Should you invest in precious metals? The answer is probably yes, but before you do so, here are some basics about this sector.
Why invest in precious metals?
There are several reasons to do so, but foremost you want to “hedge” your investments in case something unexpected occurs in this or other countries. Looking at the United States, Europe and Japan we find them struggling to stimulate their economies after the devastating market crash of 2008-09. China fared better and has about $2.3 trillion to invest. The result has been widespread stimulus programs in developing countries. One concern is that currencies are being devalued in favor of growth.
Many investors fear that these stimulus programs will result in inflation. To protect themselves they have invested in precious metals. For centuries, gold has been a store of value when inflation takes hold. Paper money loses its value but precious metals hold theirs and even increase in value.
In Europe we find instability in countries like Greece, Spain, Portugal and now Italy. Riots and demonstrations are commonplace. Any one critical event could trigger widespread selling of the euro, thus throwing Europe into chaos.
What are the most widely traded precious metals?
Gold and silver are your most widely sought after. Gold has been hoarded against world catastrophes for centuries. Silver, to a lesser extent, has followed gold. Gold also has commercial uses in jewelry and electronics. Gold and silver are also considered collectibles and retain their numismatic value.
Platinum and palladium are two important precious metals. They are used in electronics, fuel cells, refinery and purification of oil and natural gas, catalytic converters and photo processing.
How do you invest in precious metals?
The most direct way is to buy gold or silver bullion or coins. Each day a group of European banks set the price of gold. This is called the “gold fix.” or spot price. Trading then begins with the fix as a starting point. Prices can fluctuate widely intra-day, daily and weekly. If you plan to buy physical gold or silver you should know the gold fix and the up to minute quote. There is a bid and ask similar to trading stocks. Dealers buy from large banks and mark up the price for retail customers. You should shop several reputable dealers to get the best quote. For coins, you can buy “bullion” or “mint” coins. Bullion coins are intended to circulate in the economy, while mint coins are intended for collectors. You will pay a mark up depending on what coin you buy.
Precious Metals Mutual Funds
There are several mutual funds that invest in precious metals. You should read the prospectus before investing. It will give you the companies that are traded. Some limit their portfolios to the major producers, while others include junior gold mining companies.
Electronically Traded Funds (ETFs)
Gold and silver ETFs are now widely traded. The SPDR Gold Trust (GLD) holds physical gold and follows the price of spot gold. They are more flexible than mutual funds because they can be traded throughout the day.
Gold and Silver Mining Companies
You can buy stock in gold or silver mining companies. There are hundreds to choose from. They include the major producers down to junior mining companies to speculative penny stocks.
Precious metals investing can diversify your portfolio while at the same time hedge other investments such as stocks and bonds.