A novice’s help guide to investing in precious metals
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The use of precious metals can be dated back centuries before contemporary society. The value of precious metals is still imminent, even after all these centuries. Perhaps the main reason precious metals have been able to retain their value is that they are truly scarce.
Different metals have different chemical compositions, structures, and uses. Their characteristics have a bearing on their perceived value to a great extent. Examples of precious metals are gold, silver, platinum, and palladium, among others.
Precious metals can be acquired in different forms, such as physical or electronic-based. Due to the advancement of technology, you can invest in precious metals through stocks and mutual funds. Different investors will prefer different forms.
That being said, here’s a beginner’s guide to help you if you’re interested in investing in precious metals.
1. What determines the price of precious metals?
Investors don’t like uncertainty because it affects the probability of securing a sound return on their investments. So, anything that affects an investor’s expected rate of return is likely to prompt a reaction from them.
When determining the market price of precious metals, forces from either the demand or supply side can affect the price of precious metals. The interaction of demand and supply determines the price, and because these forces are ever-changing, precious metal prices are always changing.
Brokers like the Oxford Gold Group keep track of these market variations to stay on par with global market trends. The most notable factors that affect the price of precious metals are economic stability, political stability, interest rates, and inflation. Here’s how:
a. Economic stability
When the economy is booming, employment rates are high, and economic growth forecasts are positive, the central banks will likely tighten their monetary policy measures, which will drive down the price of precious metals.
The opposite is also true; when the economy is declining and unemployment rates are rising, the value of precious metals will rise. This is because, relative to other asset classes, precious metals will be more preferable to investors in such uncertain times.
But when the economy is performing well, investors are more willing to offload the precious metal to invest in other asset classes.
Gold and silver ingots isolated on white background. 3D illustration.
b. Political stability
If there’s political instability, perhaps due to political in-fighting, civil war, or upcoming elections, investors’ confidence will be negatively affected. Investors will then prefer holding onto precious metals over other asset classes because, in such instances, it’ll be a comparably safer investment.
Therefore, in a politically unstable environment, the demand for precious metals usually rises. The opposite is true when the political landscape is relatively stable.
c. Interest rates
When interest rates are low, investors are more willing to sell their precious metal holdings to invest in other asset classes. But when interest rates are high, investors opt to hold onto their precious metals because they retain their value better over time. Also, they’re not as costly to hold onto as other asset classes due to interest charges.
d. Inflation
Inflation is the general increase in the price of goods and services over time, and depending on the rate of inflation, the value of money (or purchasing power) is eroded as inflation rises. However, this doesn’t strictly apply to precious metals because it doesn’t affect their intrinsic value.
Its intrinsic value is determined by the fact that the commodities are scarce. This is why most investors try to diversify their portfolio to the extent that it’s composed of at least 5% to 15% of precious metal investments.
2. How do you buy or invest in precious metals?
You can either get precious metals physically, such as gold bullion, or you can invest in it through exchange-traded funds (ETFs), mutual funds, futures, and options.
Gold bullion can be bought through a broker. You have the option of buying precious metal bars or coins, and they’re usually sold in grams or ounces. Some investors prefer to buy precious metals in their pure physical form because they have a claim on them.
Other precious metals such as silver and platinum can also be bought in their physical form. The downside is that the more precious metal you physically accumulate, the more difficult it’ll be to store it.
ETFs are a more liquid and easier way to invest in precious metals. The downside is that you won’t have direct ownership of the precious metals in the fund you’re in. Since you don’t have a claim on the precious metals in the fund, you won’t receive any precious metal bars or silver coins. If the fund is mismanaged, you risk losing your investment.
Furthermore, when it comes to futures and options, this option would be ideal for those fearless investors who would rather go big or go home because of the high risk usually involved in investing in derivative assets. These investors will be looking to get the most profits by assuming a lot of risks.
3. Risks
When it comes to investing, it’s hard to declare any form of investment completely risk-free. Precious metals are no exception—the fact that if the global supply of a precious metal increases, its value will likely decrease, or when the economy starts performing well, the price of your precious metal will likely decrease. You aren’t fully in control of such things.
However, one could confidently say that, relative to other asset classes, precious metals are generally less risky. Also, the fact that precious metals retain value well over time makes them a relatively safe investment. Just make sure you’re buying genuine precious metals whenever you decide to invest in them.
Conclusion
By and large, precious metals are a good and wise investment consideration for those who would wish to diversify their investment portfolio because they hold their value well. The gains from precious metal investing may be alluring, but like many things in life, it’s not devoid of risks.
It would be best to consult with an investment consultant or precious metals specialist or do proper research before you start investing in precious metals.
