Some of the most long standing investments that have withstood the test of millennia are precious metals. Gold and Silver have been used since Ancient Egypt and Mesopotamia. Today, they have other metals like Platinum continue to be a time-tested store of wealth and means of investment.
In the modern investment portfolio, precious metals can provide an important hedge against market downturns, inflation, economic uncertainty, and other potential risks that other investment vehicles are more exposed to.
What are Precious Metals?
Precious metals are a group of metals known for their durability, scarcity, and long-term economic value.
These metals physically tend to be non-reactive and malleable, making them ideal for minting coins in the past. They’re also widely used in jewelry because of these properties and high luster. Most recently, several precious metals are also now used in electronics because they’re highly conductive.
While sourcing these metals has become more efficient over the centuries, they’re still resource-intensive to mine. The cost required to source them and relative scarcity restrict supply, while those aforementioned qualities sustain demand. The result is metals that have a long history of being valuable.
Types of Precious Metals for Investment
For investment purposes, there are four main precious metals that might be included within a portfolio. These are:
- Gold (Au): Gold is the most recognized precious metal, literally being the “gold standard” for the category. This is the first one that most precious metal investors begin with, and it usually also accounts for the largest portion of seasoned investors’ precious metal portfolios. Gold is so universally recognized that it’s one of the benchmarks used to measure currencies and commodities.
- Silver (Ag): Silver might be seen as the classic sidekick to gold. Although silver is more abundant than gold, technological advancements are increasing the demand for silver in industrial applications (i.e. electronics). This and silver’s longstanding history have ensured it remains one of the central precious metals, for investment and other purposes.
- Platinum (Pt): Platinum is a more recent addition to precious metal investing. It’s more rare than either gold or silver, and is the standard metal used in automotive catalytic converters. This combination also makes platinum jewelry expensive. Platinum sometimes sees more price volatility than gold or silver do, and may offer investors a slightly higher risk and potential return.
- Palladium (Pd): Palladium is a platinum group metal with similar properties and applications. It’s a lower-priced alternative to platinum for catalytic converters, and is also a more affordable alternative to platinum jewelry. Both platinum and palladium are used in various green technologies.
Some other metals have value, but are more accurately described as semi-precious rather than precious. Copper and others might account for a marginal portion of a precious metals portfolio, but the four core precious metals are gold, silver, platinum and palladium.
Understanding Historical Precious Metal Prices
Historical price charts of precious metals show the patterns of volatility and resilience over decades.
To see how these metals can counterbalance portfolios in times of uncertainty, a precious metals chart just needs to be overlaid onto a stock index or other asset’s chart. The long-term resilience and disconnectedness from other common asset classes are why investors still seek out precious metals.
Of course, historical price charts must be considered alongside a comprehensive investment assessment. Investors should consider their current situation, other investment holdings, current market conditions, and other factors before deciding to invest in precious metals.
Why Invest in Precious Metal?
Precious metals are unlike any other investment available to individual or institutional investors. When compared to other options, precious metals offer:
- Diversification: Precious metals don’t correlate too closely with the stock market, bond market, or real estate market. They’re one of the few asset classes that offers such diversification.
- Market Downturns: When used for diversification, precious metals may help maintain some stability during market corrections and crashes. This is especially important for investors who will need their portfolio at a specific time, in case there’s a market downturn at that time.
- Inflation Hedge: Traditionally, precious metals retain or increase in value during periods of high inflation. Cash is another alternative to stocks and other investments, but precious metals normally don’t depreciate due to inflation like cash does.
- Long-Term Value: Historical data shows a fairly consistent increase in the value of precious metals over long periods. No stock today has a history going back to ancient civilizations.
- Tangible Asset: Physical metals are one of the few tangible investment assets available today. Investors don’t even receive paper stock certificates anymore, but a piece of gold or platinum can be seen, held, and physically stored in a safe.
Important Considerations Before Investing
Before making the final decision to invest in one or more precious metals, it’s important to understand that these metals can be volatile. While they historically go up over long periods, their charts can be more choppy than the charts of other assets.
Once the final decision to invest is made, the one question that remains is how to actually make the investment. Precious metal investments can be made in a few different ways:
- Physical Metals: All four metals can be bought as physical bullion. Coins and bars are the most tangible method of investing, but require a storage solution and present some risk of theft. Standard homeowners insurance often won’t cover theft or loss of precious metals beyond a nominal amount.
Small investments might be made in bullion, but investors who amass large amounts of precious metals usually need a more practical option. - Precious Metals ETFs: For many, precious metals ETFs are that more practical option. These funds track the spot price of the chosen metal, and the fund takes care of any storage needs.
Some funds are paper-traded ETFs, and others are spot ETFs that actually purchase the metal. In either case, the investor simply buys and sells as they would a stock or bond — except they’re making direct investment in one of these metals. - Mining Stocks: Purchasing stock in a mining company provides less direct exposure to precious metal prices. Metal prices will have a significant impact on a mining stock’s price, but the stock will also be affected by the business’s performance, management’s decisions, geopolitical tensions, and numerous other factors that impact businesses’ stocks.
Many mining stocks offer a dividend, which could provide passive income while also providing exposure to precious metal prices. Stocks are also easy to buy and sell.
Strategies for Investing in Precious Metals
One of the most reliable ways of investing in precious metals is to dollar-cost average (DCA). This is a long-term strategy that seeks to remove short-term volatility when investing, and it can be especially useful if purchasing a volatile asset.
With DCA, a set amount is invested at regular intervals regardless of the asset’s price. For example, $500 might be invested in gold at the start of each month. Sometimes the asset’s price will be at a short-term high, and sometimes it’ll be at a short-term low. Those short-term swings will average out, though, leaving the potential long-term returns.
Other strategies base investment on macroeconomics, geopolitics, technical analysis, or other strategies. DCA is one of the most proven, however, and doesn’t require expertise in world events or market movements.
As for an investment vehicle, it’s broadly advisable to use a tax-advantaged account for precious metal investing if possible. A tax-advantaged account reduces the taxes that are paid, either when the investment is made or when the returns are withdrawn.
Precious metals can be included in most tax-advantaged investment accounts, including IRA savings accounts.
Set Up A Gold IRA Account for Your Retirement
An IRA is a tax-advantaged savings account, and one of the most common ways of saving for retirement. There are two types of IRAs:
- Traditional IRA: Funds are not taxed when deposited, which allows you to begin with a larger sum that can earn returns. Withdrawals are taxed.
- Roth IRA: Funds are taxed when deposited, but there are no taxes assessed on withdrawals. Any returns generated within the account are tax-free if used for retirement (or select other permitted uses).
Either type of IRA can be used to invest in gold. Investing in a Traditional Gold IRA or a Roth Gold IRA allows you to take full advantage of these tax benefits, while also seizing the opportunities that precious metals offer.
A Gold IRA can be used to invest in gold via any of the aforementioned ways. The IRS permits investing in gold bullion and coins, gold ETFs, and mining stocks within an IRA.
Choosing an account that focuses on bullion and coins can come with marginally higher management fees, because fees must cover the cost of physical storage. These are usually a small amount, however, and likely less on a percentage basis than storing physical gold yourself. Of course, ETFs and mining stocks are alternative options if you don’t want to pay storage fees directly from your IRA.
Additionally, a Gold IRA isn’t necessarily limited to just gold. Most investors keep the majority of their account in gold since it’s the main precious metal. You can also have other precious metals, including silver, platinum and palladium, in the same account though.
Like with all IRAs, the IRS caps annual investment. The maximum contributions for 2024 are $7,000 under age 50, and $8,000 for those 50 and older.
However you decide to set up a Gold IRA, this is one of the most effective ways to capitalize on gold. Gold can go on strong bull runs, and having a tax-advantaged IRA lets you generate and keep the most returns.
If this sounds like it may be a good option for you, learn more about gold IRAs and precious metals investing for retirement.
Include Precious Metals in Your Portfolio
Whatever you’re investing for, strongly consider how precious metals might strengthen your portfolio. You’ll likely find that the diversification, historical returns, and other benefits that these metals offer could improve your portfolio. Set up a Gold IRA today, and you could be well on your way to a good nest egg for the future.
