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Gold
Gold is the most famous precious metal in the world, considered of great value by individuals and governments over thousands of years. Gold plays a dual role as it is used in industry and has financial applications.
Gold is characterized by its high heat resistance, malleability, and conductivity. Consequently, industrial users consume 10 percent of mined gold supplies annually, including sectors such as electronics, dentistry, and medicine. Gold’s history as a decorative metal makes jewelry demand account for 50 percent of annual production. Finally, gold is money, and many investors worldwide hold it instead of other investment assets.
Forty percent of annual gold production finds its way into the holdings of investors and governments worldwide. When investment demand is high, prices tend to rise. Countries hold more than 30 percent of gold produced throughout history as part of their foreign exchange reserves.
Silver
Silver is a rare metal, and while about 2,800 tons of gold are produced annually, around 250 tons of platinum are produced each year. Platinum has numerous industrial applications due to its high heat resistance. The metal also serves as a precious metal that many investors hold as an asset.
As investment assets, the three precious metals differ from other commodities. While the prices of other raw materials fluctuate with currencies, precious metals often compete with currencies as assets. Currencies worldwide are fiat money that is printed and minted by governments for use as legal tender.
Fiat money itself holds value because governments decree it must have value. Hence, it is the full faith and credit of the state that prints the currency that gives it its value. The state controls the amount of currency that flows into the market. However, when it comes to precious metals, the production from mines and reserves determines availability. Therefore, when confidence in the governments that print the money declines, precious metals tend to increase in value.
Ways to Invest in Precious Metals
Physical Bars and Coins
The purest way to invest in precious metals is to purchase the physical metals. Gold, silver, platinum, and palladium bars and coins are available from coin dealers worldwide. Gold bars come in sizes ranging from 400 ounces to one gram.
Silver, platinum, and palladium bars are also available in a wide range of sizes and weights. Concerning coins, many governments worldwide mint coins, typically ranging in size from one-tenth of an ounce to one ounce, which are legal tender in the country that produces them.
However, the prices of these coins move with precious metal prices. Precious metal bars and coins can trade at higher or lower prices than the underlying precious metal prices. These discrepancies arise from the supply and demand for the bars and coins themselves.
When purchasing physical precious metals, it is essential to find a reliable company. Many online dealers and banks advertise offering precious metals to the retail market. Compare prices between dealers but be cautious; anyone offering precious metals at prices below the market price or significantly low prices may be fraudulent. If you are uncomfortable with a particular dealer, do not buy from them. It is always best to establish a relationship with a company that can provide precious metals and buy them from you when you choose to sell.
There are risks when it comes to buying and selling physical precious metals, but this is the only direct way to own the asset. As an alternative to taking delivery of the metals, some dealers may offer to sell and hold these metals for you in allocated or unallocated accounts.
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You need to set up a dedicated account for a specific bar or coin, while a non-dedicated account is merely a written entry of ownership. If a dealer goes bankrupt or goes out of business, the dedicated account will protect your investment because it is a separate account, while the non-dedicated investment could become a credit issue and the dealer could default on your purchase contract. Think of the precious metals market as a pyramid. At the top is the actual market, and below are the instruments that seek to replicate or move in parallel with the actual metals, adding another level of risk.
Futures and Options
Futures and options on precious metals are derivatives. These vehicles are the next step in the pyramid. Futures contracts trade on exchanges and have a delivery mechanism for buyers and sellers. Thus, a futures position can convert into a physical position in metals during the delivery period. The buyer or seller can control a precious metals position with a small initial payment.
Options on futures are also derivatives that give buyers the right but not the obligation to buy or sell precious metals. Options are like price insurance documents. Options sellers act as insurance companies while the buyer is the insured party.
Exchange-Traded Fund (ETF) and Tracking Products
ETF products and tracking products trade on stock exchanges and seek to replicate the price movement of the precious metal. The most famous ETF products for this asset class are GLD and IAU, which replicate the price movement in gold. SLV tracks the price of silver, and PPLT is correlated with the price of platinum. Additionally, there are many tracking products in the world of precious metals.
Some will rise when the prices of specific metals rise, while others will rise when the prices of those metals fall. Leveraged tracking products amplify the price movements in the underlying precious metals. These tools are lower in the pyramid as they are derivative tools based on other derivatives like futures and options in precious metals.
Mining Stocks
Another way to invest in precious metals markets is to buy shares of companies that are involved in mining and producing the actual metals. These stocks tend to rise when metal prices rise and fall when prices fall. However, buyers of mining stocks bear additional risks beyond metal prices.
Buying a precious metal mining stock is a bet on the management of the company and the company’s production characteristics. If there is an issue with either, the stock price may diverge from the movements in the underlying metal prices. At times, mining stocks outperform the movements in precious metals, and at other times they underperform.
When choosing a tool in the world of precious metals, it’s important to do your homework. The most direct way to invest is through the actual market, but other instruments provide varying degrees of ease and liquidity when it comes to entering and exiting positions. The key thing to remember is to understand what you are buying and selling and the risks of your counterparty.
Source: https://www.thebalancemoney.com/how-and-why-to-invest-in-precious-metals-4102071
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