Basics of Precious Metals Investing

Investing in commodities like precious metals is an excellent way to diversify an investment portfolio. Investors use metals like silver and gold to hedge against inflation. There are several ways to invest in precious metals. Additionally, each metal has its own advantages and weaknesses.

Gold is one of the most in-demand commodities. The price of gold is not ruled by simple supply and demand for the metal itself. In addition, the value of gold rises and falls as a result of gold buyers' behavior.

Since buyers tend to view gold as a stable asset, its value often increases when other institutions like large banks or governments appear unstable. Investors also turn to gold when other investments offer effective negative interest rates.

Metals can also counter the effects of a weak currency. Investors may prefer to transfer their savings from U.S. dollars into precious metals when the dollar is falling in value. This movement also causes the price of precious metals to rise.

In some situations, such as an extreme political crisis, people may be forced to convert their currency or other assets into gold in order to maintain possession of their wealth while fleeing to another country.

People can buy gold in bar or coin forms. This type of investment is usually stored in a secure location like a bank deposit box. Some precious metal traders opt for certificates as proof of ownership. While a paper certificate is less cumbersome to manage than gold bars and coins, it may be less liquid should the owner want to sell.

Other metals such as silver and platinum can also be purchased as bars or coins. However, as these metals have practical and industrial applications, their values tend to fluctuate more than gold. For example, the rise of the middle class in emerging economies increased the demand for silver as these households purchased more devices containing the metal.

On the other hand, the value of both silver and platinum has been impacted by industry changes or economic downturns. The shift toward electric cars has reduced the automotive industry’s use of platinum in vehicles, where it is used in catalytic converters. This has impacted its value. Similarly, the rise of digital photography reduced the demand for silver used in film processing. Although these metals are both more volatile than gold, they are still considered good hedges against inflation.

Individuals who do not want to purchase metal assets can invest by other means. There are numerous exchange-traded funds (EFTs) that rise and fall in line with the price of precious metals. EFTs can be bought and sold like other vehicles in the stock market.

Determining how much gold, silver, and other precious metals to include in a portfolio depends on several factors. Investors must decide if they want a long-term strategy or a short-term return. Many people also invest in precious metals for sentimental or collectible purposes, rather than financial reasons. Other people prefer buying precious metals because they are tangible, unlike stocks and other investment vehicles.

Like with any other investment, an investor may regret having too small a position in metals. If an investor’s stake in precious metals is too small, even a significant rise in price will have little impact on their overall portfolio. For this reason, financial professionals suggest allocating about 20 percent of one’s long-term portfolio to commodities and metals.