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What is a precious metal?
A precious metals are elements that are considered rare and chemically inert making them high in economic value. Common examples of precious metals are gold, silver, platinum, and palladium. Historically precious metals have been used as a portfolio diversifier and inflation hedge, with gold being the most well known inflation hedge. Today, it seems gold is becoming less of an inflation hedge with the price of gold staying relatively stagnant with the highest CPI numbers the United States has seen in nearly 40 years. I do write this with slight bias as I believe that Bitcoin has become a great inflation hedge and is the better asset going forward, but if you’d like to diversify into precious metals there are a few ways you can do that. The ways you can invest in precious metals include ETFs, common stocks and mutual funds, futures and options, coins and bars, and certificates. We’ll get into each strategy below.
ETFs, Common Stocks, Mutual Funds, Futures & Options
I’ve lumped these together because each option is something that you can purchase through your brokerage account. Exchange-traded funds (ETFs) exist for gold, silver, or platinum and are liquid like a stock or any other ETF. An ETF does not give you access to the physical commodity, but the benefit of that is the ETF is extremely liquid if you’d like to sell your precious metal ETF for cash.
Common stocks and mutual funds offer shares of precious metal miners and are leveraged to the price movements of each precious metal. Mining stocks are difficult to be valued if you are not familiar with the in’s and out’s of the business. While futures and options markets for precious metals offer liquidity like ETFs as well as leverage to investors who want to make bets on metals going forward. Similarly to options in the stock market, the potential profits and losses are the greatest.
Coins and Bars
Many traditional investors like having physical metals as hedges against inflation and the perception that the metals are valuable. For gold the market is determined by three main factors: systemic financial concerns, inflation, and war or political crisis. The systemic financial concerns mostly when banks and money are perceived as unstable which could also be a cause of inflation. War or political crisis have also caused people to historically hoard gold because of the portability for the amount of wealth that can be taken.
Silver has historically been used with more utility opposed to an inflation hedge and store of value than gold. Silver has been used in photography, electrical appliances, medical products, bearings, batteries, superconductor applications, microcircuit markets and much more. Silver’s value generally tends on the demand of many of these products and experiences historically more volatility than gold because of that.
Similarly to silver, platinum is used in various products, with the greatest demand in automotive catalysts, jewelry, petroleum and chemical refining, and the computer industry. With these use cases, there is a heavy reliance on the industries it has use cases in such as the auto industry. Platinum also is only mined in two countries - South Africa and Russia, making it very concentrated.
The last method to purchase certificates of gold. This will allow you to “own” gold without having to store or transport gold bars or coins.The biggest negative for investing in certificates is there is no guarantee the person or entity that is holding your gold is keeping it and it is unlikely you can exchange your certificate for physical gold.
In conclusion, there are various methods with pros and cons to each if you’d like to invest in precious metals. If you’re interested in learning about gold, although I do not believe in his take on Bitcoin, I’d recommend checking out @PeterSchiff on Twitter. He’s the biggest name in the gold industry (ironically probably because of his takes on Bitcoin). This is a brief outlook on what goes into investing in precious metals and I know there is a lot more to research if you’d like to begin investing, so as a reminder this is not financial advice and please do your own due diligence and consult an expert before investing.
If you’re new to alternative asset investing, check out our introduction to alternative asset investing series:
If you’re new to stock investing, check out our introduction to stock investing series:
If you’re new to real estate investing, check out our real estate investing series:
Have a great rest of your week!
Brandon & Dan
Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock, asset, or cryptocurrency. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.