Back in 2007-2009, there was a massive financial crisis. Investors sold off their stocks and banked on hard cash to protect themselves and their assets. Some began to invest in precious metals to hedge against the crisis. When the economy faces turmoil and volatility, there are only so many options investors have to protect their assets. One way to shield yourself from these disastrous times is to invest in precious metals.
Why Diversification is Important
When investing in stocks, it is important to ‘diversify.’ What this means is avoid putting all your eggs in one basket. For example, owning stocks in only one company will only cause disaster if that company declares bankruptcy and shuts down. When that happens, you wasted all your hard-earned money from that investment.
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So, on top of adding an assortment of stocks from different sectors to your investment portfolio, you might consider looking to investing outside the stock market. When you balance your investments, you are also more likely to protect yourself from major losses. Some might invest in real estate or in cars, but for a more liquid asset, you might want to invest in precious metals.
Which precious metal should I invest in?
When you decide to invest in precious metals, you might notice that you have many metals to choose from. There are the classic gold and silver, but also there might be some metals you maybe haven’t heard of. For example, palladium and rhodium. So which precious metal should you invest in?
Like any investment, which one you invest in depends on your specific goals. The top choice for many who desire physical ownership is gold because of its long history as a commodity, and currency. Others prefer silver or platinum because, currently, they are cheaper options.
When it comes to precious metals investing, you should first consider all your options and understand how each metal derives its value.
Gold is considered the king of precious metals. It is often the first choice for many who want to invest. Gold is a limited, highly durable material that doesn’t rust or corrode. Therefore, gold is a great resource for both jewelry and industrial applications. It is highly conductive, but not magnetic, which makes it perfect for medical instruments and electronics. So, industrial demand is one factor that determines the price of gold. But industrial usage is not the main determinant for the gold price.
The gold price changes every second the market is open, and it is the same price internationally. Because gold is also a precious metal, its value derives from the mined supply. There is a finite amount of gold in the world, and only so much of it has been refined. Supply and demand obviously factor into the gold price, but that only goes so far. The gold price can also be affected by political events, which was recently seen in 2019 with the trade war between the US and China.
Another major factor that affects the gold price lies in the hands of investors themselves. Specifically, this includes systemic financial concerns, like inflation. When people are worried about the strength of the dollar, they often turn to gold. For example, the Federal Reserve can print fiat currency, which they did during the pandemic crisis. But you cannot print gold, which means this metal will always carry its own value. This is why gold tends to do well when the stock market, or the dollar, suffers.
Sometimes, gold is too expensive for investors, but that doesn’t mean you cannot invest in precious metals. Silver is a highly attractive option for those who want to spend less. But, keep in mind that the silver price is very connected to gold. When gold swings up, silver will most likely follow in the same direction. This is simply because of the high correlation between the two metals. Therefore, a lot of people tend to follow the when looking at which metal is best to buy at the moment.
Similar to gold, industrial demand for silver affects its price. But because silver is more common, it is less expensive than gold. Additionally, new inventions can make silver demand drop in the industrial sector. Despite this, it is still commonly desired for necessities like batteries, superconductors, and microcircuits. This is in addition to the traditional demand for jewelry and bullion products like bars, coins, and rounds.
Platinum Group Metals
When people think of precious metals investing, some might think of platinum. They may also think of the other metals that share similarities to platinum, like palladium and rhodium. These metals offer an interesting investment opportunity because their value is mainly derived from industrial use, particularly in the automotive industry.
In the past, platinum was more expensive than gold. This is because it is much rarer than gold, and it can be an irreplaceable material for certain technologies. Industrial uses for platinum include catalytic converters for diesel engines, refining petroleum and other chemicals, and computer engineering.
Because the largest source of demand comes from the automotive industry right now, this industry influences the platinum price the most. Platinum use in catalytic converters results in less harmful gas emissions from diesel-powered cars.
On top of that, other metals that are often byproducts of platinum mining include palladium and rhodium. These two metals are also in high demand in the automotive industry. However, palladium and rhodium are much rarer and far more useful for gasoline engines than platinum. Palladium also carries its own specific capabilities. For example, it is an extremely important tool for solar panels. Additionally, rhodium is much rarer than palladium. It is also far more efficient in catalytic converters for gasoline engines than palladium is.
In conclusion, the price of platinum can make it a more desirable investment than silver. Its group metals are also much more expensive than gold but have high industrial demands. But, platinum is possibly one of the most volatile precious metals. Larger deposits of platinum and its group metals are mostly found in Russia and South Africa. Therefore, political events in these countries can severely influence the price.
How can I invest in Precious Metals?
Precious metals investing carries its own risks that are mostly independent of the stock market. Furthermore, each metal also bears its individual risk factors. But, because every stock portfolio benefits from diversification, you should still consider investing in precious metals.
There are many options to invest in precious metals. Some of the main choices include ETFs, common stocks and mutual funds, and physical bullion. Investing in ETFs does not grant you physical ownership of precious metals. While owning ETFs could be a good option, you will only own paper or digital currency that is backed by the precious metal and its spot price. If you are interested in precious metals investing, it might not be good to only invest in this.
The same thing can be said for common stocks and mutual funds. You might be interested in investing in stocks for the mines of these precious metals, but again, you will not be owning the physical precious metal. Miner’s stocks are also connected to spot prices. That being said, these are still directly connected to the stock market.
Physical Ownership of Precious Metals
Physical ownership of bullion is a great way to diversify your portfolio. This is because precious metals carry their own values. All you have to worry about is safe storage and making sure you buy from reputable companies. You do not want to get stuck with a counterfeit. Even having a small pool of precious metals in your portfolio can help guard your assets against volatility and inflation.
You should always know what your goals are when investing, and that putting all your eggs in one basket is a bad idea. So, how much of your portfolio should be made up of physical bullion is up to your personal agenda. Some invest about 5% of their portfolios in physical precious metals, while others prefer 20%. Gold and other metals are great investments because, unlike real estate, they offer fast liquidity.
Finally, you should know that wealth can accumulate over time from holding certain bullion products. For example, low mintage coins that are well taken care of can become far more valuable over the course of 20+ years. Precious metals investing is a great way to hedge your stock portfolio, and many turned to it after the 2008 Financial Crisis. Developing a solid plan to invest in precious metals will provide additional protection more than just spreading out your investments can.
About Eric Gozenput
Eric Gozenput founded Bullion Exchanges at the age of 27 and has been featured in places such as Fox Business News, Forbes, Reuters, Seeking Alpha, Value Walk. Eric maintains that precious metals are vital for investment portfolios and that investing in precious metals should be convenient, transparent, and secure. Before beginning his business in 2012, he began his career at Merrill Lynch as a Financial Advisor, then transitioned into working at a Hedge Fund as an International Trader for six years. Today, Bullion Exchanges has grown to become one of the largest precious metals dealers in the world that buys and sells physical precious metals and numismatic coins online and in-person at our location in the Diamond District of NYC.