Are precious metals a good investment?
If you’re like most people, the stock market is the first thing that comes to mind when you think about investing. But stocks are just one of several asset classes. Precious metals are one of the most popular asset classes among investors looking to diversify their portfolios.
Like any other investment, these high-value metals have their pros and cons, but unlike most other asset classes, they can fit into just about any investment portfolio.
Are Precious Metals a Good Investment?
The answer to whether precious metals are a good investment largely depends on what you’re looking for.
Precious metals are highly liquid assets that hold value well, protect your portfolio from inflation, and typically enjoy upward momentum when the overall stock market is trending down. If you’re interested in taking risks to generate aggressive growth, precious metals won’t float your boat.
Whatever stance you take, however, diversification within your asset allocation is an important consideration. The virtues of precious metals make them a strong candidate for the safe-haven allocation within many portfolios.
But when you talk about investing in precious metals, you’re actually talking about a class of multiple assets, each with its own history as a safe haven, industrial uses, and pros and cons.
Types of Precious Metals
All told, there are eight metals said to be precious. These metals have economic value due to a mix of scarcity, industrial uses, and history as a hedge against inflation. Only a select few of these metals are common in investment portfolios.
Gold is one of the most popular precious metals among investors. There are many ways to invest in gold. You can purchase gold bars, gold coins, and other forms of gold bullion like bullets and collectibles.
Like all precious metals, gold has a history of keeping up with or surpassing inflation, and the returns on the metal over time may surprise you. According to Statista, gold produced a 10.61% average annualized gain from 1971 through 2019; that’s in line with a well-managed portfolio of stocks.
To put those figures into perspective, in January 1971, the spot price of an ounce of gold was about $37. By December 2019, the price had ballooned to around $1,480. As of July 2022, an ounce of gold trades for $1,714.
Gold has several industrial applications:
- Jewelry and Fashion. Gold jewelry is commonplace, and adding gold sequins to a piece of clothing, a handbag, or even shoes can greatly increase the product’s value.
- Medical. Gold is used in multiple medical applications. For example, doctors use gold compounds to detect or treat various ailments such as cancer and arthritis.
- Spacecraft. Gold is used to manufacture conductors, connectors, and even mechanical lubricants for spacecraft.
- Glass. Gold is often used in the production of high-end glassware, windows, and other applications of glass.
Investors also use silver coins and bars in their portfolios, and those who have invested in silver in the past 10 years are smiling from ear to ear. In 1991, you could have purchased silver for around $4 per ounce. By 2022, that price has grown to around $20 per ounce.
Granted, growth in the price of silver hasn’t been nearly as monumental as that of gold, but many argue that the white metal will outpace its yellow counterpart in the years to come.
Gold is more expensive compared to the price of silver today than it has been throughout most of history, but silver’s industrial uses are growing. Many expect the gold-to-silver ratio to narrow in the years to come. If that’s the case, the price of silver will grow at a faster rate than the price of gold, although it’s also known to be a bit more volatile.
Silver also has multiple industrial applications:
- Solar Panels and Other Electrical Applications. Silver investors typically see solar panels as one of the key drivers of the future value of silver. As demand for clean energy continues to grow, more solar panel production will equate to more industrial demand for silver.
- Photography. Silver bromide is photosensitive and often used in the field of photography.
- Medical. Silver is often used in wound dressings, creams, and as an antibiotic coating on medical devices.
Other Types of Precious Metals
Although gold and silver are the most popular precious metals among investors, they’re not the only metals you might want to add to your portfolio. The six alternative precious metals include:
- Platinum. Platinum costs about $1,000 per ounce and is prized for its chemical makeup. It’s used in catalytic converters along with palladium and rhodium. Platinum is also used in the production of other chemicals such as nitric acid, silicone, and benzene.
- Palladium. Palladium costs about $1,750 per ounce. It’s commonly used in catalytic converters, dental fillings, jewelry, and as a catalyst for processing various compounds used in chemistry and biology.
- Rhodium. Rhodium costs about $15,000 per ounce and is most commonly used in the chemical industry. Chemists use the metal to produce hydrogenation reactions and when making nitric acid and acetic acid.
- Ruthenium. Ruthenium sells for about $585 per ounce and is primarily used for electrical contacts and to make metal alloys.
- Iridium. Iridium costs about $520 per ounce and has a high melting point. As a result, it’s used to make containers for melting other metals and in other high-heat industrial applications, like spark plugs for aircraft.
- Osmium. Osmium costs about $400 per ounce and is used to create extremely hard metal alloys for fountain pen tips, needles, and electrical contacts.
Pros of Investing in Precious Metals
Precious metals have been used as investments throughout history, and for several interesting reasons. Some of the biggest advantages to investing in precious metals include:
- Inflation Protection. Inflation is an invisible evil that robs you and your investment portfolio of buying power. When inflation hits and prices are on the rise, you see similar increases in the price of gold, silver, and other metals prices, making them effective inflation hedges.
- Liquidity. Precious metals aren’t just valuable; they’re useful and in demand. That makes them highly liquid. When it’s time to exit your investment, you won’t have any issues finding a buyer.
- Safe Haven Qualities. These metals are known as a strong store of value with a weak or even negative correlation to the stock market. When the market heads for a downturn, investors flood precious metals in an effort to protect themselves from fluctuations in stock prices. This causes these metals to rise in value when stocks are down.
- Limited Quantities. One of the factors that makes precious metals so valuable is that there are limited quantities of them on the planet and they can’t be human-made. Their scarcity helps drive their value.
Cons of Investing in Precious Metals
There are plenty of perks to investing in precious metals, but there are a few drawbacks to consider before you get started.
- Storage. Over the long run, you may amass a large enough precious metals collection that storage in your home is unsafe or unfeasible. You may have to pay for safety deposit boxes or precious metals depository services at some point.
- Growth. Although there are times these investments outpace the market, they’re not necessarily known for compelling growth. A diversified portfolio of stocks will typically outpace precious metals investments during bull markets.
- Premiums. Even the best metals dealers charge a markup on the metals they sell. These markups can mean you’ll need to hold your precious metals for some time just to break even.
- Can Be Expensive. Although you can buy silver for a relatively low price, gold, platinum, and other precious metals have a pretty hefty price tag for a beginner investor, even if you’re only buying a single ounce.
The Verdict: Should You Invest in Precious Metals?
Precious metals fit into most investment portfolios and most investment strategies, even if only as a tool for diversification. That’s because even the risk takers in the market need a way to balance that risk, and they often turn to precious metals to do so.
The bigger question is, “How much should you invest in precious metals?” Answer the questions below to help you decide:
- What Is the State of the Market? Are the bulls or bears running? These investments tend to outperform the overall market when it’s trending down. Limit allocation when the bulls are running and load up as the bears take control.
- What Is Your Risk Tolerance? Increase your allocation if you have a low tolerance for risk and look elsewhere if you’re a risk taker.
- Are Economic Signals Positive? Precious metals are in demand when economic pressure takes hold. If economic signals are positive, you should limit exposure to these investments, but if there are signs of economic hardship ahead, it may be time to increase your allocation.
If you’re uncomfortable deciding your own precious metals allocation, consider speaking with a financial advisor. Your advisor will ask you questions to get a better understanding of your overall financial picture and make recommendations based on your unique situation.
How to Invest in Precious Metals
Precious metals are popular investments that come with many different options. There are even multiple ways to access the market. The three most common ways to invest in this asset class are explained below.
1. Physical Precious Metals
The first and most obvious option is to invest in physical metals, called bullion. These include investments in products like physical gold and silver coins, bars, and collectibles.
Of course, there are pros and cons to investing in physical metals.
On the positive side, physical metals are the best way to store value. There’s no risk that the company you trusted with your investment does wrong by you because you’re in possession of the metal itself.
On the other hand, physical metals are sold at a premium (a higher price than the current spot price), so it may take some time to break even before your investment begins to grow. And you need a way to securely store your metals without risking theft.
2. Exchange-Traded Funds (ETFs) & Mutual Funds
Exchange-traded funds and mutual funds are a great option if you’d like to invest in precious metals but aren’t interested in paying premiums and dealing with storage headaches. These funds pool money from a large group of investors to purchase assets according to their prospectus.
Often referred to as gold ETFs, there are plenty of precious metals ETFs to choose from.
As you compare your options, pay attention to the following factors:
- Expense Ratio. A fund’s expense ratio is the percentage of your investment you’ll pay as an annual fee for the management of your shares. Of course, you want the lowest expense ratio possible.
- Asset Allocation. Some precious metals ETFs and mutual funds have large holdings of physical metals, while others invest in mining stocks and other equities. Pay close attention to the fund’s allocation so you know your money’s being invested where you want it invested.
- Historic Performance. You don’t want to invest in a losing fund. Compare the historic performance of the fund to the average growth of precious metals prices to ensure you have a winner.
- Liquidity. It’s important to be able to exit your investment when you decide the time is right. The best way to be sure you can is to look at the assets under management and the average daily volume for the fund. Popular funds with a large amount of assets and high daily volume are typically easy to exit. If you buy into a smaller fund that doesn’t trade much, you may have to wait a while for a buyer to come along before you can exit your investment.
3. Mining Stocks
When gold, silver, and other metal prices are on the rise, the mining companies that produce them earn a larger profit on their product. Therefore, investing in mining stocks gives you indirect exposure to precious metals prices.
However, it’s important to do your due diligence before making any investment. No two mining companies are exactly the same, and blindly buying stocks is one of the best ways to lose money.
Precious metals likely have a place in your investment portfolio regardless of whether you’re a risk-taker or you prefer the slow and steady method of building wealth. These investments have long proven their ability to store value and protect portfolios through bear markets.
However, as with any other investment decision, you should carefully consider your options when it comes to which metals to invest in, how you plan on investing in those metals, and how much of your portfolio you’ll allocate to them. Always do your research and make educated decisions when you make investments, regardless of the asset class you invest in.