Every financial advisor that follows the world of precious metals investments understands how it has become volatile the last 12 months. Many of the newer investors were quickly sidelined when the spot price of gold, silver, palladium and platinum became stagnant near the end of 2012, after rising significantly over the five previous years. This happened for a very fundamental and predictable reason, though.
Ultimately, it always comes down to the levels of supply and demand to move the price of any precious metal or other commodity. As an example, any institution or investor that owns a variety of asset classes that tend to suffer losses usually ends up selling those assets indiscriminately in spite of the potential of long-term profits. This is usually a result of not having stop losses firmly set in place. As a result, investors began seeing raw precious metal investments as an unworthy or unprofitable solution, which dropped the price.
However, the opposite is actually true. Historically, precious metals investments continue to be the most worthwhile investment for hedging against inflation, political uncertainty, and the devaluing of US currency. It does come with its own risks that need to be considered, though. These risks tend to be minimal when compared to other trading instruments including paper stocks.
The spot price of gold is still four times greater than its value at the beginning of 2000. Likewise, the spot price of silver is nearly double what it was just five years ago. Comparatively speaking, it significantly outperforms a variety of trading assets including paper stocks, options, bonds and even real estate.
The Value of Precious Metals
Typically, the value of precious metals is determined by their beauty, usefulness, rarity and portability. In fact, precious metals are virtually indestructible. They hold an inherent value that is hard to diminish over time. Because of that, they give investors the ability to diversify their portfolios to get away from cash, bonds and stocks. A highly diversified portfolio tends to be in a better position to weather many types of extreme market fluctuations. It does this by spreading risks out over varying financial precious metals products.
The Physical Asset
Bullion – bars, rounds and coins of investment-grade quality precious metals – along with minted coins provide investors the opportunity to take physical delivery of silver, platinum, palladium and gold. Owning the physical asset of these heavy metals eliminates the possibility of having no investments should there be a complete meltdown of the financial markets.
Another form of precious metals investments is through equities. This type of exposure requires purchasing stock in a mining company. Theoretically, should the price of the mined precious metal begin to rise, so too should the company stock that is producing the metal. In reality, this is not always true. Labor disputes, mismanagement, out of control expenses, and corporate board decisions could produce negative returns. Mining laws from foreign governments could change. Any one of these aspects could have a dramatic negative impact on the actual price of the stock even when the spot price of the metal continues to rise.
Exchange Traded Funds
Exchange traded funds (ETFs) is an easy solution for exposure to precious metals investments. This can be performed both passively and actively. As a passive solution, it works more as a strategy for investing in the short term. In the long term, active managed ETFs help investor buy on margin and short sell.
The current state of worldwide economies suggests that precious metals investments strategies are still viable solutions for diversifying a portfolio and generating profits in the short-term and long-term. Like any type of tradable instrument, investing in precious metals requires knowledge along with a basic understanding of when to enter and exit the market.