Precious metals have historically served as a “safe haven” for investors. Investors view precious metals as a means to protect their wealth from inflation, currency devaluation, and overall economic uncertainty. As alternative investments, precious metals such as Gold, Silver, Platinum, and Palladium present a unique opportunity for wealth preservation. There are many options to purchase precious metals, each presenting its own advantages and disadvantages. To make informed decisions regarding the inclusion of precious metals in your diversified portfolio, you must understand the various forms of investing in precious metals available.
Physical Metals (Coins, Bars, etc.)
The most traditional method of investing in precious metals has been through purchasing physical gold, silver, or another precious metal in coin, bar, or bullion form. With this type of investment, the investor retains possession and ownership of the metal.
Benefits of Investing in Physical Metals:
A tangible asset – The investor owns the actual metal and can store and protect it.
Immunity to Digital Risks – Like digital assets, physical metals are not vulnerable to cyber threats or failure of systems.
No Counter-Party Risk – The ownership of physical metals does not depend upon the actions of a third-party, similar to stocks or bonds.
There are, however, some negative aspects associated with investing in physical metals. These include the necessity of storing the metals securely and obtaining insurance for the metals, as well as the possibility of paying a premium above the spot price of the metal when purchasing physical metals.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds (ETFs) provide investors with the ability to obtain exposure to precious metals without actually taking ownership of them. A precious metal ETF tracks the price of the precious metal and is listed for trade on stock exchanges in a manner similar to stocks.
Advantages of ETFs:
High Liquidity – ETFs can be purchased and sold throughout the day during regular market hours, providing investors with the flexibility they desire.
Reduced Storage Costs – Since physical storage is not required, ETFs remove the cost associated with storing and insuring physical metals.
Diversification – ETFs can follow either a basket of precious metals or a single metal, thereby enabling investors to diversify within the precious metal asset class.
However, ETF investors do not own the physical metal and will typically incur a management fee.
Mining Stocks & Mutual Funds
When an investor purchases shares of mining stocks, they are essentially purchasing shares of a company that mines precious metals. Mutual Funds that specialize in precious metals invest in a variety of mining stocks and other assets related to precious metals.
Benefits of Mining Stocks:
Market Performance Exposure – Mining stocks tend to out-perform the price of the underlying metal(s) because of company growth and profit margin.
Dividends – Some mining companies pay dividends to their shareholders, creating a source of income for the shareholder.
However, mining stocks also possess additional risks and volatility associated with the business itself. Mining companies face a number of challenges, including operational issues, geopolitical risks, and regulatory changes.
Precious Metal Futures Contracts
A futures contract is an agreement to purchase or sell a certain quantity of a specific precious metal at a predetermined price on a specific date in the future. Trading futures contracts is primarily utilized by traders attempting to capitalize on the fluctuation in price of the precious metals in the marketplace.
Characteristics of Futures Trading:
Levers – Futures contracts enable traders to control a large quantity of precious metals with a very small investment; this increases both potential profits and losses.
Potential Hedge – Futures contracts are used as a hedge against price fluctuations in the underlying market.
However, futures contracts are extremely speculative and involve significant risk. Therefore, they are not suitable for long-term investors who wish to maintain precious metals as a store of wealth.
Summary
Investing in precious metals can serve as a prudent means of hedging against economic uncertainty and increasing the diversity of a portfolio. Ultimately, the selection of the vehicle (physical metals, ETFs, mining stocks, and/or futures) is based on the investor’s personal objectives, degree of risk tolerance, and expectations for the marketplace. Each vehicle presents its own unique characteristics and advantages, ranging from the tangible ownership of physical metals to the liquidity of ETFs and the growth potential of mining stocks. By understanding the differences, investors can identify the precious metal investment vehicle best suited to achieve their financial objectives.