Investing in Precious Metals: A Beginner’s Guide
Precious metals are a popular asset class to provide further portfolio diversification beyond stocks and bonds.
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Precious metals are among the oldest and most traditional asset classes as they have been considered stores of value for centuries since they are widely accepted as means of exchange.
Meanwhile, some of these metals have also been gaining importance in today’s up-and-coming industries, including high-tech, electric-powered vehicles, and renewable energy.
Gold is perhaps the most well-known precious metal and one of the most sought out during times of economic hardship due to its long-standing reputation as a safe-haven asset. However, there are many other precious metals that you can invest in to further diversify your portfolio.
In this article, we will be discussing what precious metals are, why they are considered investable, and how you can incorporate them into your portfolio.
What Are Precious Metals?
In this section, we share more details about the top five precious metals that investors can incorporate into their portfolios.
Gold is a yellow-colored material and perhaps the best-known precious metal for both its reputation as a relatively stable financial asset and its industrial applications. This commodity has served as a store of value for both individuals and governments for centuries and it is also the most common material used in fine jewelry.
The largest gold reserves are located in Australia, Russia, and South Africa. This metal’s durability is one of its most appealing characteristics. It can be traded physically, via derivatives such as futures, or indirectly by investing in gold mining stocks. Some reasons to invest in gold include:
- Gold maintains its value over time so it can be a great way to preserve wealth
- Gold prices tend to rise when the US dollar (or reserve currency) falls
- Gold is a great way to hedge against inflation when the cost of living increases
- The purchasing power of gold tends to go up during deflationary periods
- Gold prices tend to go up during periods of geopolitical uncertainty
- Gold is an excellent way to provide diversification to your portfolio
If you plan on buying physical gold, make sure you buy it from a reputable dealer and you’re able to verify the bars’ purity, form, size, and weight before purchasing it.
Silver is a grey-colored, shiny material and the second best-known precious metal after gold and its practical and industrial applications have made it gain this spot. This metal is used to manufacture batteries, chips, photographic materials, and semiconductors — among many other goods.
The top regions in which silver is mined are Bolivia, Peru, the United States, Canada, and Mexico. Same as gold, silver can be bought physically or via financial derivatives such as futures. On the other hand, investors can also buy a silver-focused investment fund such as exchange-traded funds (ETF). Some reasons to invest in silver include:
- Physical silver can be a store of value just like gold
- Silver is used in a number of industries and products such as cellphones, electric vehicles, photovoltaic cells, etc
- Global demand for silver is growing and is expected to continue to grow in the upcoming years
Platinum is a shiny, grey-colored, and rare precious metal that is typically used to produce fertilizers, electronics, explosives, and plastic materials. This metal has also been gaining popularity in the jewelry industry.
Platinum is mined in Canada, South Africa, Zimbabwe, Australia, Russia, and the United States primarily. This metal can be traded via futures, physically, or by buying an investment fund that focuses on this precious metal solely.
Palladium is a shiny, grey-colored precious metal that is used in the healthcare industry — primarily in dentistry. However, it has been becoming increasingly popular lately due to its extensive practical applications in the renewable energy industry.
There is only one palladium mine in the United States while others are located in Canada, South Africa, and Russia. Investment funds have rushed to launch products that specifically target palladium amid the increasing popularity of this rare precious metal. Meanwhile, investors can also opt to trade it via futures or physically.
Even though it was not considered a precious metal initially, copper has gained this distinction by becoming a highly-valuable and rare material that is extensively used in the electronics, construction, and transportation industries.
Copper is primarily mined in Chile — the largest mining region by volume — but also in Peru, China, and China — the top consumer of this metal in the world.
Ways to Invest in Precious Metals
Now that we have touched ground on the most common precious metals that investors can consider for investment purposes, here is a detailed list of the vehicles and approaches that can be adopted to incorporate these assets into one’s portfolio.
Physical Ownership (Bullion)
Buying precious metals in their physical form and storing them is the most common, although not necessarily the easiest, way to invest in these assets. Individuals can buy gold or silver in bullion, coins, or jewelry.
Storing costs are one factor to consider as physical pieces must be kept in a safe place such as a bank’s safety deposit box or at a private vault or safe. However, this latter alternative increases the risk of theft.
Meanwhile, certain companies have launched services that allow investors to buy physical metals online while they take care of their storage. Some of the most popular companies are BullionVault and Vaulted. The precious metals bought from these companies are stored in Canada or Switzerland and they allow customers to buy and sell their holdings easily and at a low cost.
Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs) are investment vehicles whose shares can be easily traded in the open market. These funds invest in different types of assets and allow investors to own a fraction of the fund’s portfolio while charging relatively low management fees.
In the case of precious metals, multiple ETFs invest in specific metals such as gold, silver, and platinum while others offer exposure to a diversified basket of these assets.
These are the largest precious metals ETFs by assets under management (AUM):
- SPDR Gold Shares (NYSEARCA: GLD) – Expense ratio: 0.40%
- iShares Silver Trust (NYSEARCA: SLV) – Expense ratio: 0.50%
- iShares Gold Trust (NYSEARCA: IAU) – Expense ratio: 0.25%
- SPDR Gold MiniShares Trust (NYSEARCA: GLDM) – Expense ratio: 0.10%
- Aberdeen Standard Physical Platinum Shares (NYSEARCA: PPLT) – Expense ratio: 0.60%
- Aberdeen Standard Physical Precious Metals Basket Shares (NYSEARCA: GLTR) – Expense ratio: 0.60%
These ETFs can be bought through a stock brokerage firm, such as Robinhood, Charles Schwab, or Fidelity.
Mutual funds are vehicles managed by financial professionals that allow investors to gain exposure to different types of assets. They work similarly to exchange-traded funds (read our ETFs vs. Mutual funds comparison to learn more) but their legal structure and fees are different.
Most mutual funds require a minimum investment and penalize early redemptions. Meanwhile, their shares are not traded in an exchange. Instead, investors deal directly with the fund.
In the same way as ETFs, there are mutual funds that focus on either one specific metal or a diversified basket of many of them. Here are some of the most popular precious metals mutual funds for you to explore:
- Allspring Precious Metals Fund (MUTF: EKWAX) – Net Assets: 208.54M USD
- Fidelity Select Gold Portfolio Fund (MUTF: FSAGX) – Net Assets: 1,826.97M USD
- Invesco Gold & Special Minerals Fund (MUTF: OPGSX) – Net Assets: 1.17B USD
- Gabelli Gold Fund (MUTF: GLDAX) – Net Assets: 25.41M USD
- USAA Precious Metals and Minerals Fund (MUTF: USAGX) – Net Assets: 639.83M USD
Most of these funds invest in securities tied to the precious metal sector such as mining stocks. In contrast to ETFs, there are no funds that invest in precious metals directly.
Individual Retirement Accounts (IRAs)
An individual retirement account (IRA) is a type of investment account that allows investors to compound the proceeds from their operations without having to pay taxes unless the funds are withdrawn.
Some companies enable you to invest in precious metals through specialized IRA accounts. The most common types of precious metal-specific IRA accounts are Gold IRAs and Precious Metals IRAs.
These accounts are offered by private companies such as the Patriot Gold Group and Augusta Precious Metals. Fees vary from one provider to the other and the portfolio is typically comprised of highly pure gold, silver, palladium, platinum, or other precious metal bullion and/or coins.
Something to keep in mind while shopping for a gold IRA provider is that these types of IRA accounts typically come with higher fees than a Roth or traditional IRA that holds assets such as stocks or bonds.
Futures and Options
Futures are financial derivatives that entitle the holder to receive a certain asset once the contract expires. These instruments are traded in specialized exchanges such as the Commodity Exchange (CME Group) and the Intercontinental Exchange (ICE). On the other hand, options are derivatives used by investors for speculating about the direction a given underlying asset will take in a short period of time.
For precious metals specifically, the CME Group offers futures for gold, silver, palladium, and platinum. These instruments are highly liquid and contract specifications vary depending on the underlying asset.
Futures can be bought through an authorized broker-dealer. In the United States, brokerage firms such as Interactive Brokers, TD Ameritrade, Charles Schwab, and E*TRADE, offer access to the futures market.
Trading fees vary from one provider to the other and they can be percentage-based or fixed. One particular disadvantage of futures is that they can generate significant transaction costs in the long term as contracts have to be rolled over every month before they expire.
Mining & Exploration Stocks
Mining stocks are equity investments in companies that participate in this sector one way or the other. Mining companies can specialize in different precious or common metals. As long as most of their revenue comes out of the metals mentioned in this article, they can be considered suitable investments for building a diversified precious metals portfolio.
Mining stocks can be bought individually or investors could opt to buy a vehicle that focuses specifically on this industry. One good example is the VanEck Gold Miners Equity ETF (NYSEARCA: GDX), which currently oversees $13.8 billion in assets and charges an annual expense ratio of 0.5%.
As for individual companies, some of the largest publicly-traded mining enterprises in the world by market capitalization are:
- Barrick Gold (NYSE: GOLD) – Barrick Gold Corporation is a mining company that produces gold and copper with 16 operating sites in 13 countries.
- First Majestic Silver Corp (NYSE: AG) – First Majestic Silver Corp. is a Canadian silver-mining company that operates in Mexico and the United States. It has four producing mines under its control.
- Franco-Nevada (NYSE: FNV) – Franco-Nevada Corporation is a Toronto, Ontario, Canada-based, gold-focused royalty and streaming company with a diversified portfolio of cash-flow producing assets.
- Newmont Corporation (NYSE: NEM) – Newmont, based in Greenwood Village, Colorado, United States, is the world’s largest gold mining company.
- Wheaton Precious Metals (NYSE: WPM) – Wheaton Precious Metals Corp. is a Canadian multinational precious metals streaming company. It produces over 26 million ounces and sells over 29 million ounces of silver mined by other companies as a by-product of their main operations.
There are a lot more mining companies out there so make sure you do your research before investing in any of these companies.
Benefits of Investing in Precious Metals
- They have been considered a store of value for centuries.
- They are a tangible asset and they are highly liquid.
- The price is very transparent as these assets trade in the open market globally.
- They can provide an extra layer of diversification to a portfolio.
- There are many sophisticated financial vehicles nowadays that facilitate the process of investing in precious metals.
- Transaction, storing, and investment fees have declined significantly.
Downsides of Investing in Precious Metals
- The value of these assets can be rather volatile depending on macroeconomic conditions and supply/demand dynamics.
- They are not necessarily a good hedge during times of economic distress.
- Storing costs if investors opt to buy and hold these metals physically can be high.
- The risk of theft or damage is high when storing precious metals physically.
- They don’t produce any form of income.
FAQs About Investing in Precious Metals
The following are answers to some of the most frequently asked questions we get on the topic of investing in precious metals.
Are Precious Metals a Good Investment?
The performance of precious metals over time has been quite volatile. This makes it hard to conclude if they can be considered a good investment or not as such an appraisal would depend on each investor’s risk tolerance and financial goals. Overall, precious metals have produced positive returns in the long term and that makes them deserve some degree of consideration as potentially good assets for portfolio diversification. However, their weight should not exceed 5% of the total portfolio as a rule of thumb.
In the past four years, both gold and silver prices have generated compounded annual gains of 9.5% or so while platinum and palladium have produced compounded gains of 2.2% and 22.8% respectively.
What Are the Best Precious Metals to Invest In?
The most well-known and sought-after precious metals to invest in are gold, silver, palladium, platinum, and copper. Gold is certainly the safest choice as it’s widely used during periods of increased volatility, as well as, periods of political and economic uncertainty.
Why Do People Invest in Precious Metals?
There is a widely-accepted belief that precious metals can act as a hedge against inflation or that their tangible nature makes them a good alternative for long-term investors. The performance of these metals in the past has been very volatile and this makes it hard to predict what kind of long-term outcome can be expected from them.
What Percentage of Your Portfolio Should Be in Precious Metals?
As a rule of thumb, a 5% asset allocation into precious metals should be good enough to take advantage of positive swings in the price of these commodities under certain scenarios while limiting their negative contribution when market conditions are not favorable.
Precious metals have been considered for a long time a must-have asset class in any long-term investor’s portfolio. However, their appeal as an investment varies drastically from one investor to the other depending on their risk tolerance and financial goals.
Overall, the performance of these assets has been positive in the past but their prices can fluctuate wildly in relatively short periods. This calls for some degree of cautiousness when determining their weight on a given portfolio.
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Alejandro is a financial writer with 7 years of experience in financial management and financial analysis. He writes technical content about economics, finance, investments, and real estate and has also assisted financial businesses in building their digital marketing strategy. His favorite topics are value investing and financial analysis.
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