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Precious Metals Investing

Jun 30

When you invest in precious metals, 1/10 oz troy oz the value of your investment can rise or fall dramatically on a daily basis. This volatility may be attractive to some investors seeking to diversify their portfolios and hedge against equity market declines.

The most popular precious metal investment is gold, but silver, platinum and palladium can be added to a metals-focused portfolio as well. There are a number of ways to gain exposure to these commodities, including physical bullion, futures contracts, metal ETFs and mutual funds, and mining company stocks.

Before you begin exploring precious metals investments, make sure you understand the risks and rewards. Some of the disadvantages include a volatile price structure and limited liquidity, which can limit your ability to quickly sell your holdings. Additionally, investing in physical precious metals can expose you to high-pressure sales tactics, which can lead to fraud or even outright theft of your hard-earned money.

Another downside to precious metals investing is that, with the exception of mining company stock, they typically don't generate much income. If you're looking for a source of passive income, it's best to stick to more reliable assets like real estate and stock mutual funds.

Nevertheless, the addition of precious metals to a balanced portfolio can provide several benefits. These include diversification, protection against inflation and favorable tax treatment. In addition, many investors find that they are able to easily exchange their physical precious metals for cash anytime they want, and they can pass them down to future generations.

The diverse sources of demand for gold, silver and other metals contribute to their low correlation with equities and other risk assets. Pro-cyclical demand from jewelry and consumer and industrial applications increases as economies expand, while counter-cyclical demand from investments and safe-haven assets picks up during economic slowdowns or market pullbacks. This lower correlation helps to protect these assets from broader market volatility and serves as a valuable hedge against a potential economic or market downturn.

Precious metals investing also offers a low correlation with equities and other traditional risk assets, making them an effective diversifier for many investors. In 2022, when stocks and bonds suffered double-digit losses, gold rose by 0.4%, silver climbed by 6.3%, and platinum gained 12.2%1.

Investors can gain exposure to precious metals without the need for physical bullion through futures markets, metal ETFs and mutual funds, or mining company stocks. Bullion products such as coins and bars are another way to own metals, but they are often illiquid and cumbersome to store and insure. In contrast, precious metals ETFs and closed-end funds can offer more frequent trading, greater leverage and less hassle than owning physical bullion. However, ETFs should be considered only after you've explored the options and chosen a platform for your precious metals investment.