Categorized | Commodities, Investing

Investing In Precious Metals

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Why Investing In Precious Metals Is Popular

Investing In Precious MetalsInvesting in precious metals has become quite popular in recent years, as new and easier precious metals investment products have become available and more individual investors seek to diversify their investments into numerous asset classes.  Precious metals include a number of rare metals, such as gold, platinum, palladium, and silver that have commercial, industrial and/or historical investment value.  Many investment advisors recommend investors hold a portion of their investment portfolio in precious metals or other commodity investments to properly diversify their investments across several asset classes.  Many investors like to hold these rare and valuable metals in their investment portfolios, not only to diversify, but also as a hedge against economic crises and the potential for future runaway inflation.

In the old days, investors that wanted to invest in precious metals had to buy the physical metals and store them.  This made precious metals investing difficult for many individual investors, since storing physical precious metals, such as gold coins or bars of silver, was challenging for a number of reasons.  These include:  finding a suitable and secure storage container at a location owned by the investor or paying a third-party for secure storage and the risk of theft.  The barriers and costs associated with storing physical precious metals discouraged many individual investors from investing in these metals, which left precious metals investing to deep pocketed investment professionals and institutions.  Those days are long gone, as a variety of Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs), and Mutual Funds have been introduced in recent years that allow investors of all types to invest in precious metals as easily as they invest in stocks.  This, and a few other factors since the 2008/2009 economic crisis, has made precious metals investing very popular.

The Factors That Determine The Price of Precious Metals

Gold InvestmentOne important thing that individual investors need to understand regarding putting money into precious metals is that the price of these rare metals is ultimately determined by different factors than those that determine the price of more familiar investments, such as stocks and bonds.  While sometimes it is hard to pinpoint the factors that affect stock prices, the price of stocks is ultimately determined by the amount of underlying earnings earned by companies.  Bond prices are affected by both the interest rate policy set by the United States Federal Reserve and by the ratings associated with individual bonds, which is an indication of how likely the bonds will mature without default.  Precious metals prices are not affected by earnings, because they do not earn anything, and are not affected directly by interest rate policy or ratings, because they do not pay interest and are not at risk of default.  Instead, the factors that determine the price of precious metals can be quite abstract and even based on investor-psychology.

While precious metals have an intrinsic value that is based on their historical standing going back thousands of years as highly sought after metals and current supply and demand factors, there are many other not so easy to define factors that affect the price of precious metals on both a short and long-term basis.  Investors need to keep a long term outlook, and should ignore short term factors that influence the price of precious metals.

Some of the not so easy to define factors that affect the price of precious metals carry on for many years and decades, and therefore need to be considered by precious metals investors.  These include:  concerns about inflation and hyper-inflation, concerns about economic crises and collapse, concerns about the devaluation of currencies, etc.  While it may seem difficult to comprehend, these abstract factors can actually have a very big impact on the price of precious metals, which causes them to trade at a premium to their intrinsic supply and demand valuations.  How much of a premium is a result of these abstract factors is open to debate, but given the skyrocketing price of some precious metals in recent years in absence of significant supply constraints, it is obvious that they are playing a role in setting a premium price.  Another factor that appears to be skewing the price of precious metals in an upward direction in recent years is the ease at which investors of all types can now establish a position in these rare metals via ETFs, ETNs, and Mutual Funds.  This has created additional demand for precious metals.

The New Way To Invest In Precious Metals Via Funds

Gold BullionIndividual investors can invest in precious metals for the long-term via a variety ETFs, ETNs, and Mutual Funds that have been introduced in recent years.  It is extremely important to understand how these funds derive their valuation prior to investing in them, as the funds can use dramatically different methods of achieving their valuations, which can have a major impact on investment risk and long term returns.  For example, some funds invest in precious metals futures contracts and other financial products to derive their valuation.  This introduces both the risk of price decline due to the fact that futures contracts lose value over time as a result of price decay and the risk that in the event of a crisis, the funds hold no physical precious metals, and therefore the value of their investments are not based on actual precious metals holdings.  For investors looking to invest in physical precious metals, it is a good idea to invest via funds that purchase and store precious metals, as these funds derive their value from actual precious metals holdings.

The following are examples of precious metals funds that are currently available to investors:

  • ETFS Physical Precious Metal Basket Shares (GLTR) – GLTR is designed to replicate, minus expenses, the performance of the prices of physical gold, silver, platinum and palladium.
  • SPDR Gold Shares (GLD) -GLD is designed to replicate the performance, minus expenses, of the price of gold bullion. The trust holds physical gold in warehouses to obtain a true valuation based on gold holdings.

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