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Investing in Precious Metals

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Investing in Precious MetalsInvesting in precious metals, and in particular gold, has received a lot of attention from investors the past few years.  Many investors turn to gold and other precious metals as a safe haven during times of political and economic uncertainty. 

Benefits of Investing in Precious Metals

People invest in precious metals for a number of reasons, including the following:

  • Some metals are considered universal symbols of wealth
  • They may act as a hedge against inflation
  • Precious metals may have low or negative correlation to other common asset classes, making them attractive investments for diversification purposes.
  • They are seen by some as a safe store of value during hard times
  • Some precious metals have industrial applications

Downsides to Investing in Precious Metals

Like any other investment, investing in precious metals may have its downsides:

  • Some precious metals are quite volatile
  • Some may not perform well when times are good
  • Certain precious metals may have more psychological value than actual industrial value
  • Gains may be taxed at higher collectible capital gains tax rates
  • They may not be a productive asset like a farm or a business and may not generate income
  • Physically owning precious metals can mean dealer mark-ups and high carrying costs: shipping, storage, and insurance
  • Historically, other asset classes such as stocks and bonds have greatly outperformed certain precious metals over long periods of time.  Although gains (or losses) may be very large in any given year, over the long term, returns have not been particularly attractive.
  • Like any other asset, precious metals can decrease in value

Precious Metal Options

Although gold gets most of the attention, there are other precious metals available to investors.  Some of the more popular alternatives to gold include silver and platinum.

Each precious metal is quite unique.  For example, some metals may have significant industrial uses while others don’t.  Some also tend to be much more volatile than others.

Ways to Invest in Precious Metals

If investing in precious metals is appropriate for you, it’s helpful to understand your options.  There are a number of ways to invest in precious metals.  Some of the more common ways include the following:

  • Purchase stock of mining companies
  • Purchase mutual funds that hold shares of mining companies
  • Purchase ETFs that hold bullion
  • Purchase bullion or coins
  • Using derivative products, such as options and futures

Each of the alternatives above has its benefits and downsides.  For example, purchasing an ETF that holds precious metals may be much more convenient, liquid, and involve fewer fees than physically holding the metal.  However, if there really is a financial catastrophe, some investors may feel more prepared if they hold the actual metals themselves rather than a piece of paper.

Investing Tips

Before investing in precious metals, do the appropriate research and consider how it fits into your overall portfolio.  Consider your age, risk tolerance, need for income, and other appropriate factors before investing.

In general, I think trying to time the market or day trade is a losing proposition.  Find an asset allocation that is appropriate for you and stick with it, rebalancing periodically and adjusting it as needed over time

Basic diversification theory indicates that no single investment should make up a huge portion of one’s portfolio.  This holds true for precious metals as well.  Many investment professionals recommend investing no more than 5-10% of your portfolio in precious metals.  It may also make sense to invest in a variety of precious metals, rather than just one.

If you do decide to purchase coins or bars, make sure you purchase them from a reputable source and don’t overpay.  Additionally, make sure you have factored in all the costs of ownership.

What are your thoughts about investing in precious metals?  Leave a comment below!

Image: bigstock/shelmojov

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