Investing in Precious Metals for Beginners
Investing in precious metals for beginners can be intimidating. Many investors – especially beginners just do not know where and how to start. Yet, all investors should be familiar with the concept of diversification. This means you are distributing your investments across a wider range of financial assets to minimize risk. If one asset class loses value, your portfolio will continue to be safe from the other asset classes you hold. If you hold a large percentage of the stocks in your portfolio, it can be very beneficial to have other investments that are unlikely to be affected by stock market events.
Precious metals are a class of assets that have proven to be an ideal investment as a safe haven. Gold and silver have historically performed well in times of economic uncertainty. These metals are driven by fundamentals that run opposite of the stock market. When stocks go down, often precious metals will go up. Holding them in your portfolio can help counter market volatility. But even if you realize that precious metals are a good option for you, jumping into the market can be intimidating. Many investors – especially beginners just do not know where and how to start. This guide is intended to give you a basic overview of how you invest in precious metals. Once you’ve defined your specific areas of interest, you can do more research and ask your financial adviser for additional insights and guidance.
Precious Metals List
Precious metals are naturally occurring elements that are relatively rare and possess intrinsic value due to their properties and industrial applications. Gold and silver have been associated with money and coinage throughout history. Due to their luster and appearance, both are used in fine jewelry and are a status symbol of wealth. Other precious metals have a variety of industrial uses and properties that make them valuable as a store of wealth. The supply and demand of these metals across various industries causes spot prices—the current price of a metal—to rise and fall while markets are open.
The most common precious metals used for investing include:
Gold: Throughout history gold has symbolized wealth – used for coinage, jewelry, and other fine arts. It is rare and durable – making it an ideal safe haven investment that has been treasured for centuries as a monetary device and the highest standard of wealth. It is also malleable and conductive – increasing its demand for industrial uses in electronics, dentistry, and medicine. Gold is valued for its durability, formability and conductivity. But it is mainly used as a means of payment and jewelry.
Silver: : With more industrial uses than gold, silver price fluctuations are often more volatile. But the affordability makes it much sought after for a wide variety of uses. It is a white lustrous metal with exceptional thermal and electrical conductivity. Silver is used for electrical appliances, medical applications, batteries, circuits and various other purposes. It is also used in coinage and jewelry in addition to its numerous industrial applications. Because of Its affordability, silver has many more uses than gold and is an ideal choice for beginner investors.
Platinum: is dense, malleable, ductile, stable, and durable. Because of its scarcity, only a few hundred tons are produced annually. Given its important uses, it is quite valuable and is a major precious metal commodity. Due to its rarity, far less platinum is pulled from the ground than gold. The most common use of platinum outside of ornamental purposes is in the manufacture of automotive catalytic converters. It is also used in the computer industry and for chemical refining.
Palladium: is a rare and lustrous silvery-white metal. Similar to platinum, palladium is used to make engines and ceramic capacitors in chargeable electronics. and a key component of fuel cells, which react hydrogen with oxygen to produce electricity, heat, and water. It can also be alloyed with gold to make white gold, which is mostly used for jewelry.
Copper: is used in building construction, in power generation and transmission, in the manufacture of electronic products and in the manufacture of industrial machinery and transport vehicles. Copper wire and pipelines are an integral part of appliances, heating and cooling systems. It is heavily used in telecommunication connections in homes and businesses. Copper is an integral part of engines, cables, radiators, connectors, brakes and bearings in cars and trucks. The average car contains 1.5 kilometers (0.9 miles) of copper wire, and the total amount of copper ranges from 20 kilograms (44 pounds) in small cars to 45 kg (99 pounds) in luxury and hybrid vehicles.
Magnesium: is the lightest structural metal. It is about 30% lighter than aluminum and is commonly used in alloys. Magnesium alloys have higher melting points and are used in the automotive and aerospace industries. Magnesium is the third most commonly used metal in construction (after iron and aluminum). Nearly 70% of the world’s magnesium production is used to produce alloys. These alloys have very low density, relatively high strength, and excellent machinability. Car parts such as steering wheel cores, gearbox housings, dashboard structures and radiator supports are often made of die-cast magnesium alloys.
Lithium: is a soft silvery-white metal. It is the lightest solid element and the lightest metal. This industrial metal has seen a sharp increase in demand as it is used in the manufacture of lithium-ion batteries, the power source for electric cars. It is also used in the aerospace sector and manufacturing aircraft. The price of lithium continues to rise as it finds more uses.
Zirconium: is a silver-gray metal. It is malleable and ductile and easily forms stable compounds. It is also highly resistant to corrosion. Its alloys have been used for centuries in a wide variety of ways. It is commonly used in corrosive environments. Alloys can be found in pipes, fittings and heat exchanges. Zirconium is also used to alloy steel, colored glazes, bricks, ceramics, abrasives, flashbulbs, lamp filaments, artificial gemstones and some deodorants. Other uses for zirconium include catalytic converters, furnace bricks, lab crucibles, surgical instruments, television glass, removing residual gases from vacuum tubes, and as a hardening agent in alloys such as steel.
Cobalt: is used to make magnets and also finds application in jet engines and gas turbine generators. It has seen an upsurge in demand as lithium batteries utilize cobalt. In 2006, only 20% of the world’s cobalt production went towards the manufacture of lithium-ion batteries. By 2016, an estimated 51% was being used for this purpose. According to projections, 62% of global cobalt output will go into making lithium-ion batteries by 2020. Since the beginning of 2016, cobalt prices have increased by over 300%.
Why Invest in Precious Metals?
The US Government has taken dramatic action since 2008 to stimulate the economy. The Federal Reserve has been rapidly inflating the money supply and its effect on the national debt is predictable and ominous.
- Concern for future inflation.
- Spreading portfolio risk during times of economic upheaval, times of war, and when inflation threatens currency values.
- Safe-haven approach to diversification and a partial hedge against equities.
- Offers an appreciation potential not available to cash in today’s low (even negative) interest rate environment.
How Should I Invest in Precious Metals?
It is important to identify your goals, what type of investments you are comfortable with, and whether your strategy is long or short term. Precious metals should only comprise a portion of your portfolio. Remember, a strategic mix of investments diversifies your portfolio and helps protect it from market volatility. Precious metals offer diversification as well as a safeguard against inflation. With these ideas in mind, there are several choices available to begin investing in metals.
Physical metals: The purest way to invest in precious metals is to buy the actual metals and hold them yourself. Bars and coins made of gold, silver, platinum and palladium are available from coin dealers, financial institutions and government mints around the world. A safe method of storage is required, but this form of ownership provides a tangible asset directly in your control.- Gold or silver stocks: This is an investment in the companies that mine metals, not the metals themselves. It provides an indirect way to invest in the market. These stocks tend to rise when metal prices move higher and fall when they depreciate. However, those buying mining equities can present additional risks aside from the prices of the metals.
Exchange-traded fund (ETF): This is a basket of funds that tracks a commodity or index. It is a security on the investment, so you can profit as others buy metals. You can get an ETF for gold, silver, or platinum as a liquid means of purchasing metals.- Precious metal IRA: When most people think of an IRA account, they usually picture an account that holds stocks, mutual funds, and bonds. A self-directed IRA, however gives an investor the ability to invest in alternative asset classes such as precious metals. This allows you to reap the benefits of owning metal, without the hassle of storing or transporting it.
- Futures and options: The futures and options markets offer liquidity and leverage to investors who want to make big bets on metals. The greatest potential profits and losses can be had with derivative products.
- Certificates: Certificates offer investors all the benefits of physical gold ownership without the hassle of transportation and storage. That said, if you’re looking for insurance in a real disaster, certificates are just paper. Don’t expect anyone to take them in exchange for anything of value.
What Should I Invest In?
In addition to choosing the metal in which you want to invest, you also need to decide what form you want your metal to take. There are several options, but the three main configurations are rounds, bars and coins.
Precious Metal Bars
When it comes to flexibility, bars are by far the most common form among the precious metal investments. Metal bars have the advantage that they are manufactured in many different weights and sizes. Gold bars start at one gram and range to 1 kg and more. Silver bars usually start at one ounce. For investors who want to quickly add large amounts of bullion to their portfolio, bars are a good option. As stated earlier, bars in the upper weight ranges can exceed 1 kg or more. These high-weight ingots are quite expensive, but they are the best way to quickly build a large portfolio of precious metals.
Precious Metal Coins
Gold and silver coins can work very well as an investment. If they were minted by a government, their weight and purity are clearly defined and easily verified. Also, gold and silver coins have been around a long time and they have some unique properties. In contrast to rounds or bars, bullion coins can have a certain collector value. Newer gold and silver coins such as Canadian Maple Leaf coins usually do not have a collector’s premium. But, American gold coins that were minted before the elimination of gold in circulation in 1933, may have more than half of their total price tied up as a collector’s premium. If you want to invest in coins, it is important to understand that the value of your investment may total more than just a direct gold value. However, it is a simple matter to locate coins that are released purely for their bullion value. These types of coins trade close to, or just a few percent above the spot value of the precious metal in question.
Precious Metal Rounds
Rounds are popular with new investors as they are usually relatively easy to find and buy. Most rounds are made of silver or copper, but there are also some gold rounds on the market. Rounds usually weigh between one and five troy ounces. This makes them relatively flexible in choosing the amount of metal you want to buy at a given time. Most of the rounds also have beautiful designs, which makes investing in precious metals even more enjoyable and rewarding.
There are differences between coins and rounds. Briefly, coins are legal tender. They are authorized by the governments and have a face value. Rounds are simple embossed pieces of metal from private manufacturers. They have no face value and are not legal tender. Rounds are used to own metal. They have no value other than the value of the metal. Any premium you pay over the metal price is to cover the cost of minting.
Outlook
The long-term view of precious metals is extremely bullish. Both gold and silver are considered undervalued metals today. Platinum and palladium are benefiting from a huge boost in demand, mostly due to their role in auto production. Both are used in catalytic converters, and global auto sales continue to set records. Cobalt and Lithium are heavily sought now in the battery sector for automobiles and electric cars. Shrinking and unreliable supply, coupled with firm demand and expanding industrial uses, continue to drive the prices higher.
There’s no doubt that the demand for metals is on the rise. This doesn’t necessarily translate into immediate price increases since the supply is constantly changing due to active mining and sales by large holders. Before buying precious metals, do your own research. If you decide to buy coins or bullion, you will need a safe place to store them. Be prepared for volatility in the price, and even if you are an experienced trader, it’s important to keep a long-term perspective.
Risks Investing in Precious Metals for Beginners
Every investment has its own risks. Although they provide a degree of security, there is always some risk when investing in precious metals for beginners. The prices of metals can fall in times of economic certainty and dampen people who like to invest in the precious metals market. In times of volatile fluctuations, selling can be challenging as prices tend to rise. Finding a buyer for physical metals can be difficult. Another risk to precious metal prices is the supply. If demand increases, the existing supply will not be enough and the price will tend upward. If demand decreases, the supply will exceed demand and the price will tend downwards.
Bottom Line
Investing in precious metals for beginners can be frustration. However, precious metals provide a useful and effective way to diversify a portfolio. The trick to succeed with is knowing your goals and your risk profile before you get started. The volatility of precious metals can be used to accumulate wealth. Without control, this can also lead to ruin. The truth is, nobody can tell you which precious metal you should buy. As with any other class of assets, a portfolio of precious metals is best hedged by diversification. For beginners, silver or gold may be the best starting point. Once you have added some to your portfolio, you can incorporate even more types such as platinum, palladium or copper. By diversifying with precious metals, you can make your investment portfolio less risky.
Should I Buy Gold or Silver
How do you buy gold or silver online? Is there really much difference between gold and silver other than the price? Both are precious metals, meaning their occurrence in the earth’s crust is rare. But when it comes to investing, there are important distinctions. These differences should be understood and considered.
For more information, check out the article: Buy Gold or Silver Online – How to Invest in Gold and Silver
