Investing in Precious Metals
Investing in precious metals has a long history. Precious metals are attractive investments because they are rare, possess high economic value due to their scarcity, have industrial uses, and act as historical stores of value.
Precious metals gained traction as a basis for legal tender, but today investment in precious metals is a way to diversify one’s portfolio and hedge against inflation.
Investors can purchase precious metals by owning physical bullion or coin, entering derivatives agreements, or via precious metals ETFs.
Historically, precious metals were central to the global economy since many currencies were either physically minted using metals like gold or currencies were backed by them.
For instance, gold has been universally accepted in exchange for goods and services.
Additionally, from the 1870s until the First World War, the gold standard formed the basis of the world’s currencies.
And although gold’s official role in the international monetary system ended by the 1970s, it is still regarded as a reserve asset. Governments and central banks still hold about 45% of all the world’s gold for that purpose.
Silver, too, was historically the standard medium for payments in the world’s trading systems.
Silver’s malleability and resistance to atmospheric oxidation contributed to the metal’s use in the manufacture of coins, ornaments and jewellery.
Since the 1960s, silver’s uses turned industrial, with the metal used for plated silverware, electronic components, and photovoltaic cells.
Like silver, gold also has its industrial applications.
Gold’s electrical conductivity and inertness make it an attractive material for the electronics industry, especially in printed circuits and semiconductors.
As for platinum, the main thing it has going for it is rarity.
Compared to gold and silver, a lot less of this metal is extracted from the ground each year.
While it’s also appealing to jewellers, platinum is primarily in demand from the automobile industry. This means the price of platinum is proportional to the automobile market.
A recent downside is that a cheaper alternative — palladium — has been discovered to combat the rarity of platinum. This could mean demand for platinum decreases which would bring down its trading value.
Commonly, one invests in precious metals to diversify one’s portfolio.
Additionally, since metals like gold and silver act as stores of value, investors see these metals as potential hedges against inflation and as safe havens during times of uncertainty or conflict.
Let’s look at gold and silver in more detail.
The price of gold can be difficult to predict because, unlike other metals, it’s not necessarily moved by supply and demand. It has more of a sentimental function. But there are some perks to having your hands on some gold.
For instance, we often see gold as a safety net. When politics, banks, or money itself grow unstable, gold always manages to hold some value. It’s also a physical way to store savings and can easily be traded for its worth when the time comes.
It’s the ultimate fear investment.
When the market panics, the gold price rises. When inflation looks to be rising, gold tends to increase with it. And when deflation hits, gold retains its purchasing power.
For instance, with the world coping with the COVID-19 fallout and governments kickstarting their economies with sustained stimulus, the flood of ‘cheap’ money into a world rattled by a pandemic could see a gold boom.
And with Australia one of the leaders in gold production with some of the largest mine reserves, that boom could be right on the ASX’s doorstep.
The main difference between silver and gold is that silver has more of an industrial purpose. This can be both good and bad, depending on the position of the market.
If silver-based appliances are in high demand, so too will be the demand for silver. But if a better alternative is discovered, the price of silver could drop overnight.
Whether positive or negative, there’s no doubt that the value of silver is extremely volatile. It can fluctuate up and down quite rapidly.
Often, it can be hard to predict these movements, which is why it’s good to keep a close eye on any silver news.
Buying Gold and Silver
One has several avenues to invest in precious metals like gold and silver.
One can buy the metals directly by purchasing physical bullion such as minted coins or bars.
Purchasing physical bullion requires thinking about storage.
One could keep the metal in a safe at home, a bank safety deposit box, or with a private storage company like Kennards Self Storage.
One could also simply have the bullion dealer store the gold on one’s behalf.
Additionally, an investor could purchase a precious metals futures contract or buy shares in a publicly-traded stock exploring and mining a particular metal.
Finally, one could also use an exchange-traded fund (ETF) to gain exposure to a whole swathe of precious metal stocks and investment instruments.
ETFs can be a convenient way to invest in the wider precious metals sector, without owning the physical asset.
It should be noted that forecasting asset prices has never been easy — whether it’s stocks, houses, copper, or gold. One must always be cautious and aware of risks.
It is also pertinent to note the added uncertainty brought by the COVID pandemic.
It could be the case that the global economic recovery stalls while interest rates remain low, triggering a rise in gold.
On the other hand, bad news surrounding the wider economy could set off a stock market sell-off, leading investors to dump their stakes in precious metals to finance their losses in other assets.
Additionally, if a global vaccine rollout succeeds and the US dollar strengthens, gold could move in the opposite direction.
Precious Metal Stocks
Precious metal stocks feature heavily on the ASX, having been an important part of the Australian equity market since the mid-1800s.
For example, the country’s first stock exchange opened in Ballarat in 1858, when the discovery of gold led to the formation of several companies seeking capital for equipment to work the mines.
Nowadays, there are more than 400 ASX stocks with exposure to gold and silver projects in Australia and elsewhere.
Additionally, when considering investing in precious metal stocks rather than the physical metal itself, it can be useful to familiarise oneself with the Lassonde curve, which charts the lifecycle of a mining company.
To make sure you stay up to date with all precious metal-moving market jumps, check out this page regularly.
And if you’re a gold bug who tracks multiple gold and silver ASX stocks and you want serious in-depth analysis of the sector, I suggest checking out Brian Chu’s Hard Money Trader.
Hard Money Trader helps readers trade some of the most exciting gold and silver plays on the ASX.