Friday 14 June 2013

The Basics of Investing in Precious Metals

Individuals and traders have been increasingly looking towards obtaining exposure to precious metals for several different reasons. The primary reason that investors have been turning towards precious metals such as gold and silver is due to the various quantitative easing and stimulus programs introduced by several world governments.

The Basics of Investing in Precious Metals

These quantitative easing and stimulus programs primarily involve the printing of these currencies, which is inflationary in nature and causes the value of currency to decrease. Since there are a limited amount of precious metals in circulation right now and a limited amount available overall since it is a finite resource, precious metals appear likely to appreciate.

Owning precious metals can seem a bit difficult for novice traders and investors, though new technologies and financial products have created a wealth of options for investors looking to gain exposure to precious metals.

This article will highlight some of the common ways that individuals gain access to precious metals and what to consider when making an investment.

Before we go further, we need to define what spot price is. A spot price is the price that a specific item, including precious metals, can be purchased for at a given time.

The spot price is influenced by any number of different factors. The spot price of a precious metal differs from the futures price which is impacted by the same factors as the spot price, but also any anticipated factors in the future that may impact the price.

One factor that influences futures price but not spot price is the length of time until the futures contract expires.

When investing in either gold or silver bullion, you’ll be able to evaluate the daily spot price and compare it to past prices in order to gauge whether now is the right time to buy or not.


Bullion is a form of precious metals that is measured, weighed, and stamped. As a result, bullion is in easily tradable quantities and buyers are assured of the content and nature of the precious metal that is contained inside.

There are often delivery and storage costs associated with owning bullion, but it is generally considered the purest form of owning a precious metal.


Gold and silver coins are issued by governments and other factors then the underlying commodity price can impact the value of gold coins such as the year the coin was issued and the rarity of the precious metals included in the coin.

In addition, coins may have other materials included in them other than the gold and silver and due diligence will have to be done by the buyer to understand the content of these coins. Gold coins can also be bought online at various online gold dealers.


Owning jewelry that contains precious metals such as gold or silver is one example of this.

While jewelry prices are influenced by the cost of the underlying precious metals there are other factors included in the price of jewelry such as workmanship and other adornments that can influence the price of the jewelry.

Market Investments

Owning physical precious metals are not the only way that investors can gain access to these markets. Financial innovations including exchange traded funds (ETFs) and futures contracts provide access to these markets. In addition, you can own equities in companies that mine precious metals.

Owning stock in a mining company will not give you a return that is directly correlated to the precious metal you are seeking to trade due to company risk (risk that the company can go bankrupt due to mismanagement or other factors) associated with the company you are investing in, as well as due to external factors such as oil prices and employment costs that can impact the profitability of the mining company.

ETF’s that hold precious metals are more closely correlated with the value of precious metals, though there are storage costs and management fees associated with these ETF investments.

Finally, futures contracts can allow you to lock in a price on the underlying commodity, though there is a time frame associated with futures contracts that may limit the correlation between the price of these investments and the underlying precious metals.

There are therefore many different options for owning and investing in precious metals that may or may not be directly correlated with the underlying precious metal spot price. Having said that it is generally considered to be a good idea to gain some exposure to precious metals due to them being a hedge on inflation and currency risks.

In conclusion, investing in precious metals such as gold and silver offers a viable hedge against inflation and currency devaluation, especially in light of quantitative easing and stimulus programs by various governments.

These programs, by increasing currency supply, typically lead to inflationary pressures, thus enhancing the appeal of finite resources like precious metals.

For novice investors, understanding the basics of precious metal investments, including spot prices and the various forms of ownership, is crucial. Physical ownership options include bullion and coins, each with its own advantages and storage considerations.

Bullion provides a pure form of precious metals, while coins may offer additional value through rarity and craftsmanship. Jewelry, while incorporating precious metals, includes additional costs related to design and manufacture.

Market investments such as exchange-traded funds (ETFs), futures contracts, and mining company stocks offer alternative ways to gain exposure to precious metals without physical ownership.

ETFs provide a more direct correlation to precious metal prices, though they come with management fees and storage costs. Futures contracts allow investors to lock in prices for future transactions but come with time constraints. Investing in mining company stocks carries company-specific risks that can affect returns independently of metal prices.

Overall, diversifying a portfolio with precious metals can be a strategic move to mitigate inflation and currency risks, leveraging both physical and market-based investment options to suit individual risk appetites and investment goals.

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