A precious metal is a naturally-occurring metallic element that is valued for its unique characteristics and economic value. The three most common precious metals for investment purposes are gold, silver, and platinum. In this article, we’ll explore the types of precious metal investments, reasons for choosing one precious metal over another, and what to look for when buying physical precious metal products.
Types of Precious Metal Investments
Let’s explore the most common means of investing in precious metals.
Precious metals can be bought as physical coins, rounds and bars called bullion. Coins have a face-value set by the government that minted them and a bullion value based on the amount of precious metal in them. Rounds are coin-shaped, but have no face-value because they are not minted by a government. Bars, like rounds, have no face-value and are usually produced by a private mint.
- Commodity ETFs (Exchange Traded Funds)
Also known as paper investments, Exchange Traded Funds exist for the three most popular precious metals: gold, silver, and platinum. They are a convenient way to buy and sell these metals without actually purchasing a bullion coin, round, or bar.
- Stocks and Mutual Funds
Shares of companies that mine precious metals are bought and sold in relation to price movements of the precious metals themselves. Without an in-depth knowledge of the ways in which mining stocks are valued (and a willingness to accept a great deal of risk), stocks and mutual funds may not be the best option for an initial precious metal investment.
- Futures and Options
Futures investments are financial contracts in which a buyer agrees to purchase (or a seller agrees to sell) a specific quantity and quality of an asset (such as gold, silver, or platinum) at a particular date and time. Such contracts are often used to speculate on future (hence the name) price movements. Options contracts are much like futures contracts, except that rather than being obligated to buy (or sell) an asset at a particular date and time, the options holder has the option to do so. They provide more flexibility than a futures contract.
Investing in Gold
Gold is perhaps the most famous precious metal. Known for its use in jewelry and currency, it is unique for its durability (it doesn’t rust), malleability, and ability to conduct heat and electricity. In recent years, gold has become a key component in electronics manufacturing; it can be found in trace amounts in circuit boards and electrical connectors.
The price of gold is determined by fluctuations in the commodities market based on supply and demand. Unlike many commodities, however, most of the gold ever mined (estimated to be approximately 158,000 tonnes) still exists in an accessible form, such as bullion (gold bars, rounds and ingots), scrap gold, and jewelry; as a result, the price of gold is mainly affected by changes in demand rather than changes in supply. In fact, annual gold mine production amounts to only 2,500 tonnes (or roughly 1.5%) of the above-ground supply.
Reasons to Invest in Gold
- Financial and Geopolitical Uncertainty
When banks and the financial system are considered unstable or political stability is in question, gold has often been sought as a store of value—its price often rises when confidence in governments is low.
- Inflation or Deflation
Historically, gold has been a good hedge (an investment that offsets the risk of other investments) against inflation because its price usually rises along with the cost of living. Additionally, in periods of deflation (such as during the Great Depression), the purchasing power of gold increased when other prices dropped considerably.
- Asset Diversification
Gold has historically increased in value as stocks and other investments have decreased in price, making it an excellent choice for diversifying an investment portfolio.
Investing in Silver
While silver is less well-known than gold, it is the most commonly found precious metal. It is unique (like gold) for its malleability, resistance to corrosion, and ability to conduct heat and electricity. It has been used as a currency and medium of exchange for centuries; more recently, silver has become an important part of the manufacturing of electronics, medical products, and energy technologies.
The price of silver, like gold, is determined by market fluctuations in supply and demand. While it is considered an investment metal, much of the demand for silver is in its industrial applications (the manufacture of electrical appliances, medical products, batteries, and superconductors) and the resultant demand for those manufactured products in emerging markets like India and China.
Reasons to Invest in Silver
Silver is much more affordable than gold, allowing investors to accumulate more silver per dollar. At the time of this article, silver traded at roughly 1.3% of the value of gold, meaning that an investor with just $1000 to spend could buy 56 ounces of silver…or not even one ounce of gold.
- Future Demand
With its varied industrial applications in the manufacture of consumer appliances and medical devices, as well as advanced battery technologies (such as those used in electric vehicles), there is great potential for future growth in the demand (and price) of silver.
- Asset Diversification
As a part of the precious metals asset class, investment in silver can be a valuable portfolio diversification technique to protect against the volatility of stocks and the uncertainty of geopolitical and economic conditions.
Investing in Platinum
Platinum is considered the most valuable of all precious metals. Known primarily for its use in catalytic converters, the metal is unique for its density, malleability and exceptionally low reactivity with other elements. In addition to its use in the automotive industry as a component in catalytic converters, platinum is used in the production of laboratory and dentistry equipment, electrodes, and jewelry.
The price of platinum, like other precious metals, is determined by changes in supply and demand. However, platinum has historically traded at a much higher price than gold, in part because of its rarity and difficulty to mine. Other factors that affect the price include demand by the auto industry, jewelers, and mining strikes affecting supply.
Reasons to Invest in Platinum
- Rise in U.S. Auto Sales
Since the auto industry relies so heavily on platinum in its production of catalytic converters (to comply with rising emissions standards), the price of the precious metal tends to rise and fall with the production numbers and sales of cars, trucks and other vehicles each year. If more vehicles are being built, it’s a safe bet that the price of platinum will rise as well.
- Supply Deficit
As much as 80% of the available platinum is mined in South Africa (with the rest primarily coming from Russia); as a result, the supply is subject to constraints from mine strikes and political instability — both potentially driving up the price.
- Asset Diversification
Like gold and silver, platinum is a part of the precious metals asset class, making it a sound investment to diversify a portfolio against the unpredictable nature of the stock market.
Buying Precious Metals
Gold, silver and platinum bullion products like coins, rounds, and bars can be purchased from bullion dealers (either online or at a local coin shop), directly from a government Mint, and through some banks. When buying a precious metal product, it is important to become familiarized with the common terms and vocabulary used in bullion transactions.
- Spot Price
The current market price at which gold, silver, and platinum can be purchased on the spot market, a public financial market where commodities (like precious metals and other natural resources) are traded. The spot price for a commodity is constantly changing, and can be affected by economic data, world events, and many other factors.
- Ask and Bid Price
The Ask price is the spot price at which a precious metal is sold to a consumer. The Bid price is the spot price at which a precious metal is bought from a consumer. The difference between a given Ask and Bid price is called a spread.
A dollar amount or percentage that is added to the spot price to yield the current price of a bullion product. Precious metal dealers, a government Mint, and banks will add a premium.
- Melt Value
The bullion value of a coin or bar if it were melted and sold.
- Troy Ounce
The unit of weight for precious metals. One troy ounce equals 1.09711 ounces, 480 grains, or 31.103 grams.
Coins and bars differ in price based on their bullion value and production cost, among other factors. Precious metal bars often have a lower premium than coins because they are not legal currency with a face-value. Other driving forces in premiums include the physical size of a precious metal product, purity, country of origin, and supply and demand of a given metal.
Choosing a Precious Metals Dealer
Whether buying precious metals online through a private or sovereign mint, or purchasing them locally at a coin shop, it is important to evaluate a dealer’s reputation, qualifications, quality of customer service, and pricing before making a purchase.
When choosing a dealer, look for a business that has been in operation for several years. Thoroughly investigate a company’s online reputation by reading reviews on websites such as Yelp, Google Maps, Yellow Pages, and others. When reading these, it’s important to keep in mind that overly positive (or negative) reviews may not be genuine, as some companies will pay marketing firms to post such reviews about themselves or their competitors.
Also, check a dealer’s BBB (Better Business Bureau) rating—if there isn’t one, they may not have been in business long enough. Read through the Complaint Closing Statistics and see if there are any reviews that have been left by previous customers.
If a dealer’s reputation checks out, the next thing to investigate is their qualifications. A company that has been in business for decades may seem qualified based simply on their years in operation; however, there are several organizations that well-qualified dealers are likely to be members of. Some of the largest include the American Numismatic Association (ANA), Professional Coin Grading Service (PCGS), Numismatic Guaranty Corporation (NGC), and the Professional Numismatic Guild (PNG).
Quality of Customer Service
Some precious metals dealers are focused solely on maximizing their profits—at the expense of educating their customers and providing as much (or as little) guidance that a customer requires to feel that their needs have been met. A dealer’s reputation can say quite a bit about its quality of customer service; reviews that consistently mention the helpfulness of store or customer support associates, ability to answer questions, and a willingness to take the time with each customer are all good signs that a dealer is not only in the business of precious metals, but also of providing a level of service that their customers deserve.
In the precious metals business, it is important to recognize that prices are constantly changing—a quoted price for a bullion item may differ wildly from one minute to the next depending on market conditions. Every dealer also charges a premium, or mark-up, on the spot price of a precious metal coin, round, or bar to cover their overhead costs and realize a profit on the transaction. Premiums vary by item and location; what matters is that a dealer is up-front about the percentage they charge.
An investment in gold, silver, or platinum can be a great way to diversify an investment portfolio and protect against the volatility of the stock market. Precious metals can also be a way of storing money for those distrusting of banks or the financial system. As with any investment, there is the risk of losing some percentage of the money put in, but also the possibility of turning a profit. A reputable, well-qualified precious metals dealer can guide a beginning investor toward the form of investment best-suited for their needs.