With increasing political uncertainty all over the western world, changing global power structures, continued sluggish growth, and record low interest rates, precious metals are today more relevant than ever. Together with cryptocurrencies like Bitcoin, aka digital gold, smart investors who want to preserve and grow their capital in this uncertain environment should take a closer look at the benefits of investing a portion of their portfolio in precious metals.
In this article, we will take a closer look at the four most common precious metals and how you can profit from them.
The original form of money, and still considered by many to be the only “true money”, unlike fiat currency, which is what we use today. Unlike in the past, when you could exchange your dollars or any other currency for physical gold, fiat currency is not backed up by anything else than a number printed on a piece of paper. Fiat currency is only backed up by governments who are free to print money as they wish, nothing is stopping them from creating more money out of thin airr.
Gold is the only currency that retains its buying power over time – it has intrinsic value. Due to this unique characteristic, many people indeed consider gold to be the only true money. Looking at the gold price chart since year 2000 gives us a clear picture as to how well gold actually works in protecting your buying power against inflation, which today’s interest rates are not even close to being able to.
As you can see from the chart, gold topped out just before 2012 and has been in a downtrend since that. However, there are signs that since the beginning of 2016, the trend has shifted, and the gold market may now be ripe for yet another rally up.
As gold’s younger sibling, silver has not been getting as much attention from investors. And perhaps rightfully so, as returns have been rather slim for the past five years. Silver is often seen as a leveraged play on gold, meaning that price movements are generally in the same direction, but they tend to be more extreme. However, it is also important to note that silver has many more industrial uses than gold, and as such is not solely used as a store of value.
From a technical perspective, silver now appears to have come down closer to the longer term price trend, making a large move to the downside less likely to happen going forward.
A very expensive metal, known for being correlated with the car industry and therefore cyclical in its nature. There are only a few companies out there that actually mine platinum, meaning that either the direct ownership of platinum coins or an investment in a platinum-backed Exchange Traded Fund are your best options for getting exposure to the price of platinum.
There is no mining companiy purely mining palladium, so buying mining shares is not a good option for getting exposure to the price of the metal. Instead, ETF’s or physical ownership would be the way to go for most retail investors.
Among other uses, palladium is an important component in catalytic converters that reduce the amount of harmful air pollutants from cars. Some analysts believe that this will continue to drive the price of palladium higher, as China and other large developing countries are stepping up the fight against air pollution. In fact, palladium has outperformed both gold, silver, and platinum by more than 300% since 2009. And as if that’s not enough, according to reporting by the Financial Times, palladium has outperformed all other commodities in the Bloomberg Commodity Index so far in 2017.
How Can I Invest in Precious Metals?
As a retail investor, you have many choices when it comes to investing in precious metals. We will here cover the three main categories; physical ownership, ETF’s, and futures contracts.
This is precious metals investing in its most basic form, and it is still the preferred choice for many investors. The most obvious advantage of buying and storing precious metals such as gold and silver yourself is the protection it offers against all kinds of financial and political turmoil. No matter what happens in the financial world, you still hold on to your gold and you don’t have to rely on any third party such as an issuer, stock or futures exchange to be operational.
Exchange Traded Funds (ETF’s)
Buying a precious metals ETF is generally considered the easiest and most straight-forward option for retail investors and traders wanting to get into precious metals. ETF’s are traded on stock exchanges just like a stock, which is something that most people are familiar with. You simply search for the ETF’s ticker code on you broker platform and buy it in just the same way you buy a stock.
When choosing to invest in an ETF, it is important to understand exactly what it is you are buying. It is advisable to stick with ETF’s from well-respected issuers that are not overly complex. Below we have listed a well-known ETF’s for each of the four precious metals we have covered. They are all backed by the physical metal, which makes it easy for retail investors to understand what is driving the performance of the fund.
- SPDR Gold Shares ETF – GLD: Currently the largest physical gold-backed ETF in existence. This is an extremely popular choice for anyone interested in exposure to gold. The fund holds physical gold at HSBC’s London Gold Vault. GLD is traded on stock exchanges in New York, Singapore, Tokyo, Hong Kong, and in Mexico.
- iShares Silver Trust ETF – SLV: By far the most popular physical silver-backed ETF. Just like GLD, it offers investors exposure to the price of the underlying metal without the complexities of the futures market and the logistical hassle of direct physical ownership.
- ETFS Physical Platinum Shares ETF – PPLT: Offers physical ownership of platinum bullion bars stored at their vaults in Zurich and London. Considering the fact that platinum is not as widely traded as gold and silver, a physically backed ETF like PPLT is one of the best ways for retail investors to profit from this precious metal.
- ETFS Physical Palladium Shares ETF – PALL: Just like PPLT, PALL is also physically backed with palladium bullion bars stored in vaults in Zurich and London. An ideal choice for retail investors looking for exposure to the price of palladium.
- ETFS Physical Precious Metals Basket Shares ETF – GLTR: Perhaps the ultimate precious metals ETF for the average retail investor looking to get a diversified exposure to all four precious metals. Keep in mind, however, that gold and silver accounts for more than 85% of the funds’ holdings, meaning that the more exotic metals platinum and palladium does not have much influence on the funds’ performance.
All precious metals can also be traded directly in the futures market. However, futures trading is highly leveraged and has higher capital requirements than the other options we have listed. It is dominated by more professional players and institutions, making it a bit more complicated for the average retail investor. Nonetheless, there is still lots of information to be found about retail investors operating in the futures market, and we advise everyone interested in this to educate themselves on how it works and the risks involved.
As you can see, investing in precious metals is easy to get started with, and thanks to investment options like ETF’s, you can get started even with just a small amount of capital.
Please share with us in the comments what precious metals you are investing in and why you believe it is a smart choice. Good luck!