How to Invest in Precious Metals

What are precious metals?

Precious metals are rare, naturally occurring metals with high economic value. Unlike common base metals, like copper or zinc, precious metals don’t oxidize or corrode, and they don’t naturally tarnish. This makes them useful for a broad range of applications, including for jewelry, industry, and as a long-term store of wealth.

The main precious metals valued by investors are gold, silver, platinum, and palladium. Gold is the most established store of value, silver is used as both an investment and industrial material, and platinum and palladium have high industrial demand. In addition to these four, other precious metals include rhodium, ruthenium, iridium, and osmium.

Types of precious metals to invest in

Gold

Gold is the best-known precious metal and, thanks to its unique properties, has been valued by humankind for thousands of years. It doesn’t rust or corrode, it’s malleable (easy to shape), and is an excellent conductor of heat and electricity. 

Today, gold is mainly used for jewelry or as a store of wealth, although it also has some industrial uses in electronics and dentistry. Investors often turn to gold in times of economic or political uncertainty because it’s considered a safe-haven asset and a hedge against inflation.

Silver

Silver is both an investment and industrial metal. Its excellent conductivity, malleability, and antibacterial properties make it useful in solar panels, batteries, medical devices, and water purification, and it’s also used for jewelry, decorative items, and sold to investors in the form of silver bars and coins.

Because of its dual role as an investment/industrial metal, silver prices can swing more sharply compared to gold. High industrial demand can drive prices up, while drops in manufacturing or changes in technology can send them down. This volatility means that silver can sometimes outperform gold, but it can also carry more risk for investors.

Platinum

Platinum is rarer than both gold and silver, and it has strong industrial demand. Its most important use is in catalytic converters that help reduce harmful emissions from vehicles, although it’s also used in jewelry, dental work, medical treatments, and petroleum refining.

What’s interesting about platinum is that most of the world’s supply comes from just two countries: South Africa and Russia. For that reason, the metal’s prices can be sensitive to political and supply disruptions. Because of its massive role in the automotive industry, any changes in car sales and emissions standards can also affect demand, making platinum the most volatile precious metal. 

Palladium

Palladium is one of the least-known precious metals. It’s part of the platinum group metals (PGMs), and like platinum, most of its demand comes from the auto industry where it’s used in catalytic converters. Palladium is also used in dentistry, electronics, medicine, groundwater treatment, and in some jewelry, although to a lesser extent than the other three precious metals.

Palladium is scarce and most of its supply is concentrated in just a handful of countries. This limited supply, coupled with its high industrial demand, has made palladium one of the most expensive precious metals at times. That said, like platinum, its prices can fluctuate with changes in global car production.

What are precious metals used for?

Precious metals aren’t just valuable because they’re rare, they have a wide range of uses that adds to their demand and investment appeal. These include:

• Industrial applications: Gold, silver, platinum, and palladium all have various industrial uses. For example, gold is used in electronics and dentistry, silver is used to power solar panels, batteries, and medical devices, and platinum and palladium are both important in catalytic converters.
• Jewelry: Gold, silver, and platinum are all widely used in jewelry and other decorative items. 
• Central bank reserves: Governments and central banks around the world hold gold in their reserves to help protect against economic shocks.  

What affects the price of precious metals?

Supply and demand

Like any other asset, the value of precious metals is affected by supply and demand. When supply is limited or demand increases, prices go up, and vice versa. For example, a strike at a major silver mine could halt production and push silver prices higher in the short term. On the other hand, new mining technology that increases output could flood the market and lower prices (assuming demand stays the same).

Economic uncertainty

Precious metals are traditionally viewed as ‘safe-haven assets’. This means that, when the economy or political climate looks unstable, investors tend to move their money into metals like gold. For example, gold's price rallied in the first three quarters of 2020 following the onset of the COVID-19 pandemic.

Industrial output 

Precious metals have various industrial uses, from electronics to medical devices, automotives, and jewelry. When these industries grow, or new uses for the metals are discovered, demand increases and drives prices higher. On the other hand, if industrial demand decreases, or a precious metal is replaced with another substance, demand could drop and prices would follow. 

Currency and interest rates

Precious metals are priced in U.S. dollars, so their prices can fluctuate with the value of the U.S. dollar. They tend to have a negative correlation with the dollar, meaning they move in the opposite direction. A weaker dollar makes precious metals cheaper for foreign buyers, boosting demand and prices.  

They can also be influenced by interest rates. When interest rates are low, the return on fixed-income investments like bonds or savings accounts falls, making precious metals a more attractive investment opportunity. 

How to invest in precious metals 

Physical ownership

The most traditional way to invest in precious metals is by buying bullion bars, coins, or jewelry. These gain value as the price of the underlying precious metal increases. 
 
The main benefit of owning physical precious metals is that you have direct ownership of the asset itself. The downside is storage and security considerations – keeping bullion at home creates a risk of theft while professional storage and insurance come with extra costs. 

Exchange-traded funds (ETFs) and receipts (ETRs)

Precious metal ETFs can be a more convenient way to gain exposure to precious metal prices. These funds hold precious metals bullion and can be bought and sold on stock exchanges, just like shares. This makes them highly liquid, and since you don’t own the actual metal itself, you don’t have to worry about storage or security.  

The downside is, however, that you don’t actually own a tangible asset. This means you’re missing out on one of the main benefits of precious metals, being a reliable, safe-haven asset that exists outside the financial system. ETFs also charge management fees.  

Closed-end bullion funds 

Closed-end bullion funds are similar to ETFs in that they give you exposure to the price of metals without having to worry about storage or security. But unlike ETFs, which create and redeem shares on demand, closed-end funds only issue a fixed number of units. This means they can sometimes trade at a premium or discount to the value of the bullion they hold, depending on investor demand. 

Most closed-end funds are fully backed by allocated bullion, and some even allow investors to redeem their units for physical metal. They can be a good option for long-term precious metals investors who don’t mind less liquidity than an ETF.  

Precious metals certificates 

Precious metals certificates represent ownership of gold or silver held by a bank or dealer, providing the benefit of physical ownership without needing to consider storage or security. They can be allocated (tied to specific bars) or unallocated (pooled). 

Certificates are convenient and can be cheaper than buying bullion directly, but they come with counterparty risk. There’s no guarantee that there’s enough bullion to back all of the certificates issued, which means should the issuer go bankrupt, you may not be able to recover all your investment.   

Mining stocks and mutual funds

Another way to gain exposure to precious metals prices is by investing in shares of mining companies. These stocks often move with metal prices, but they’re also influenced by company performance and management decisions. You can gain more diversified exposure by investing in mining ETFs or mutual funds that hold baskets of shares in different mining companies, helping reduce single-company risk. 

Note that mining stocks can be affected by equity market trends, which removes the benefit of diversification that precious metals offer in an investment portfolio (i.e. they tend to move in opposition to traditional financial markets).  

Digital precious metals

You can also invest in digital tokens backed by physical metals. These aim to combine the security of owning precious metals bullion with the flexibility of digital or blockchain-based trading. That said, not all digital precious metals are 100% backed by the underlying asset, and as this is still a new and growing market, it’s important to approach with caution and do your research. 

Advantages and disadvantages of investing in precious metals

Like any other investment, there can be both advantages and drawbacks to investing in precious metals. 

Advantages of investing in precious metals

Some of the advantages of precious metals investing include:

• Hedge against inflation: Precious metals often hold or even increase in value during periods of rising inflation, helping protect purchasing power. Since 2007, for example, many major currencies have lost close to 80% of their purchasing power relative to gold.
• Tangible asset: Unlike stocks or bonds, precious metals are physical assets with intrinsic value beyond just investments (e.g. industrial uses).
• Liquidity: Gold, silver, platinum, and palladium all trade globally and can usually be converted into cash quickly, especially if they’re in the form of coins, bars, or ETFs.
• Diversification: Precious metals tend to have a negative correlation with stocks and bonds, meaning they perform well when those markets struggle. For example, in 2022, many stock and bond markets posted double-digit losses while gold increased, silver gained over 6%, and platinum soared more than 12%. 

Some of the drawbacks of precious metals investing include:

• Storage & insurance costs: If you’re holding physical bullion, there’s always a risk of theft. To protect your investment, you’ll need to consider secure storage and insurance, which can add ongoing costs.
• Tax considerations: In the U.S., precious metals are taxed as collectibles, with a long-term capital gains tax rate of up to 28%, which is higher than the usual 15-20% rate applied to stocks. 
• No income generation: Unlike stocks, which sometimes pay dividends, or bonds, which pay interest, precious metals don’t generate any income. Their value relies solely on their price appreciating. 

Some additional risks of investing in precious metals include:

• Price volatility: Precious metals prices can swing sharply based on global demand, mining supply, monetary policy, geopolitical tensions, and investor sentiment. 
• Mining risks: If you choose to invest in mining stocks, there are company-specific risks to be aware of.
• Stock market correlation: Investing in shares of mining companies or mining ETFs means your investment may move in line with the broader stock market during downturns, even if the metals themselves are holding value.
• Competition from cryptocurrencies: Some people consider assets like Bitcoin to be alternatives to gold and silver. If more investors were to turn to crypto as a store of value, it could reduce demand for precious metals and drive prices down.