Complete Guide to precious metals trading

Both Gold and Silver are considered valuable metals and have been chosen by various clients for years now. Nowadays, precious metals trading has its place in traders’ trading portfolio, since metals are considered a good portfolio diversifier and hedge against inflation. Although gold is probably the most popular metal, it is not the only one available for a metal trader. Silver, platinum and palladium can also be added to traders’ precious metals portfolio.

Each metal has its own distinct risks and opportunities as well. Read below to get some basic insights on online metal trading.

Demand for gold jewellery continues to increase

Trends come and go, but gold remains. In several markets across the world, the demand for gold jewellery remains strong. So does gold trading online. There are even signs that gold’s popularity has increased in some markets over the last decade, for example in China and India. In more traditional markets, there is no sign of gold slowing down which means you can enjoy continuous returns on any gold investments in your portfolio.

Gold is becoming scarce

Even though the demand for gold remains strong, finding more gold is becoming more difficult. In the past several decades, the discovery of new mines has become rare. While gold is still available in low concentrations, the production costs are high.

Bearing that in mind, the gold that’s already in circulation will increase in demand and investors who hold gold futures or own gold in some sort of physical form are likely to be satisfied with the return on their investments.

Central banks are increasing their reserves

Some central banks around the world are boosting their supplies of bullion. Central banks now hold more than 35,000 metric tons of gold, about 20% of all the gold ever mined. One of gold’s main roles for central banks is to diversify their reserves. The banks are responsible for their countries’ currencies, but these can be subject to fluctuations in value depending on the perceived strength or weakness of the underlying economy.

During times of need, banks may be forced to print more money, since interest rates have been near zero for over a decade. This increase in the money supply may be necessary to avert economic turmoil but at the expense of devaluing the currency.

In contrast, gold is a finite physical commodity whose supply cannot easily be added to. Therefore, it is a natural hedge against inflation. This is a strategy that individual investors also consider. Choosing to add some form of bullion assets to an international portfolio could mean offsetting losses when other investments start to decline in value.

The drawbacks of trading precious metals

Investing in precious metals is not without its risks. Warren Buffett has always railed against gold and its value, saying: “It has no utility.” Unlike stocks, for instance, gold does not produce any passive income. Gold just sits and increases in value until you sell it off. Trading   on  gold is speculation that gold’s value will increase to a point where you will potentially make a profit. Silver, on the other hand, is more practical, and Buffett bought nearly 130 million ounces of silver in 1998.

Warren Buffett obviously changed his opinion on the shiny metal with “no utility.” In August 2020, his holding company Berkshire Hathaway purchased nearly 21 million shares in mining company Barrick Gold with the value of shares’ reaching $563 million in total.

Trading silver 

There are many ways through which silver traders can trade silver, making it difficult for them to know which is the most suitable for them. Traders’ choice will mainly depend on their budget and trading goals. Below are a few methods available:

• CFDs. The most popular way to trade silver is through CFDs, which are financial derivatives with which traders speculate on the price of silver rising or falling, without actually owning the actual metal.
• Physical silver. Owning physical silver as coins or bullion is another way to invest in silver. If the price of silver increases, you can make a profit on silver coins and bullion. However, it can be easy to pay a high price for physical silver, so make sure you consider the spot price to ensure that you’re getting a fair price. The spot price of gold represents the exact current price at which you can buy or sell the asset. Also, like all physical assets, silver can be stolen, so you will have to safeguard it and maybe even insure it.
• Silver futures. Silver futures are a simple way to speculate on the rising or falling price of silver without any of the inconvenience of owning physical silver. They are an attractive way to invest in the silver market because of the high leverage available in futures contracts which means you have to put down relatively little capital to open  quite a large position in the metal. If silver futures move in the right direction, you will make a high return very quickly, but you can make a loss just as quickly if the market moves against you.
• Exchange-traded funds (ETFs). If you don’t want to own physical silver directly but also prefer a lower-risk method than futures, you can buy an exchange-traded fund (ETF) that owns physical silver. ETFs are considered a more liquid and less-expensive investment compared to owning physical gold. Funds like the iShares Silver Trust (SLV) and Aberdeen Standard Physical Silver Shares ETF (SIVR) have made it quite easy for retail investors to tap the silver market. However, there are many risks with this as well.