If you are thinking about investing in precious metals — especially in light of recent concerns about inflation — you have plenty of options.
Many investors see precious metals, such as gold, silver, and platinum, are a way to diversify your investment portfolio. You can buy and hold metals in an account, take physical possession, or invest in derivatives, metal ETFs, or metal mutual funds.
Investing in Gold
Gold has been a long-coveted metal because of its value and durability. Gold does not corrode or rust, yet it is malleable. It is used in industrial applications in electronics or for gold fillings, but it is known most commonly for jewelry and as a form of currency.
The “gold standard” is a monetary system that links currency or paper money to gold. Most countries tied their currency to gold for decades, although no country currently uses the gold standard. Still, It is popular for collectors and investors.
Gold’s value varies depending on supply and demand. In inflationary times where the return on bonds, equity, or other markets decreases, investors tend to invest more heavily in gold because it tends to hold its value.
Investing in Silver
Silver trading tends to follow similar patterns to gold, although there are more industrial uses for silver which can also impact pricing. Silver’s value is also determined by supply and demand, but pricing will typically fluctuate more than gold prices because of its industrial use.
Silver is used in batteries, microcircuits, electrical appliances, bearings, and medical products, in addition to jewelry. While the use of silver decreased over time as silver-based photography film was made mostly obsolete with the emergence of digital cameras, growing consumer demand for electronics has offset that.
Typically, investors that want to hold metals will invest in standardized units, such as a 100 oz silver bar.
Investing in Platinum
Platinum tends to have a higher price than silver or gold due to supply. Less platinum is pulled from the ground each year. Mines are only in two countries currently — South Africa and Russia. Political and social unrest can impact supplies and prices.
Platinum is used in the auto and computer industry along with catalysts for the chemical, oil, and gas industries.
Platinum prices are the most volatile of precious metals.
Precious Metal Investment Options
Investors that want to have physical possession of precious metals can invest in coins or bars. Bullion can be stored locally or held in reserve. If you go this route, you will need a safe place to store them. If they are lost, you have no claim against them.
Certificates are also available for investors that do not want to take possession of bars. Some brokers will offer proof of ownership of physical assets without the hassle of dealing with them and store the physical assets for you.
Other precious metals brokers will provide certificates without holding physical assets and value them against commodity prices. This can be of concern in cases of broker default.
There are Exchange-traded Funds (ETFs) for gold, silver, or platinum. With an ETF, you will not get possession of the bars or coins, but you can buy, sell, or trade ETFs more easily.
ETF pricing typically models spot prices for metals, although there may also be management fees on top of pricing.
Stocks and Mutual Funds
Stocks and mutual funds that concentrate on the precious metals market are also available. Funds leverage price movements in the metals market with fund managers.
Future and Options
You can also invest in gold, silver, and platinum futures. There can be a significant upside, but also significant risk when investing in the future for any commodity. It is no different than investing in other derivatives where potential increases or losses occur depending on changes in future commodity prices.
Tax Implications of Investing in Precious Metals
The IRS considers precious metals as collectibles for federal income tax purposes. That means when you sell precious metals, you are subject to a higher long-term capital gains rate, which is currently 28%.
Risks in Investing in Precious Metals
During times of uncertainty, prices generally increase. However, prices can rise or fall quickly depending on sellers and buyers in the marketplace.
There are risks involved in investing in precious metals. If you are thinking about investing in gold, silver, or platinum, you should consider your options carefully. Investors should examine their current portfolio to see if it makes sense to diversify using precious metals given your risk profile and tolerance.
When investing in precious metals, make sure you work with a reputable dealer or broker. Counterfeit coins and bars have increased in the past year due to demand, according to the Anti-Counterfeiting Task Force at the nonprofit Anti-Counterfeiting Educational Foundation (ACEF).