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Investing in Precious Metals: A Guide for New Investors

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Precious metals have been prized for their beauty and scarcity for millennia. The oldest surviving examples of decorative gold artifacts date back some 6,000 years. It's a legacy that continues into the present day, as investing in precious metals is a key strategy used to safeguard wealth.

But how do you invest in gold, silver, and other precious metals? And how can you make the most of that investment?

If you're only now entering the precious metals market, it can be hard to know where to start. So to help you navigate these unfamiliar waters, let's take a look at the main types of investment metals, the ways you can add them to your portfolio, and how to maximize the returns on your holdings.

Key Investment Metals

If you're looking to buy precious metals for the first time, you may think that you may only be able to invest in silver or gold. And while those are both worthwhile options with plenty of reasons to recommend them, you should be aware of all your options before you make any commitments.

To that end, here are the four most common selections, including some that are less widely traded but still present fascinating investment opportunities.

Gold

Gold, if you'll pardon the use of the term, is the gold standard of precious metal investments.

Gold has been treasured since the dawn of recorded history. Virtually every culture that had access to the rare metal recognized both its beauty and its scarcity, elevating it to a venerated position. The many surviving relics and jewelry pieces from across the globe attest to the fact.

It was so valued that medieval alchemists spent centuries in fruitless toil looking for the mythical philosopher's stone, a substance that could turn common metals like lead into gold.

Part of what makes it so valuable is its unique chemistry. Unlike most metals, gold neither rusts nor corrodes. It's also uncommonly malleable and is an excellent conductor.

These properties make gold useful in manufacturing electronics, computer chips, and aerospace technology. It also finds use in medical devices and procedures, artificial limbs, and dental filings.

So beyond being valued due to its scarcity, gold will always be in demand thanks to these applications.

Silver

Alongside gold, silver tends to be the precious metal that most often comes to mind when you think of investing in precious metals. Like gold, silver has been valued by innumerable cultures worldwide since time immemorial. But as an investment item, it differs from gold in a few key respects.

Gold is traded primarily based on sentiment. Global conditions like wars or economic booms and busts trigger patterns of hoarding and selling.

The value of silver, by contrast, is derived largely from its wide range of industrial applications. It's an essential component in almost every consumer and commercial electronic device. You'll also find it in almost every modern automobile.

Silver is an important chemical catalyst and is therefore used in an even broader range of industries than gold. The burgeoning market for solar technology is also a major consumer of silver, meaning that demand for the metal will likely continue to grow as that market expands.

One of its most interesting applications is in medicine. Silver has potent antiseptic qualities, destroying the cell walls that bacteria cells need to survive without harming nearby human or animal cells.

Some historians even suggest that ancient humans noticed these effects. Not understanding the chemistry behind the phenomenon, many cultures prescribed mythical properties to the metal, making it even more precious. If you ever wondered why vampires, werewolves, and other creatures are supposed to be vulnerable to silver, this property is the likely origin.

Platinum

Platinum is the most scarce precious metal. As such, it tends to fetch a higher price per troy ounce than even gold does.

Though it is sometimes used in jewelry or for other decorative uses, it's associated much more with heavy industry. The auto industry, in particular, consumes a lot of the metal, as platinum is a key material in parts like catalytic converters and high-quality spark plugs. The petrochemical and computer technology sectors are the next largest industrial consumers.

Because of the material's heavy use in auto manufacturing, its value is closely tied to fluctuations in that industry. For example, catalytic converters are used to reduce the levels of harmful emissions from vehicles. The passage of clean air legislation could force automakers to adhere to higher standards, consuming more of the precious metal in the process.

Further, platinum is only found in a few locations on earth. The two largest deposits are in Russia and South Africa. This makes it more feasible for suppliers to engage in cartel-like behavior, artificially manipulating the value of the metal. Not to mention that ongoing geopolitical tensions with Russia can further affect the price of platinum.

That said, the value of this metal has taken a bit of a hit in recent years. Thanks to its scarcity and the political issues surrounding its suppliers, many industries have shifted to using platinum's sister metal, palladium, wherever possible.

Palladium

Though lesser-known than its counterparts, palladium has gained popularity in recent years as an investment item.

This shiny, silvery metal is found in relative abundance in the United States, Russia, South Africa, and Canada. But it's valuable thanks to the fact that, due to being chemically quite similar to platinum, it can fulfill many of the same roles as its scarcer cousin.

For example, whereas catalytic converters in cars once relied on platinum almost exclusively, American and Japanese automakers started to shift towards using palladium around the year 2009. It's also found in ceramic capacitors and used in cell phones, tablets, and laptops.

It also finds use in dentistry and jewelry, where it is one of the metals that can be combined with gold to create white gold.

Methods of Investing in Precious Metals

The variety of precious metals traded on the commodities market already gives investors plenty of options for diversifying their portfolios. However, there's more than one way to invest in these commodities.

Here are the most common ways to add precious metals to your investments.

Physical Bullion

The simplest way to buy precious metals is to acquire the physical commodities themselves. Bars, coins, and rounds made from precious metals are called bullion. And like any investment, they come with their own pros and cons.

For one thing, it's easy for high-net-worth individuals to acquire bullion in quantity. But for investors of more humble means, amassing any significant sum of bullion can take time.

Another factor to consider is that buying bullion is a long-term investment. The higher premiums associated with trading bullion mean that no one tends to flip their supplies in a short time frame and turn a profit.

Like any other valuable commodities, secure storage becomes an issue as well.

That's not to say bullion isn't a worthwhile investment, however.

In terms of protecting your wealth, nothing is more secure than transferring it into a tangible asset. And even if you don't have the means to buy a king's ransom in gold all at once, you always have the option to build your wealth incrementally over time.

That latter point makes bullion an attractive proposition for younger investors. As many learned during the 2008 recession, putting your life's savings in the hands of the banks isn't always a foolproof plan. Converting at least a percentage of your savings into a physical asset affords you a certain level of protection that financial institutions cannot guarantee.

Commodity Exchange-Traded Funds (ETFs)

For the investor who wants a more liquid option, exchange-traded funds (ETFs) may be the right choice.

ETFs are a form of pooled investment. They operate a lot like mutual funds, with numerous investors coming together to make an investment they couldn't or wouldn't make individually.

But unlike mutual funds, they can be bought and sold on exchanges like any normal stock. So they're ideal for the commitment-averse investor.

The way this works concerning precious metals is that you are pooling your resources with other investors to buy a large quantity of a given commodity. For investors without the means to invest in bullion, it can be an accessible way to invest in precious metals.

The trade-off is that because the commodity in question is owned by the fund as a whole and not any individual, you don't get a physical portion of the commodity purchased. Therefore, they lack a lot of the same security afforded by buying physical bullion. In essense, you don't own anything physical.

Futures and Options

Futures and options are financial products that guarantee the holder the right to buy an investment at a specific price by a specific date. In this case, the option to buy a given precious metal at a given price.

The main difference between the two is the obligation that they carry. Options, as the name implies, give the investor the option to buy a commodity by a certain date. However, they are not obligated to do so if they choose not to.

Futures, on the other hand, requires buyers to buy and sellers to sell, no matter if it would be against their interest to do so.

As opposed to bullion, or even ETFs, neither of these are usually long-term investments. More often, they're used to try to create short-term profits. Therefore, they're not ideal for the investor trying to build or protect their wealth in the extended term.

Certificates

Certificates are documents declaring that the holder has possession of a certain amount of a commodity.

They're attractive because they offer many of the financial benefits of owning physical bullion. But at the same time, the holder need not concern themselves with the physical storage, security, and transportation of precious metals.

The main drawback is what should happen if a major emergency should arise. One of the main appeals of accumulating physical bullion is that you have a valuable asset in the event of a major financial meltdown, long-term civil unrest, or natural disaster. Should such a scenario arise, a certificate of ownership would only be worth the paper it's printed on.

So for the individual interested in securing wealth for a rainy day, bullion remains the principal choice.

Are Precious Metals a Smart Investment?

So now for the big question. Is investing in precious metals a sound move?

The short answer is that it depends.

Not all investors have the same priorities. And like any other investment, there are right and wrong times to buy in and sell out.

At times when inflation is on the rise, for example, the value of precious metals tends to rise as well. This is because they're one of the best bulwarks against inflation. Their scarcity and practical uses give them intrinsic value that fiat currency doesn't have.

By the same token, they're valuable as a protection against economic, social, and even military upheaval.

Corporations, financial institutions, and governments may come and go. And they can wipe out incalculable assets in the process. But physical gold, silver, platinum, and palladium can't be erased as easily.

While those are extreme scenarios, they're not impossible. In general, precious metals tend to carry a lower degree of risk than stocks, bonds, and other financial products. So converting even a small percentage of your portfolio into precious metals provides a degree of protection.

But that's not to say that they carry no risk whatsoever. All investments do. So to make sure you're making the right moves at the right time, be sure to check out the latest investing tips that experts have to share.

Maximizing Your Return on Investment

Investing in precious metals is a tried and true way to diversify your portfolio. It allows you to safeguard your holdings while building wealth. And though precious metals are subject to the same volatility as other investment options, the savvy investor can harness those elastic values to produce a profit.

That said, it can be an intimidating prospect for the novice investor. You can always reach out to us with questions. To learn more, view our precious metals investment offerings and contact us today.

Don’t miss a golden opportunity.

Now that you’ve gained a deeper understanding about gold, it’s time to browse our selection of gold bars, coins, or exclusive Sprott Gold wafers.

About Sprott Money

Specializing in the sale of bullion, bullion storage and precious metals registered investments, there’s a reason Sprott Money is called “The Most Trusted Name in Precious Metals”.

Since 2008, our customers have trusted us to provide guidance, education, and superior customer service as we help build their holdings in precious metals—no matter the size of the portfolio. Chairman, Eric Sprott, and President, Larisa Sprott, are proud to head up one of the most well-known and reputable precious metal firms in North America. Learn more about Sprott Money.

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