in gold.

While gold has always held economic significance, it is likely to remain one of the most sought-after precious metals in the future as well, which makes it a must-have precious metal for your investment portfolio.

Silver

Unlike gold that has retained its significance as an investment vehicle and store of value, silver partially serves the same purpose while catering to a fair share of demand for its industrial application.

It is commercially used in electronic devices, batteries, medical devices, the automotive industry, and a catalyst to produce industrial chemicals.

Therefore, the demand for silver is not primarily generated by investors but also by manufacturers in several industries. As a result, industrial demand has a strong influence on the price of silver.

And given that the price of silver is influenced by industrial demand, it is important to note that the recent expansion of various industries, such as the microcircuit market, medical products, electronic appliances, and other industrial items, will significantly impact the price.

How this rise in demand will affect the investment demand for silver still remains unclear, but one thing is for sure: silver serves as a store of value, so it is a great choice if you are planning to invest in precious metals, but it also has wide industrial appliances.

In all, both gold and silver are considered safe investments that can save you in times of economic turmoil. If you are looking forward to tumultuous times, you may want to consider investing in gold and silver to diversify your risk and hedge against economic setbacks.

Platinum

Being a rare precious metal, platinum has a higher price compared to gold. Platinum mines are largely concentrated in two countries around the world; South Africa and Russia.

And given its restricted supply, the prices are not determined by demand and supply. Instead, the two leading producers have more say in the price. This cartel-like arrangement reflects in terms of artificially high prices of platinum.

Platinum’s extraction and global reach is far less compared to the shiny yellow metal (gold) that makes it an excellent investment choice.

However, just like silver, platinum has a wide industrial demand primarily from the automotive industry, the petrochemical industry, and the computer industry.

Moreover, it is also used as jewelry. If you are planning to invest in this precious metal, always remember that platinum is the most volatile precious metal that you may invest in given the nature of its demand.

Palladium

Another precious metal that is worth considering for investment is palladium. Most of this precious metal’s supply comes from the mines located in the U.S., South Africa, Russia, and Canada.

While it is lesser-known compared to gold, silver, and platinum, it has wide commercial applications. It is used in several manufacturing processes, including electronics.

Moreover, it is also used in medicine and dentistry along with usage in groundwater treatment. Being the less costly sister element of platinum, palladium is also used in the automobile industry as a catalytic converter.

Given its physical properties, such as conductivity and malleability, the precious metal is widely used for renewable electricity generation, such as solar energy.

Palladium is also used in the jewelry industry where it is mixed with pure gold to form alloys that are stronger and different in color compared to the yellow gold. The metal is also used in coinage.

It is now clear that the demand for palladium primarily comes from industries but given its high industrial usage, it also appears to be a lucrative option for investors as well.

However, just like its sister element, palladium’s prices are volatile so it may be one of the risky precious metals to invest in. But more risk also means more returns, so your investment decision will largely depend upon your investment strategy and risk-aversion.

Should You Buy Physical or Paper Metals?

Now that you are aware of some of the precious metals you can invest in, it is time to address the second most crucial investment decision “whether you should invest in precious metals physically or go for paper investment.”

Each option comes with its challenges and paybacks, but let’s first understand what paper metals mean before looking into it.

Paper metal refers to investment in gold derivatives, which do not give you access to physical gold. Some of the ways you can invest in paper metal include:

Only by fully understanding the advantages and disadvantages of either investing in precious physical metal or going for a paper alternative can you determine whether you should buy physical or paper metals.

Advantages of Investing in a Paper Metal

PAPER METAL

Ease of Investment

Investing in paper metals is super easy.

You can read the terms and conditions and make your investment decision right from the comfort of your home.

No-Risk of Metal Purity

When physically investing in metals, such as gold and silver, the purity of the metal is perhaps the most important consideration.

But when you invest in paper metal, you don’t have to worry about the purity because the issuer guarantees it.

Ease of Liquidation

Similar to how easy it is to invest in paper metals, liquidation is as convenient as the investment itself.

Paper metals are highly liquid, meaning that the investor can cash them right with a click and easily avoid the hassle of transporting the asset for liquidation.

No Cost of Holding

When you invest in a paper metal, you don’t have to pay the additional cost of holding that is associated with the physical storage of precious metals.

This may include paying insurance for your precious metal or additional rent to hire a locker facility.

Safe Return

When you invest in paper metals, such as sovereign bonds, your investment serves as a store of value and offers regular returns for holding the investment.

Disadvantages of Investing in Paper Metal

DISADVANTAGES OF INVESTING IN PAPER METAL

There are several risks associated with investing in paper metals. Some of these include:

No Physical Value

Unlike physical gold that you can hold and sell whenever you want, a paper may become worthless, especially during economic uncertainty.

This is primarily because you do not have anything physical to back up the paper.

Counterparty Risk

Perhaps, the most significant risk associated with investing in paper metal is counterparty risk.

There is always a possibility that the issuer of paper metal (ETF, metal mining company or limited partnership) may go bankrupt. In that case, you lose your investment as you do not have the physical ownership of the asset.

Risk of Scam

By investing in paper metals, there is always a high risk of scam because any asset that is not in a physical form does not back the value.

Advantages of Investing in a Physical Metal

ADVANTAGES OF INVESTING IN A PHYSICAL METAL

The advantages of investing in physical metals are a mirror image of the disadvantages highlighted in the earlier section.

Some of the paybacks of investing in physical metals include:

Physical Possession

Perhaps, the biggest advantage of investing in a physical metal is its physical possession.

The joy of owning any precious metal is only natural, which you can enjoy by investing in it.

Store of Value

Precious metals are a store of value, and in times of economic uncertainty, they can also be used as a currency that you can easily liquidate and use as security against a collapsing economic system.

Hedge Your Risk

If inflation is a concern, investing in a physical metal is a great way to hedge that risk.

The rising value of precious metals often guards against inflation.

Disadvantages of Investing in a Physical Metal

DISADVANTAGES OF INVESTING IN A PHYSICAL METAL

Investing in a physical metal has some disadvantages as well, including:

Risk of Theft or Loss

Robbery burglary is seldom avoidable.

When you have a precious metal at home or any other accessible place, there is always a risk of theft and loss.

Cost of Storage

To counter the first disadvantage, investors often have to insure their investment or store it at a safer place.

So they usually end up paying insurance premiums or charges for availing a locker facility, which are all the costs associated with owning and storing the precious metal.

Regulatory Risk

The laws pertaining to ownership and taxation on returns on investment may but subject to change that often goes against the investor – a risk that you can easily avoid if you invest in the paper metal.

By knowing the pros and cons of both investing in paper metals and physical metals, you should now be in a better position to make an appropriate investment decision. An important thing to remember is that several factors influence your investment decision, including:

  • The metal you are planning to invest in,
  • Your investment strategy (long-term investment/short-term) and
  • Your investment style (risk-averse/risk-taker).

With so much information about which precious metals make the most suitable investment and whether to go for physical or paper metals, let’s move to the final section highlighting the pros and cons of investing in precious metals.

Pros of Investing in Precious Metals

Pros of Investing in Precious Metals

Crisis Resistance

One of the biggest advantages of investing in precious metals is that it guards against economic downturns. In general, precious metals are more resistant to times of economic uncertainty and their value is likely to remain stable.

The fact that the value of a precious metal is not directly related to how the economy is performing makes it a highly desirable investment vehicle.

Security

The scarcity of precious metals is another reason you should invest in them. Precious resources are limited in supply, which will eventually deplete.

However, their demand will continue to exist, given that most precious metals also have industrial usage. Thus, investing in precious metals today can provide you with security as you possess a valuable resource that you can liquidate and gain in years to come.

Moreover, inflation is an unavoidable economic phenomenon worldwide but possessing precious metals provides security against inflation.

The value of precious metals is subject to demand and supply, along with several other factors and it continues to rise, regardless of how the economy is performing. Therefore, it is a safe haven for investors that offer security against inflation.

Value Dense

Precious metals have no credit risk.

They can guard you against inflation and economic uncertainty and are more resistant than other investments, such as stocks and bonds. This value density is another great reason you should invest in precious metals.

Cons of Investing in Precious Metals

Cons of Investing in Precious Metals

Every investment comes with its own set of disadvantages and risks, and precious metals are not an exception.

It is best to go for a physical investment; however, as mentioned in the earlier section, physically investing in precious metals comes with the following challenges:

Storage and Security

The most significant setbacks associated with physically investing in precious metals include their storage and security.

Storing precious metals in a safe place often involves additional costs, such as insurance and locker facility charges, that the investor needs to pay.

Low Liquidity

While physically possessing a precious metal offers several benefits, a major drawback comes in the form of low liquidity.

Physical assets are more difficult to sell compared to their paper counterparts.

Supply-Side Issues

Apart from the challenges associated with physically investing in precious metals, supply-side issues can be a disadvantage of investing in precious metals.

While precious metals are known for hedging risk and guarding against economic turbulence, that may not always be the case. Due to some technical imbalances on the supply side, investors may face consequences, such as reduced prices and the unavailability of the resource.

Bottom Line

Investment in precious metals has increasingly become popular due to obvious reasons. If you are new to the metal investment world, we are confident that by now, you are aware of the precious metals to invest in and whether you should go for physical or paper investments.

Again, your investment decision depends upon your investment strategy and style, but this pre-requisite information will surely help you make the right choice.

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