Managing Risk In Precious Metals Investments

Managing Risk In Precious Metals Investments 5.00/5 (100.00%) 12 votes

It is true that at least one of the precious metals investments options, gold, is a good investment across all investment strategies but one, gold futures, and would therefore be the safest of all investments in all strategies (all non-precious metals stocks, bonds, mutual funds, etc.).  However, there is a strategic plan that can involve all precious metals (gold, silver, platinum and palladium; the latter three being more volatile than gold, and the latter two are very volatile) and yet keep a safe portfolio by limiting which precious metals investments are engaged.

Considering the various types of precious metals investments from lowest to highest risk, there are bars and bullion coins, mutual funds, EFTs (exchange traded funds), and major mining companies (all low-risk); collectable coins and midsize mining companies (medium risk); futures and small mining companies (high risk).

Considering the types of risks represented by these options, there is physical ownership, market volatility, political upheaval and fraud. 

Low Risk Investments

If an investor wanted a safe, diverse strategy of precious metals investments which would be safer than all non-precious metals options, the choice would be a blend of bars and bullion coins of gold, silver, platinum and palladium, with a higher volume investment in gold and silver.  There are two separate risk assessments involved: physical ownership, which is at risk of theft if not properly secured; major mining companies which have a track record of stable mining and reserves of precious metals relatively free of political and labor upheaval; and volatility of the market, by which precious metals valuation is more volatile than physical ownership.

Medium Risk Investments

A mid-range strategy that is still relatively safe, particularly when compared to non-precious metals investments, would choose collectables, EFT’s and midsize mining companies.  With this investment strategy, there are three risk factors: physical ownership of the collection with the same risk of theft as above, fraud (the collectables may not be authentic) and political upheaval.

High Risk Investments

A high-risk strategy in precious metals investments may still be safer than a non-metals investing portfolio.  This strategy includes precious metals futures (not an advisable approach, particularly for the novice investor), and small mining companies, which have little to no track record and no stability in reserves not yet mined and may be more at risk of encountering labor disputes.  The risks associated with these investment types are, political upheaval and market volatility.

An investment strategy in any market must consider the longevity of the investment, the returns expected, and the relative safety and stability of the investment to at least maintain status quo.  Growth, of course, is always the goal of investment, but is not always the outcome, particularly if the above considerations are loosely applied.

 

That said, an investor is not obligated to choose either a blend of precious metals, or a blend of investment types and their associated risks.  For example, an investor may happily choose to invest in physical possession of gold bullion coins and bars and suspend any thought of engaging anything else.  This is the absolute safest option of variables with a virtual assurance of growth, but never with an absolute, cross-the-heart 100 percent guarantee of growth.  All that can be said is that considering the long view of history, say, twenty years, possession of physical gold has seen a handsome growth rate any investor would have been glad to have in abundance.

 

From that limited, very safe choice, a matrix of investment options using the grid of the types of precious metals investments and risk assessments can be constructed to diversify the portfolio.