Investing in precious metals

In times of crisis in world affairs, or when the stock market is in an extended decline, attention turns to gold and other precious metals as safe places to put your money. Even in good times, many financial advisors suggest putting a portion of your investments in precious metals for diversification.

What are the benefits of precious metals?

Advocates of precious metal investments point out several benefits to investing in these assets. First, precious metal prices don’t move in tandem with stocks and other investments. Actually, during times of financial crisis when stock prices are in decline, gold prices may increase as many turn to gold as a “safe haven” investment. During the 2009 financial collapse, the gold price rose by 50%.

Although stocks have historically outperformed precious metals in investment returns, over the past decade this trend has been reversed. Charts of gold and silver prices from 2000 to 2012 compared to the Dow Jones Industrial Average show that gold and silver have returned over 500%, compared to a 10% gain in the DJIA over the same period. This increase is attributed to the fact that many fear another global financial meltdown is imminent and are turning to precious metals as a safe investment.

Unlike stocks, precious metals are tangible assets and have intrinsic worth. So even if the value of the dollar and your other investments decreases, precious metals will retain value. Some doomsters even predict that if the economy completely collapses, people will revert to trading precious metals instead of currency, though others think food and health supplies would be more useful as trading material.

What are the disadvantages?

Despite their advantages, most financial experts suggest limiting your investments in precious metals to no more than 3% to 5% of your total investments.

Precious metal prices are very volatile. Once the crisis passes, or the stock market comes back, people tend to become less attracted to precious metals, causing their prices to fall. The activity of mining companies and buying and selling by large traders causes the supply of metals to fluctuate, resulting in more price volatility.

Additionally, unlike stocks and bonds, precious metals pay no interest or dividends. Some people feel precious metals are a good hedge against inflation, while others believe treasury inflation-protected securities, real estate, or dividend-paying stocks serve the same purpose.

How do I invest in precious metals?

If you do invest in precious metals, you have multiple options. Gold and silver are popular choices, but platinum and palladium are also investment metals worth looking at. You can also buy the metals outright, buy mutual funds that hold bullion, or buy metal mining stocks.

Sophisticated investors even trade in precious metals futures and options, which offer the greatest chance for profits (and losses). If you buy the metals, you can buy bullion or buy either antique coins or new coins. Coins may have intrinsic value beyond the value of the metal itself.

For additional information

For more information about investing in precious metals, view this article.

This article gives a detailed look at investing in precious metals.