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 and diversifying a portfolio. For instance, gold is one of the most famous and popular precious metals. 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.
Here’s a closer look at what to know before investing in precious metals.
What Are the Main Precious Metals to Invest In?
Precious metals are naturally occurring elements that have a high economic value. Generally speaking, the term refers to gold, silver, and platinum.
Precious metals are rare, and only a small amount is mined each year, which helps drive their high price. Consider gold: About 3,000 metric tons of gold have been mined annually in recent years. 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, and it’s just a drop in the bucket.
If you think gold sounds rare, consider platinum: Only 170 metric tons of platinum was mined in 2020. Silver is by far the most common of the three major precious metals. In 2020, an estimated 25,000 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.
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.
It 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 the most expensive precious metal. As of April 2021, the price of gold was hovering around $1,777 an ounce.
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 April 2021, an ounce of silver cost about $26.10.
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 April 2021 cost about $1,231.51.
Up and Coming Metals
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. 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.
Here are some more details about some of these.
Palladium is a white metal. As of April 2021, it was trading at $2,855.93 an 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–a byproduct of platinum and palladium–is one of the rarest precious metals. Its price surged in 2021 to $6,000 an ounce 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 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. Global production is equal to a 10th of platinum or palladium.
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.
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. The Federal Trade Commission suggests consulting with a financial advisor with specialized investment knowledge in precious metals trading to help investors determine the best type of investments.
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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.
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.
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.
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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.
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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.
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.
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.
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.
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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 measured over periods of five years or longer. But in fact, the time period may need to be much longer than that. Research by Duke University professors found that gold keeps pace with inflation only when measured over periods of a 100 years or more.
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.
Alternatives to Precious Metals
In recent years, cryptocurrencies like Bitcoin have emerged as an alternative to precious metals such as gold–particularly for younger investors including millennials. These investors may be looking for a store of value or hedge against inflation, but may find holding physical bars or gold coins antiquated.
Instead, the digital nature of cryptocurrencies has appealed to them, since they’re used to frequenting mobile or web-based platforms. Like gold, Bitcoin has a limited supply. In fact, by design, there are only 21 million out there to be mined.
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.
You could check out SoFi Invest®. The Active Investing platform allows investors to buy ETFs that give direct exposure to precious metals prices. Another option is to purchase shares or ETFs of mining companies that produce precious metals. For those seeking alternatives to metals, SoFi Invest also offers cryptocurrencies, like Bitcoin and Ethereum.
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
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