Take the guesswork out of investing in precious metals!

Investing in precious metals isn't new. Throughout recorded history, we've used precious metals as an investment.

In the earliest civilizations, gold and silver were used to showcase wealth, affluence, as well as creating a way to exchange goods and services.

In the modern age, the precious metals platinum and palladium have gained popularity by investors and traders as well.

What are Precious Metals?

Precious metals are a class of commodities (raw materials) which are used to produce goods in different industries.

gold, silver, platinum, and palladium bars, bullion, and coins

"Precious" refers the fact that these metals are rare and in high demand, which gives them a high economic value.

Why Buy Precious Metals?

Investing in precious metals is usually considered a capital preservation technique.

Precious metals are used to "store of value", or to maintain purchasing power during times of inflation and deflation.

Instead, precious metals are considered a "hedge" (think insurance).

In other words, investors see precious metals as an investment that should not appreciate or depreciate when other asset classes rise and fall in price because of changes in the value of a dollar.

Many people feel that investing in precious metals does not offer the opportunity for large returns (i.e. growth), because commodities do not "create" anything of value (as a company does) or income (such as dividends or interest payments).

However, this does not mean that investing in precious metals cannot be profitable. For example, from 1/1/09 to 11/1/09, palladium increased in price by ~93%, followed by silver (~58%), platinum (~51%), and gold (~27%).

For more information on investing in gold, click here.

For more information on investing in silver, click here.

For more information on investing in platinum, click here.

For more information on investing in palladium, click here.

Factors Affecting Price

Since precious metals are physical substances, price movement is generally driven by supply and demand, as they are produced for and consumed through practical use (jewelry, industrial production, etc.).

Private investors (retail demand), large corporations (industrial demand), and even national governments can drive prices on the demand side.

On the supply side, production levels typically drive price movement, although national governments can also influence prices through rules and regulations.

Fundamental analysis is one way to gauge the prices of precious metals. This analysis technique uses macroeconomic factors (such as annual production, changes in global supply, other commodity prices, etc.) to calculate market prices.

Technical analysis is another technique used to make buy and sell decisions, based on the historical price movement of each commodity.

One key concept for investing in precious metals (as well as other commodities) is the "spot price". The spot price is simply the current market price for a standard quantity of a commodity.

Another important consideration when investing in precious metals is the "premium" or "discount". Real assets sell at a premium or a discount to their spot price. Supply and demand, as well as manufacturing, storage and shipping costs affect the size of the premium or discount.

Investment Choices

Investors and traders looking to invest in precious metals have two asset classes to choose from: Real Assets and Financial Assets

Real Assets

  • Collectible Coins
  • Bullion - Coins and Bars
  • Jewelry

Collectible coins derive a majority of their value from the scarcity of the coins. The rarer the coin, the more someone might be willing to pay for it (higher price).

Obtaining a profit from this type of asset depends on a seller’s ability to find the right buyer.

Bullion refers to an investment grade precious metal and is valued by its mass and level of purity.

Since these bars and coins are produced specifically as an investment vehicle, controlling and verifying the mass and purity of each coin is part of the minting process. Due to this standardization, it is much easier to buy or sell bullion on the open market.

However, this standardization also comes with a price, in the form of a premium. This means that bullion usually sells at a higher price than the spot price.

As the number of ounces decreases (in terms of the size of the bullion bar or coin), the premium increases. The smaller sizes increase in price because of the increased manufacturing, storage and shipping costs.

It is also important to note, when investing in precious metals using bullion, that the "face value" of each coin is not used to determine value.

Many nations mint bullion coins as legal tender, so a face value must be stamped on each coin. However, a bullion coin's face value is usually far below the true marketplace value. This is the reason bullion is used as a store of value or an investment, rather than a currency for daily transactions.

Jewelry is probably the most common way people buy precious metals, although we do not consider this a true "investment". This is due to the fact that the value of most jewelry is subject to personal taste (beauty is in the eye of the beholder). Therefore, as with collectible coins, profiting from jewelry requires a seller to find the right buyer.

Financial Assets

  • ETF's
  • Mutual Funds
  • Stocks
  • Trusts and Partnerships
Financial assets are the most common way to invest in precious metals.

Exchange traded funds are created to track the price movements of various precious metals. Some funds may purchase the physical quantities of each and store them at a secure location. Other ETFs buy financial instruments and try to mimic the movement of the spot price on a daily basis.

Mutual funds purchase shares in companies that profit from the sale of precious metals. Investing in precious metals using mutual funds and individual stocks can provide advantages over ETFs, such as dividends and increased returns.

For example, mining an ounce of gold, silver, platinum, or palladium may cost a company less than the revenue generated by selling that ounce at the spot price, which creates an automatic profit.

However, since we are still dealing with stocks, a downturn in the market could create losses for your portfolio, even though prices are rising.

There are also investment opportunities through limited partnerships, which are used to finance exploration (looking for deposits), mining, and refining.

Where to buy Precious Metals

Real assets can be purchased at a number of locations. Local rare coin dealers and trade shows are one place that collectible coins can be purchased, as well as some online auction houses.

Investing in precious metals in the form of bullion can also be done online or from local dealers. A good place to start your research is the U.S. mint website (www.usmint.gov).

There are several online brokers of precious metals, but you MUST do your research to ensure that these dealers are reputable.

Financial assets, such as funds and stocks, can be purchased in your normal brokerage account, as well as retirement accounts. For more information on trading accounts, click here.