Precious metals: how to constitute a protective part of the wallet
How to invest in precious metals and why investors buy gold during a crisis – we will tell you in this article.
Faced with the crisis, investors are starting to stock up on precious metals, since these tools are backed by a specific raw material. The likelihood of the cost of metals approaching zero point is hardly imaginable, so the risk of losing all the money invested is too low.
The most popular precious metals are gold, silver, palladium, and platinum. They are divided into 2 groups:
- Precious industrial metals.
Traditionally, gold is viewed as an asset that preserves value: in most cases, this metal is invested to save money, not to increase. Gold bars can last for centuries and will not rust, so their value does not decrease over time.
Gold is bought not only by private investors, but also by the reserves of global banks. They replenish gold reserves to withstand the crisis, when the prices of other investment instruments fall.
Where is gold used? Half of global demand is jewelry, 40% of investment demand. Industrial demand is only 10%, gold is mainly used in the production of electronics.
Industrial precious metals
Palladium buys the automobile industry and manufactures devices from this metal which purify exhaust gases. With the increasingly demanding public of the car “environment”, automakers are increasing the amount of this metal in cars, which means that the demand for palladium will increase. Until 2024, analysts forecast a deficit in the palladium market.
Platinum, like palladium, is used in the automotive industry. In other industries, platinum is used at certain stages of petroleum refining, in the production of nitrogenous fertilizers. Unlike palladium, platinum is a high quality precious metal and is used in jewelry.
Silver. As an industrial material, silver is used in electronics, chemistry, medicine, and the military industry. It is also used for making jewelry.
How to invest in precious metals
- Ingots. You can buy a pure metal ingot from the bank. When purchasing, you have to pay VAT to the state and also to the bank for the storage of ingots in the cell. The main disadvantage of investing in physical metal is its low liquidity. You can sell bullion to a bank, jeweler, pawnshop, or professional gold trader like Pacific Precious Metals where you can buy or sell gold, platinum, and other precious metals.
- Coins. Bullion coins can be bought at the bank, you don’t need to pay VAT. Bullion and bullion coins must be maintained properly, otherwise the metal may oxidize and its value will decrease.
- Mutual funds and ETFs. You can buy securities of mutual funds (mutual funds) or ETFs (exchange-traded funds) that invest in gold on a brokerage account.
- Shares of mining companies. The share price depends on the prices of precious metals, but also on the reputation of the company, its financial performance and general news. Many companies pay dividends – part of the profits that the issuer pays back to its shareholders. To invest in mining stocks, you need to open a brokerage account and access the stock exchange.
- Futures contracts. This investment instrument is suitable for professional traders who speculate in the market. By purchasing a precious metal futures contract, you agree to repurchase the goods from the seller at a price agreed upon in advance. If the market price on the date of execution of the contract turns out to be higher than the forward price, then the buyer wins: he takes the goods and receives the difference.
Rules for investing in precious metals
- Form a protective part of your precious metals portfolio. Diversify your portfolio. Invest 10-15% in precious metals – and that will be the protective part of your portfolio. There is no point in increasing the share, because gold and other metals are an asset that does not generate cash flow, unlike stocks or bonds. With its help, you can temporarily protect your money from inflation or wait for market volatility, but without getting income.
- Precious metals trading is expected to be situational. Increased demand for gold is formed under conditions where risk-free rates (for example, on US government bonds) begin to fall below expected inflation. When trading industrial precious metals, pay attention to the balance between consumer demand and manufacturer supply. Perform a market surplus / deficit assessment and analyze the size of available stocks.
- Long term investment. Against the backdrop of a century-old history, precious metals exceed inflation, but the fluctuations during the day are quite high. Therefore, it is worth investing in precious metals for the long term – 10 to 15 years.
Why do investors buy gold in times of crisis?
In the days of the gold standard, when each currency could be exchanged for a certain quantity of gold, this noble metal was considered a guarantor of the preservation of value. Since then, gold has acquired the status of a defensive asset.
In the 21st century, the situation is changing. Demand for gold during an economic downturn persists, but this market, due to its limited size (there is a limited amount of metal circulating in the market), is not able to “accommodate” everyone. .
The 2020 crisis, the worst economic downturn since the Great Depression, did not push the metal to new all-time highs. Precious metals will remain instruments of protection for a long time, but each time the reaction of quotations to the crisis may be less sensitive.
The actual cost of gold is less than $ 1,000 and the profitability of gold mining companies is unfairly high. The growth in quotes is justified by the expectations of investors (everyone is used to the fact that with the next crisis the demand for metal is expected to increase), and not by the real need for physical metal.
How did metal prices evolve during the crisis? When interest rates fall, inflation rises and a crisis approaches – the price of gold and, to a lesser extent, silver. Platinum and palladium as industrial metals during such periods can be under pressure. This is exactly the situation that was observed in February-March 2020.
Each investment option has its own advantages and disadvantages. You just need to choose the right tool based on your personal abilities, your personal financial goals and your tolerance for risk.