There has been consistent growth for all the most popular metals this year, with the demand for gold and other precious metals spiralling. Due to a significant trend emerging over the past few months, many people are now considering the idea of investing in valuable metals. Precious metals certainly have their place in an intelligent investor’s portfolio, but which precious metal is best to invest in and why are they so volatile?
There are many good reasons why you should invest in precious metals. Read on to learn more about the different types of precious metals, what affects their value and whether they are a good investment.
What are the different types of metals?
There are several kinds of precious metals that investors can invest in. The main ones are gold, silver, platinum and palladium.
- Gold. Gold is unique for its durability, malleability, and ability to conduct both heat and electricity. It is used in jewellery and as a form of currency. When banks and money are considered as unstable, gold is seen by many investors as a safe-haven asset during times of market uncertainty.
- Silver. Silver is used in jewellery, and in industry due to its conductive, anti-bacterial and malleable properties. In contrast to gold, the price of silver jumps between its perceived role as a store of value and its role as an industrial metal. Due to this reason, price fluctuations in the silver market are more volatile than gold.
- Platinum. Platinum is considered an industrial metal. The greatest demand for platinum is from automotive catalysts, which are used to reduce the harmfulness of emissions. Platinum in its pure form is used in jewellery and dental work, but it’s also commonly used as an alloy. Platinum usually reaches a higher price than gold during periods of market and political stability simply because it’s much rarer. All of these factors contribute to making platinum the most volatile of the precious metals.
- Palladium. Palladium is not as well-known as gold, silver and platinum. It is a shiny, silver metal used in many types of manufacturing processes, particularly for electronics and industrial products.
What affects the prices of precious metals?
A number of factors have an effect on the price of precious metals. Let’s look at these factors below:
- Supply and demand. As with all products or services, a shortage of precious metals or an increased need for them makes them more valuable.
- Economic uncertainty. In times of economic and political instability, precious metals are traditionally viewed as safe haven assets due to their lasting value.
- Industrial. Precious metals have a wide range of industrial uses, including in the manufacture of automotive parts, medical devices, electronics and jewellery. When demand for these goods grows, the demand for precious metals also grows.
- Strength of the dollar. Precious metals are dollar-denominated, so they are particularly influenced by fluctuations in the value of the US dollar. When the dollar falls, precious metals are a good place to store USD, meaning it will push the price of precious metals higher.
- Interest rates. Precious metals offer a positive alternative for fixed-income investors, who get a lower return on their investments when interest rates are lowered. Therefore, Fed decision-making may direct investors towards these safe-haven opportunities, but of more importance is how rate announcements affect the dollar.
- Quantitative easing. Precious metals generally perform better in an economy where inflation is rising. Quantitative easing or money-printing weakens the value of the currency in circulation and makes it more expensive to buy assets which are viewed as a reliable store of value.
How to trade or invest in precious metals
You can trade precious metals by speculating on prices rising or falling with financial derivatives like CFDs. You will be trading on these prices, so you will not actually own the underlying assets. You can also invest in commodity stocks and exchange-traded funds (ETFs). ETFs are a convenient and liquid means of buying gold, silver or platinum, but you do not have access to the physical commodity.
Are precious metals a good investment?
Precious metals are regarded by many investors as a good investment, particularly gold, which is known as a safe-haven asset. Investors will often invest in gold during times of market uncertainty. Because of their applications in jewellery, electrical components, car parts and industry, precious metals are usually in high demand.
The risks of precious metals
Every investment has its own risks. Although they may seem secure, there is always some risk that comes with investing in precious metals. Prices for metals can fall if there are more sellers than buyers. However, during times of economic uncertainty, sellers benefit as prices tend to jump up.
Precious metals offer a useful and effective method of diversifying your investment portfolio. The rule to achieving success with precious metals is to know your goals and risk before investing.