Proceed With Caution When Investing In Precious Metals

Proceed With Caution When Investing In Precious Metals 5.00/5 (100.00%) 3 votes

Investing in precious metals- gold, silver, platinum and palladium- can offer solid opportunities as long as it is understood that these assets respond differently to the current market climate than stocks and bonds. If the way precious metals respond to market climates is thoroughly understood, then investing in precious metals can be a solid way to diversify your portfolio with the potential for high returns; however investors should consider all evidence before buying.

First consider gold and silver investing.  Over the long term, gold and silver prices tend to move together.  If data from 1915 through 2012 is considered, it seems likely that gold prices and thus silver prices will drop in the near future.  Three time periods break some of the long term gold trends including gold prices rising in times of uncertainty and suggest that gold prices will be dropping in the near future.

Consider the market between December 1929 and March 1949.  With the onset of the Great Depression and the ensuing panic and uncertainty, gold prices skyrocketed.  Between December 1929 and January 1934, gold prices rose by 120 percent.  After January 1934, gold prices returned to just above where they were in December 1929.  Even participation in World War 2 did not cause gold prices to rebound to their January 1934 high.  By 1949, gold prices had returned to where they were in the late 1920s, despite all the turmoil and uncertainty of the past 20 years.

Next, consider the market between February of 1972 and January 1980.  The 1970s were a time of extremely high inflation.  Gold acted as a way to store value.  As more and more money was invested in gold to safeguard against inflation, gold prices rose dramatically until early 1980, when the market began to fluctuate.  After the spike in early 1980, gold prices fell for the next 20 years.

Lastly, examine the market between 2001 and 2011.  The bull market between 2001 and 2008 during which gold compounded by 12.147% annually suggests that there would be a rapid fall shortly after.  However, between 2008 and the most recent price spike in 2011, gold prices continued to rise, compounding by 15.858% over roughly 3.5 years.  Given that gold has risen nearly 16% compared to the long term average stock market gains of 7-10% over a year, there is not much room for gold to continue to rise, pointing to the risk of continued investing in gold (and silver).

Much like gold and silver, platinum and palladium investing are also related to each other due to their outside applications in technology.  Palladium is used heavily in automotives and electronics.  Platinum has applications in dentistry and medicine.  Neither palladium nor platinum gives any indicators that the price will rise or fall.

However, with both metals, there is an indication that the supply could be easily interrupted due to political disturbances as both metals are largely supplied by South Africa and Russia.  If the supply were to be jeopardized by political disturbances, prices of these metals would soar.  Conversely, if an alternative material could be substituted in the technological applications that these two metals have, prices would drop.