Precious Metals Investing Guide
If you’re wondering how to invest in precious metals, here are a few places to start.
- Understand the different types of precious metal investments: There are several ways to invest in precious metals, including physical bullion, ETFs, mining stocks and futures contracts. Each has its own advantages and disadvantages, so it's important to understand the differences and choose the option that best suits your investment goals. We break down each of these in the article below. If you have any additional thoughts – we would welcome your feedback in the comments section.
- Do your own research: Before investing in precious metals, it's important to research the market and understand the factors that can impact the price of precious metals, such as economic and political events, supply and demand and global trends.
- Diversify your investments: As with any investment, it's important to diversify your portfolio by investing in a range of different precious metals and other assets. This can help spread risk and reduce the impact of any one investment on your overall portfolio.
- Consider the long-term: Precious metals investments are typically considered a long-term investment. It's important to have a long-term perspective and not to make investment decisions based on short-term price fluctuations.
- Storage and insurance: If you choose to invest in physical bullion, you will need to consider how you will store and insure your investment. Some investors choose to store their bullion in a safe deposit box at a bank, while others prefer to store it in a private safe or with a third-party storage provider. Make sure you have a plan in place to protect your investment.
- Be aware of the taxes: Be aware of the tax implications of your precious metal investment. The tax treatment of precious metals can vary depending on the type of investment and the country or state you reside in.
- Consult with a financial advisor: Precious metals investments can be complex and it's always a good idea to consult with a financial advisor before making any investment decisions. They can help you understand the risks and benefits of investing in precious metals, and help you develop a strategy that's right for you.
Precious Metal-Related Stocks
Precious metal stocks include mining, exploration, or production of precious metals such as gold, silver, platinum, and palladium. These companies include large mining companies that extract precious metals from the earth, as well as exploration companies that search for new deposits of precious metals.
Investing in a mining company can be a high-risk, high-reward proposition. While mining companies can offer significant returns, there are also several risks to consider. Some of these risks include:
- Commodity price risk: The prices of the commodities that a mining company produces, such as copper or gold, can be highly volatile. A sharp drop in commodity prices can significantly impact a mining company's revenue and profits.
- Operational risks: Mining companies are subject to a variety of operational risks, including accidents, natural disasters, and labor disputes. These events can disrupt production and lead to significant financial losses.
- Regulatory risks: Mining companies are subject to a wide range of regulations at the local, national, and international level. Changes in laws and regulations, or increased enforcement, can have a negative impact on a mining company's operations and financial performance.
- Environmental risks: Mining can have a significant impact on the environment, and mining companies are subject to various laws and regulations to mitigate these impacts. Non-compliance or unexpected environmental issues can lead to costly fines and penalties.
- Geopolitical risks: Mining companies often operate in regions with political instability or conflict. This can disrupt production and make it difficult for mining companies to access resources.
- Financing risks: Mining companies often require significant capital to fund their operations, and they may rely on debt or equity financing. If a mining company is unable to secure adequate financing, it may be forced to cut back on production or even shut down operations.
It is important to note that mining companies are not only affected by the risks mentioned above, but also by other specific risks that depend on the mining company, the location of the mine and the commodity that is being mined. Therefore, it is important to do your own research and consult with a financial advisor before investing in a mining company.
Precious Metals Futures
Futures are contracts that specify the terms of a future deal between a buyer and seller. Investors can use precious metals futures to make a bet on fluctuations in future metal prices without the requirement of owning the physical commodity. When the future contract matures, you have an option of selling the contract or taking possession of the physical asset.
Investing in precious metal futures can offer several benefits, including:
- Hedging against inflation: Precious metals, such as gold and silver, are often considered a hedge against inflation. As the value of paper currencies decreases, the value of precious metals tends to rise, making them a good investment during periods of inflation.
- Liquidity: Precious metal futures are traded on regulated exchanges, making them highly liquid and easy to buy and sell.
- Leverage: Futures contracts allow investors to gain exposure to the underlying asset, such as gold or silver, with a relatively small amount of capital. This is because futures contracts can be leveraged, meaning investors can control a large amount of the underlying asset with a small amount of capital.
- Transparency: Futures markets are highly regulated and transparent, providing investors with a high degree of price visibility and market information.
- Risk management: Futures contracts can also be used for risk management, for example, to hedge against price volatility of the underlying commodity.
It's important to note that investing in futures also comes with its own set of risks, such as counterparty risk, margin risk and volatility risk explained below.
- Volatility: The prices of precious metals can be highly volatile, and investing in futures contracts exposes investors to the risk of significant price fluctuations. This can lead to large losses if the market moves against an investor's position.
- Counterparty risk: Futures contracts are traded on exchanges and are typically settled through a clearinghouse. However, there is still a risk that the counterparty, or the other party in the contract, may default on the contract.
- Margin risk: Futures contracts require investors to maintain a margin account with the exchange, and investors can be subject to margin calls if the value of their account falls below a certain level. This can lead to forced liquidation of positions and significant losses.
It is important to understand the terms of the contract and the underlying commodity being traded, as well as the market conditions before investing in precious metal futures.
Precious metals ETFs may buy and hold physical commodities, trade precious metals futures or hold stocks in related companies. As Forbes notes, generally, ETFs aren’t expected to outperform – they’re used as a diverse, liquid hedge against inflation or market turmoil. You can use ETFs to sidestep risks of theft and illiquidity (for physical metals) or concentrated volatility (for metals and stocks).
ETFs can offer several advantages and disadvantages, including:
- Accessibility: ETFs are traded on stock exchanges, making them easily accessible to individual investors. This allows investors to invest in commodities without the need for a futures account or physical storage of the underlying assets.
- Liquidity: ETFs are generally liquid, meaning that shares can be bought or sold easily and quickly.
- Low costs: ETFs generally have lower management fees than actively managed funds.
- Transparency: ETFs typically disclose their holdings on a daily basis, which allows investors to see exactly what they are invested in.
Still, there are no guarantees that these investments will perform, or that their prices won’t be swayed by supply and demand changes. ETFs may also trade at a discount to NAV or net asset value, trading units below the underlying asset they hold in inventory resulting in holders failing to realize the value of their asset if they sell their shares on the open market.
Coins and Bullion
Some investors prefer to own physical metals over tradable securities. However, this form of precious metals investing is by far the least liquid and most expensive. Physical metals don’t produce cash flow, and you may be forced to incur high costs to buy, store and insure your investment.
Physical bullion and coins are tangible assets, meaning that they have intrinsic value and can be held and touched. This can provide a sense of security for some investors. However, they face many cons including:
- Cost of storage: Physical bullion and coins require storage at banks or secured vaults, which can be costly in terms of both money and security.
- Risk of theft: Physical bullion and coins can be stolen, and insurance can be expensive.
- Price volatility: The price of physical bullion and coins can be highly volatile, and investing in them exposes investors to the risk of significant price fluctuations.
- Counterfeit risk: Coins and bullion can be counterfeited, and investors need to be aware of the risks of fraud and the need to purchase coins and bullion from reputable dealers.
While it may seem fun to build a flashy nest egg, investing in coins and physical bullion is not suitable for all investors. It's important to thoroughly understand the coins, bullion, and market conditions before investing in them. It is also important to consult with a financial advisor before making any investment decisions.