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Good investment advisers always promote the importance of investment diversification.
While each investment market comes with inherent risks, the riskiest move of all would be putting all your investment dollars in one basket.
A lot of bad things have to happen in a short period for a well-diversified investment portfolio to suffer colossal damage.
A narrowly focused investment portfolio is always more vulnerable to one piece of bad news or one mistake. But can investing in precious metals be a good investment strategy to diversify your portfolio?
Most people invest in precious metals like gold, silver, or platinum not for income-producing options but to hedge against inflation and other fluctuations in the economy and world markets.
In other words, people often look to gold and precious metals to hold wealth in times of economic uncertainty not create it.
While many people have at least some basic knowledge of the stock market, few truly understand the concept of investing in precious metals.
The following information provides insight into the ownership of precious metals as an investment option. Let’s see how investing in precious metals can help you build a portfolio designed to endure.
What are Precious Metals?
Any discussion about precious metals needs to start with the word precious. What makes anything precious to an investor? The answer is simple – scarcity and demand.
A metal qualifies as precious if it has a finite supply and economic value. As for economic value, that can come from investors or manufacturers needing the precious metal to produce an important product.
While there are a few metals qualifying under the above definition, investors typically focus on gold, silver, platinum, and palladium.
Gold is by far the most popular investment-grade precious metal. Historically, it has maintained favor as a way to store value for literally thousands of years.
What seems to set gold's value above all other precious metals is its lack of practical uses in the manufacturing realm. Investors tend to buy gold and “squirrel” it away, which creates the optics of scarcity.
Silver is similar to gold in terms of proportional value, meaning its value tends to change by much the same percentages as gold.
The reason why silver's price is about 1% -1.5% of the value of gold has a lot to do with the fact that there’s a demand for silver as a manufacturing material. To meet said demand, more silver is mined, which keeps the per ounce price low.
Platinum prices are roughly at a value near 60% of gold's price. It does have practical uses, but the price runs higher because of scarcity.
Palladium, rising in popularity and price, is another precious metal included in the platinum group of metals along with iridium, osmium, rhodium, and ruthenium.
Examples of Precious Metals Prices
In the current market environment, gold prices are around $1,500 per ounce. Over the last investment year, gold's price has been moving higher from $1,200 to where it currently sits.
There are two economic trends that tend to move gold prices in one direction or the other. The first is oil prices. Gold prices tend to move in the same direction.
The other gold price mover is inflation. Investors have long used gold as a hedge against inflation.
While inflation normally impacts stock prices to the downside due to rising interest rates, gold prices rise with inflation.
As the investor loses value in their securities portfolio, they will often simultaneously see an increase in value on their gold deposits.
Silver is currently priced around $18 an ounce. Again, it tends to move proportionately with the price of gold. It can also serve as a hedge against inflation, though to a slightly lesser extent.
The same can be said of platinum, which is currently about $930 an ounce.
To be clear, manufacturing demand could independently affect the price of silver or platinum one way or the other.
If a new product innovation that requires silver as a raw material were to explode on the market, the demand for silver could increase rather suddenly.
The price of silver would likely jump independently of gold until such time as more silver could be mined.
Likewise, if a product requiring silver as a raw material were to become obsolete, the demand and price of silver would likely drop until mining requirements are adjusted.
You can expect platinum and palladium-currently around $1,800 per ounce, to move independently for similar reasons.
Benefits of Investing in Precious Metals
As indicated over the last year, gold and silver can create income. Both metals are up approximately 30% over the past 12 months. That's quite an ROI.
With that said, most precious metal investors don't invest in precious metals as an income-producing investment option.
As mentioned above, the primary benefit that comes from investing in precious metals lies is its value as a hedge against inflation.
History makes it clear that inflation has an adverse effect on stock and bond markets.
If you are heavily investing in those markets as an individual or through an employer-sponsored 401K account, during tough economic times you would likely lose asset value – possibly a lot of value.
Precious metals tend to increase in value in an inflationary environment. Yet, they always seem to stabilize at around the $1,100-$1,200 level when inflation becomes insignificant and the securities markets are advancing.
As the market value of your securities portfolio drops, the increase in your precious metals portfolio would likely offset the loss in other investments. That's a hedge.
In reality, you always have the option to take profits on your precious metal investments when inflation indicators start improving.
However, the whole point of using the hedge is to protect the value of your primary investment portfolio against something drastic bringing that market down.
Disadvantages of Investing in Precious Metals
You need to be aware of the disadvantages of investing in precious metals too. You and your investment adviser should consider these disadvantages and how they could affect your financial health.
First, any notion you can build wealth by investing in precious metals would be misguided.
The historical value of precious metals makes clear that while price variances do offer profit-taking opportunities, precious metals are notoriously stable, leaving little room for long-term growth.
Second, gold, in particular, is always subject to hoarding or confiscation by governments.
The world is filled with unscrupulous leaders who would think nothing of raiding gold reserves and creating havoc in financial markets.
Finally, the price of any precious metal is always subject to manipulation.
Should a gold miner decide to increase or decrease production, it would affect prices regardless of where current market trends might be heading.
How to Invest in Gold and Silver
If you are interested in investing in precious metals, you have three good options.
First, you can buy physical precious metal bars and coins. You have the option of taking actual possession of your precious metals or paying to have them stored.
For what it's worth, gold and silver coins carry both spot value and collection value, which makes for two ways you can gain extra value.
You can even buy and sell gold with an app through companies like Vaulted.
You can check out the FAQ at Vaulted to learn more about the origin and quality of gold you can buy, the fees involved, security and privacy concerns, along with options to have physical delivery of gold.
Your other investment options are to buy gold exchange-traded funds (ETF’s) or purchase mining company stocks.
These serve as a hedge because precious metal related securities often move in the same direction as precious metal prices.
Which Precious Metal is the Best to Invest In?
If history has done nothing else, it has made clear that gold is one of the best precious metals in which to invest (although not everyone agrees.) It's resilient, scarce, valued, and somewhat liquid.
When some of the world's best economies are tied to the gold standard, it’s a clear indication of what the financial masters of the world think of gold.
Now that you have a better idea of how precious metals might fit as an alternative investment in your portfolio and overall strategy, it might be time to contact your investment adviser and start asking questions.