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Investing in Gold and Silver: a Guide

By Samuel Becker · July 28, 2023 · 13 minute read

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Investing in Gold and Silver: a Guide

Investing in gold and precious metals can also play a part in building and diversifying a portfolio. Consider this: Gold is one of the most valuable and popular precious metals, and it also tends to move inversely with the stock market. So, when there is a global event that triggers a decline in share prices, gold might, in the meantime, experience a jump higher as investors seek a safe haven asset to park their money for the time being.

Before digging into gold investing and other precious metals, there are numerous things investors should know.

What Are the Main Precious Metals to Invest In?

When it comes to investing, gold, silver, and platinum are generally in the discussion. But it can be helpful to know a bit more about precious metals before investing in gold or any others.

For starters, precious metals are naturally occurring elements that have a high economic value. Generally speaking, the term “precious metals” refers to gold, silver, and platinum — again, when discussing investments.

Precious metals are rare, and only a small amount is mined each year, which helps drive their high price. They’re also used in a variety of ways: Minting currency and bullion (coins, bars, etc.), in electronics production, as decorative jewelry, and more. But it’s the relative rarity or scarcity of precious metals which tends to keep their prices high.

Gold

For centuries, gold has been prized for its use as currency and for jewelry making. It has a number of unique qualities that set it apart from other metals.

Gold doesn’t corrode, it’s highly reflective of light and heat, and it’s extremely malleable. Gold is also a very good conductor of electricity — its conductivity outlasts other common conductors, namely copper and silver — which has made gold a popular metal for industrial uses as well.

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 usually the most expensive precious metal. As of May 2023, the price of gold was hovering around $1,950 per ounce.

Silver

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 tends to be the cheapest of the precious metals. In May 2023, the spot price for an ounce of silver cost about $23.

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 May 2023 cost about $1,034.

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Gold Investing vs Stocks

Investors may find themselves considering investing in gold vs investing in stocks. Both have their pros and cons, and potentially, a place in an investor’s portfolio. But some serious consideration needs to be made to the potential risks and benefits, and how each type fits into an individual’s investing strategy.

Investing in stocks is likely what a financial professional would suggest to most investors. Stocks tend to appreciate over time (despite some day-to-day volatility), with market returns averaging around 10% historically. Stocks also come in a variety of types, and investors can gauge relative risk levels to choose what’s appropriate for their portfolios. And stocks often pay dividends — a big plus for many investors.

Gold, on the other hand, is a good store of value. It’s less volatile than stocks, which means that investors may not see much value appreciation over the short term. But that can also serve a purpose, too, as gold can be a hedge against inflation.

Gold investing vs Stocks

Investing in gold

Investing in stocks

Potential for moderate returns over time Potential for big returns over shorter periods of time
Less volatile than stocks Different types and levels of risk
May serve as a hedge against inflation Often pay dividends

Up and Coming Metals

Investors 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. It’s important for investors to know that because these metals are smaller markets, they’re more liable to big price moves and volatility due to slight changes in supply and demand.

Palladium

Palladium is a white metal. As of May 2023, it was trading at $1,370 per ounce. About 85% of palladium ends up in the exhaust systems of cars, where it turns pollutants into less harmful carbon dioxide and water. In recent years, the price has jumped due to a combination of a shortage and increased demand from China, where the government has cracked down on pollutants from cars.

Iridium

Iridium — a byproduct of platinum and palladium – is one of the rarest precious metals. Its price surged in 2021 to $6,000 per ounce (as of May 2023, it’s priced at around $4,600) due to supply disruptions as well as rising use in electronic screens. Investing in iridium is tough though because it’s not traded on an exchange and there are no exchange-traded funds that give retail investors access to it. Such investors need to buy ingots of iridium from a metals dealer.

Rhodium

Rhodium prices have also surged in recent years due to demand for its use from the auto industry. It’s a byproduct of platinum and nickel. However, similar to iridium, it’s very difficult for everyday investors to bet on rhodium because it’s not traded on exchanges and even the supply of bars or coins is tiny, especially relative to markets like gold or silver. As of May 2023, rhodium prices are around $6,500 per ounce.

💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.

5 Ways to Invest in Gold and 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.

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

However, not all purchases of precious metals are regulated, and fraud can be an issue. It may be wise to consult with a financial professional with specialized investment knowledge in precious metals trading to help investors determine the best type of investments.

1. 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 Krugerrand.

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.

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.

2. Commodity 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.

Recommended: Commodity Investing Risks

3. Mining 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.

4. 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.

Recommended: How to Trade Options

Also, beware of dealers that allow you to buy on margin, i.e., borrowing money to buy precious metals. First of all, it’s a riskier strategy that could lead to a margin call. And plus, 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.

5. Precious Metals and 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.

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-currency systems. 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 vs. market 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 currencies 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 prices 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.

Some investors also buy precious metals like gold as a hedge against inflation. Gold may act as a good hedge against inflation when held for several years.

Investors should also be careful about the tax consequences of owning precious metals. The market is considered to be made up of capital assets, so therefore capital gains taxes may apply. The IRS may also classify some precious metals holdings as collectibles, and thus they may be taxed at the maximum capital gains tax rate. So whether you own a gold ETF or physical gold bars could make a difference.

Alternative Investments to Gold and Precious Metals

Gold and precious metals may be alternative investments on their own, but there are other alternatives on the market for investors as well.

Crypto

In recent years, cryptocurrencies like Bitcoin, Ethereum, Litecoin, and others have emerged as an alternative to precious metals such as gold — particularly for younger investors. These investors may be looking for a store of value or hedge against inflation, and open to non-traditional investments.

Cryptocurrencies are available to many investors, but have significant risks that should be taken into consideration.

Stocks

As discussed, investors can also look at stocks as an alternative to investing in gold or precious metals. There’s likely some overlap, too (mining stocks, for example), and investors may be able to gain exposure to precious metals through stock holdings. Bug, as mentioned, there are pros and cons to investing in gold vs. investing in stocks.

Real Estate

Real estate is yet another potential investment, but it’s generally an expensive one. There are ways to gain exposure to the real estate market by purchasing shares of REITs or similar assets, but real estate itself is also a fairly risky play. It’s best to do your research and know the risks before jumping in with both feet.

The Takeaway

Precious metals may be a useful way to diversify your portfolio and speculate on assets that aren’t public companies or government bonds. 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.

There are many other things to consider before investing in precious metals, too, such as whether it’s a better fit for your strategy to invest in stocks, etc. All told, there’s a lot to think about, and it may be a good idea to consult with a financial professional.

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