Why it’s worth it to Invest in Precious Metals

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Throughout the ages, gold, diamonds, silver, sapphire and other precious metals have been a symbol of wealth. Ancient civilizations made their currency mainly from gold and silver. Centuries later, the fascination with precious stones is still as strong as ever. Of late, investing in gold, palladium, silver and platinum among other precious metals has attracted lots of attention. Precious metals retain their value despite the economic situation.

Types of Precious Metals to Invest in
Gold is the most popular precious metal. It attracts a lot of attention from the media and investors. However, it is not the only metal a person can invest in. Other precious metals include palladium, platinum and silver. The price of these metals has been on a steady rise due to their increasing demand across the world.

Though precious metals are mainly associated with jewelry, they have many other functions. The metals are also used in industry. The demand for precious metals for industrial purposes has been on a steady climb as a result of the emergence of India and China as major economic powers.

Gold is an essential part of many high-tech commodities. This is because it conducts electricity, is resistant to corrosion, is chemically stable and is a great heat shield. Platinum is mainly used in medical equipment, automotive parts and computers. Palladium is softer than platinum and is mainly used in catalytic converters because it can withstand oxidation and high temperatures. Palladium is an excellent electricity conductor. It is used in making electronic components, fuel cells, oil refining and purification, processing of raw materials as well as photo processing.

Benefits of investing in Precious Metals
Governments have taken different steps to combat the global economic meltdown. There have been mixed results as a result of these efforts, however in many countries, the national debt has been adversely affected.

In the US, the Federal Reserve has on several occasions inflated the money supply. However, at some point, interest rates will have to increase to counter retail inflation. The success of this strategy and its effect on the economy are open questions.

There has been a growing concern by investors on the instability of some investments. Investors have come up with various means of spreading their investment portfolio. One of the strategies is to invest in precious metals. It’s one way they can secure their investment during economic upheavals and inflation, which threaten currency value. To many businesspeople, investing in precious metals is one way of diversifying their investment portfolio.

Ways to invest in precious metals
Buy physical
Investors can buy the physical metal. For instance, they can purchase gold bullions, silver, palladium or platinum. These can be purchased from dealers, online auctions and coin shops. Various countries manufacture their own precious metals. Investors interested in gold can purchase the US Eagles or Canadian Maples gold bullions. However, there are other recognized miners and mints that also sell precious metals. Having physical precious metal is like having spare cash on hand; the metals can be exchanged for money.

Exchange Traded Funds
More experienced investors looking to trade in precious metals rather than buy-and-hold would be more interested in metal Exchange Traded Funds. Though ETFs are not exchangeable with physical metal, they allow investors to buy and sell with ease like stocks.

Trade Futures
Futures are contracts for delivery of large quantities. This means investors purchase futures with leverage or borrowed money. The commodities are rarely taken for delivery. Futures contracts are used purely as trading vehicles except for industrial and commercial consumers. Though this investment tool has very high liquidity, it carries significant risk. It is only recommended for experienced investors.

Bullion pools
Investors can find reputable brokers selling shares of precious metals. These shares may be redeemed for physical metal. However, investors should read through the fine print of the shares contract before investing in bullion pools. The main advantage of this form of investment applies when a dealer with a good reputation stores the bullion. The proliferation of ETFs as trading vehicles has rendered obsolete bullion pools that cannot be redeemed.

Mining Stocks
One means of investing in precious metals is to buy the stock of mining companies. When the price of precious metals increases, the companies that mine those metals make greater profits.

Precious Metal Mutual Funds
Mutual funds pool the resources of many small investors and use the gathered amount to purchase a variety of stocks. This method seems to reduce the risk of investing in the stock market. Many mutual fund companies offer at least one fund to precious metal investing.
precious metals investing
Factors Affecting the Price of Precious metals
Like any other commodity, precious metals are affected by various factors in the market. The price of precious metals is affected by disputes and disasters in major production centers, increase or decrease in production supply and a slowdown in industrial demand.

However, precious metals are unique because they are not affected by the supply and demand web of a single country because they have universal value. Other materials may not have universal value. For instance, if China can produce its own steel, then US steel has no value in China. Gold, palladium, plutonium and Silver have universal value, which means they can be sold in any country other than the country of origin.

Tax issues
Though it’s important for investors to understand the various ways they can invest in precious metals, there are a number of complex tax rules that they should also be aware of. The IRS classifies precious metal Exchange Traded Funds, bullions and coins as collectibles and not capital assets. That means that these precious metal investment tools are not taxed at the capital gains rate of 15 percent but rather the maximum rate of 28 percent if held for more than a year. However, if the collectibles are purchased in a 401(k) or IRA, they are classified as distribution taxed at ordinary rates. Investors should consult a tax professional to find out which precious metal vehicle is most suitable for their situation.

Tips for Investment
• Never buy a large amount of physical metal or other precious metal investment vehicle at once. Even after taking the time to study and plan the purchase, it’s recommended to buy in stages. This allows an investor to lower their cost basis in case there is a short-term reduction in the price of the metal.

• Set a dollar cost average. Many investors prefer to set aside some amount of money each month or quarterly for the purchase of precious metals. This means they purchase the same dollar value each period.

• Know the spot price of the precious metal before making the purchase. Many brokers charge a premium above the spot price. Ensure the premium is not more than 5 percent of the spot.

Like any other form of investment, there is a risk involved with buying precious metals. Consult a professional like Monex.com before making an investment decision.