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Investing in Precious Metals

September 28, 2020 · 7 minute read

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Investing in Precious Metals

Precious metals have held a place in human culture for thousands of years as currency, decoration, and industrial materials.

Think of the treasures in King Tut’s tomb, gold bars at Fort Knox, or platinum in the catalytic converter of a Prius.

Investing in precious metals can also play a part in building a portfolio. Here’s a look at what to know before investing.

What Are Precious Metals?

Precious metals are naturally occurring elements that have a high economic value. Generally speaking, the term refers to gold, silver, and platinum.

You may also hear talk of the platinum group, which are metals that are chemically similar to platinum and include palladium, iridium, osmium, rhodium, and ruthenium.

Precious metals are rare, and only a small amount is mined each year, which helps drive their high price. Consider gold: About 2,500–3,000 metric tons of gold is mined each year, while just over 190,000 metric tons have been mined over the course of human history.

That sounds like a lot, but compare that to the 160 million metric tons of bauxite—one of the primary sources of aluminum—that’s mined each year, it’s just a drop in the bucket.

If you think gold sounds rare, consider platinum: Only 190 metric tons of platinum comes out of the ground each year.

Silver is by far the most common of the three major precious metals. In 2018, nearly 27,000 metric tons of silver came from mines around the world.

Here’s a closer look at each of these metals and how they are used.

Gold

When thinking of precious metals, gold may be the first to come to mind. For centuries, it’s been prized for use as currency and for jewelry making. It also has a number of unique qualities that set it apart from other metals.

It doesn’t corrode, it’s highly reflective of light and heat, and it’s extremely malleable. In fact, gold leaf can be pounded to 0.18 microns thick, or seven millionths of an inch. Gold is also a very good conductor of electricity, and because it doesn’t tarnish, its conductivity outlasts other common conductors, namely copper and silver.

About 78% of the gold mined each year is destined to become jewelry. Another 10% is used industrially, including in electronics and for medical and dental purposes. The rest is used to supply financial transactions.

Gold is the most expensive precious metal. As of early 2020, the price of gold was hovering around $1,293 an ounce .

Silver

Thinking about silver may conjure images of fusty tea services or ornate tableware. But like gold, silver has a long history as currency, and a number of its attributes make it an important industrial material.

It’s also malleable, which makes it a good material for jewelry making and industrial purposes. And it’s an excellent conductor—as a result, many consumer products, such as computers, mobile phones, appliances, and automobiles, contain silver.

Silver is even starting to show up in some unexpected places. For example, radio frequency identification (RFID) devices, which use sprayed-on silver, are replacing barcodes on items like supermarket goods, packages, and warehouse inventory.

Silver is the cheapest of the precious metals. In 2020, an ounce of silver cost about $15 an ounce .

Platinum

By far the rarest of the three precious metals, platinum is primarily mined in three countries: South Africa, Russia, and Zimbabwe. Like the other precious metals, platinum is used for decorative and industrial purposes.

It is the least reactive material known to man, meaning that, like gold, it doesn’t corrode. It is also extremely malleable and a good conductor of electricity. Industrially, platinum is used in the manufacture of everything from fertilizer to sticky notes, and it’s used in catalytic converters in automobiles and fuel cell technology.

Because it’s nonreactive and nontoxic, it’s an important material in a number of medical devices, including joint replacements and pacemakers.

Despite its relative rarity, the price of platinum comes in under the price of gold. An ounce of platinum in 2020 cost about $900 .

How To Invest in Precious Metals

There are a number of strategies investors can take to get started investing in the precious metals market, from buying the materials directly to more indirect methods like investing in mining companies. Some options:

Bullion

When buying bullion investors are buying precious metals in their physical form, as bars or coins. Bullion is often bought and sold on the commodities market, but it can also be purchased from precious metal dealers, brokerage firms, coin dealers, or major banks.

The U.S. Mint produces gold, silver, and platinum bullion and guarantees its precious metal content. Common bullion coins include the American Gold Eagle, and internationally, the Canadian Maple Leaf, the Australian Gold Nugget, and the South African Kruggerand.

Before buying an investor might want to shop around for sources with the lowest markup. Banks might charge less than dealers. Ask for a coin’s melt value, which will tell the actual value of the metal used to make it. And always be sure to have a secure place to store purchases, such as a safety deposit box.

Commodity exchange-traded funds (ETFs)

Rather than buying physical bullion, investors can buy shares of precious metal ETFs much like they would a share of stock.

Commodity ETFs invest in physical commodities, such as agricultural products, petroleum, or, in this case, precious metals. These ETFs may track a single commodity or a commodity index. Commodity ETFs may also make use of sophisticated investment strategies such as futures contracts.

Stocks

Investing in stock from mining companies can give investors indirect access to precious metals. The stock price of these companies is tied to the price of the metal they mine. The stock price of a gold mine might rise with the price of gold and fall as the price of gold falls.

When buying stock, investors must understand that price performance may also be tied to the underlying management and performance of the company.

If something goes wrong—say a mining disaster destroys equipment—the stock price might diverge from the price of the metal. In this case, even if precious metal prices are on the rise, stock prices could tumble.

As is the case whenever buying stocks, investors should also be aware of other potential pitfalls, such as trying to time the market. In other words, be wary of jumping in too quickly when prices are soaring, or jumping out when prices fall.

Instead, when choosing stocks, evaluating them, and determining how long to hold them, an investor might want to consider them in light of their overall portfolio and goals.

Futures and options contracts

These are derivatives, meaning they derive their value from an underlying asset—in this case precious metals. Futures contracts are an agreement to buy or sell a specific amount of a commodity at a set price and on a set date.

A futures contract can mean that an investor ends up holding the physical commodity. Options, on the other hand, give investors the right to buy or sell a commodity at a given price and at a certain time. However, the investor is not obligated to do so.

Precious Metals Certificates

This is a way to access the benefits of owning physical metals without having to store them. The certificate is a promissory note that can be exchanged for a certain amount of bullion stored in a bullion bank.

However, there are some drawbacks with this type of investment. For one, there may be no guarantee that there is enough bullion to back a certificate. In other words, the bullion may not actually exist.

There is also no way to check whether the precious metal content is what the dealer says it is, and it may not be properly insured.

Buyer Beware

Before investing, investors might want to be sure they thoroughly understand the types of investments available. Stocks, ETFs, and futures/options contracts are regulated by the federal government.

However, not all purchases of precious metals are regulated, and fraud can be an issue. The Federal Trade Commission suggests consulting with a trusted financial advisor with specialized investment knowledge in precious metals trading to help investors determine the best type of investments.

When buying gold coins or bullion, research dealers thoroughly. Investors might look them up online and read about other people’s experiences with the company. The state attorney general’s office or local consumer protection agency could be other avenues to find out whether there have been any complaints against the company an investor is researching.

Investors also might want to be extremely wary of sales pitches that encourage them to “act now,” sellers that appear to minimize risks, or buying bullion that won’t be delivered directly.

Also, beware of dealers that allow you to buy on margin, i.e., borrowing money to buy precious metals. Such dealers must be registered with the Commodity Futures Trading Commission.

If they are not, they could be operating illegally. Any dealer selling a commodity on credit or margin must deliver the material to the buyer within 28 days of purchase.

Potential investors could run a background check on anyone trying to sell precious metals by looking them up on SmartCheck.gov to find out whether the person or company is registered.

Finally, if anyone is actively trying to sell precious metals, investors could watch out for these tell-tale signs of fraud:

•  Guaranteed returns
•  Being pitched a financing agreement
•  Cold-calls or cold-emails
•  Scare tactics—For example, being told that gold is the only material that holds its value in times of upheaval or that precious metals are about to reach their highest value in recent times
•  Sales agreement that doesn’t say where the physical metal is located

What Are the Benefits of Investing in Precious Metals?

Investors hold precious metals for a number of reasons. First, they tend to hold their value when other currencies don’t. Most currencies are fiat currencies. The paper money and metal coins used as legal tender are backed by the government that issues them.

In other words, they have value because governments say they do. Governments can always print more money and mint more coins. Yet if people lose faith in the currency, that currency can lose value. On the other hand, the amount of precious metals in the world is finite.

As a result of their scarcity and their industrial uses, precious metals have an intrinsic value. And as investors lose faith in a currency—during times of political or economic upheaval, for example—precious metals may maintain their value or even rise.

Similarly, because precious metals don’t derive their value in the same way as paper money, they can also be used as a hedge against inflation. As inflation rises, investors tend to flock to stable investments like gold and silver, driving up the price.

What Are the Risks of Investing in Precious Metals?

Though investors may fall back on precious metals in times of instability, it’s important to understand that they can also be subject to risk and volatility.

First, a weak U.S. dollar relative to other currency can push precious metal prices higher. That’s because as the dollar falls, gold becomes cheaper to buy with other currencies. Conversely, a strong U.S. dollar can push precious metal prices lower as it becomes more expensive to buy with other currencies.

Volatility in the broader market can also affect precious metal prices. As stock price drop, investors may look for alternatives, turning their attention to precious metals.

It may sound counterintuitive, but during times of economic stability, the price of precious metals may fall. Remember, these commodities are often used as a hedge during times of instability. So when things are going well, fewer investors may be interested in them.

Before Investing

Precious metals maybe a useful way to diversify your portfolio. Yet because they can be volatile, you might want to make sure they fit your goals and your risk and return profile before you invest.

Looking for other ways to diversify your portfolio? You could check out SoFi Stock Bits where you can buy fractional shares of your favorite companies and ETFs with as little at $1 to start.

Get started with fractional share investing with SoFi Invest®.


SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.

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