A Brief Background
Dating back decades or longer, people have been investing in various precious metals. Some of the most popular and obvious types are of course, gold and silver. It seems like since the beginning of time there have been reasons to either own or hoard these metals. Prior to the 1970’s the United States currency (US Dollar) was backed by gold held at Ft. Knox, until former President Nixon along with his administration decided to unlink the dollar from gold. Lately because of G0ld prices, there have been more and more discussion and coverage of the metal. There has also been a tremendous amount of controversy surrounding this move ever since, and speculation that some day as a result of this move, the dollar along with other fiat currencies will collapse in the face of hyper inflation. While certainly possible, it remains to be seen and the debate continues between the inflationists and deflationists as to whether or not we will see gold prices (along with other precious metals) rise to thousands of dollars an ounce or collapse in the face of a deflationary spiral.
Traditional diversification and conventional wisdom indicates that individuals should diversify their investments among many different asset classes such as large company stocks, small company stocks, international stocks, various types of bonds, and yes, of course precious metals.
Primary Types of Precious Metals
Gold – The most obvious of the bunch and the most discussed as an investment. There are long time “gold bugs” that continue to hold on to the notion that we will return to the gold standard for our monetary system. This may or may not be true, but perception tends to matter much more than reality. Today the perception is that gold has been and will continue to be bought for safety against a deteriorating financial system whether in the US or many other parts of the world. These buyers contend that gold is the only form of real money left in the world and the holders of this hard asset will be able to exchange portions of gold for either goods or other currencies at a later date.
Silver – A lesser discussed metal, but in many cases more useful. Also once a very common form of legal tender, silver is now thought of primarily as an industrial metal or jewelry applications. However, like gold, today with all the discussion about the economic environment, silver is also thought of as a hedge against inflation and in some circles, deflation. It doesn’t seem likely that the same item would protect against opposite forces like inflation and deflation – time will tell.
Platinum – Not many people are familiar with platinum, its uses as a metal are mostly suited for jewelry. It remains extremely rare and even sometimes mistaken for silver. In 2008, the price hit an all time high of $2300 per troy ounce.
Palladium – One of the most common uses for palladium has been in the automotive industry, more specifically in catalytic converters. Investors who wish to own the metal are able to purchase bullion coins and bars and now like other metal investments, can make purchases through more traditional and liquid vehicles such as mutual funds, exchange traded mutual funds and futures contracts.
Purchasing and Owning For Investment Purposes
Direct Investment is the oldest and most tried way to invest in metals. Simply put, you would own the metal in the form of bullion, bars or coins. Most of the time and investor would secure these items in a safe or vault for protection.
Stocks are also very common, but can be much riskier than direct investments. When you own stocks, you are not investing in the metal, but typically in the companies that mine the metals. Here you are subject to much more than the price of gold for example. You can be subject to news items pertaining to the company also known as headline risk, poor management decisions, stock market ups and downs, political risk, and other issues surrounding ownership of stocks.
Mutual Funds and ETFs are another method to make an investment in the metals sector. Some of the same issues that exist when investing in stocks also exist in mutual funds. However, if a mutual fund is is investing in the stocks of mining companies, you should be investing in many companies within the fund, thereby providing another level of diversification. You should know that there are a few exchange traded funds that are not diversified such as GLD and SLV for example. They are supposed to invest directly in the the corresponding metal such as gold and silver. They state that the fund sponsor holds the corresponding metal in a vault in accordance with how many shares are outstanding.
Futures contracts are another way to purchase precious metals. This type of investment can be more complex and should only be made by experienced investors that have a full understanding of how these contracts work and what their exposures and liabilities can be. In short, a futures contracts is a firm commitment where the characteristics are understood in advance. You are purchasing the obligation for a specific amount of the underlying asset (gold for example) on the basis of a defined place and time (referred to as maturity). These contract are traded on a futures exchange and handled by commodity brokers.
Investing in precious metals can be a good way to diversify a portfolio of investments, but along with anything else, the price you pay is directly reflected in whether or not you will make or lose money over the short or long term.
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