Investing in Precious Metals - Gold, Silver & Platinum

Ever since man created money and started to understand the value of money, gold and silver have been recognized as valuable and precious. Even today, precious metals have their place in a savvy investor's portfolio. But, not many of us know how to invest in precious metals and what precious metal to invest in. The purpose of this article is to elaborate on the same.

Gold

Let us start with the big-daddy of them all: gold.

Gold is unique for its durability (it doesn't rust or corrode), malleability and its ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, but we know it principally as a base for jewellery and as a form of currency.
The value of gold is determined by the market 24 hours a day, nearly seven days a week. Gold trades predominantly as a function of sentiment; its price is less affected by the laws of supply and demand. This is because new mine supply is vastly outweighed by the sheer volume of above-ground, hoarded solid gold. Simply put, when the hoarders feel like selling, the price drops. When they buy, new supply is quickly absorbed and the gold prices are driven higher.
Several factors cause an increased desire to hoard or buy the precious yellow metal:

1. Systemic Financial Concerns

When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought as a safe store of value. To understand more on the reasons to buy Gold read this earlier article I had written. Click Here

2. Inflation

When real rates of return in the equity, bond or real estate markets are negative, people regularly move to gold as an asset that will maintain its value.

3. War or Political Crisis

War and political upheaval have always sent people into gold-hoarding mode. An entire lifetime's worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter or safe passage to a less dangerous destination.

As you can see, Gold has been and will be one of the most sought after precious metals in the world.

Shining Silver

Silver too has been a valuable precious metal for ages. Though not as valuable as Gold, Silver too is treated with respect and bought by many for various reasons. Unlike gold, the price of silver swings between its perceived role as a store of value and its very tangible role as an industrial metal. For this reason, price fluctuations in the silver market are more volatile than gold.

So, while silver will trade roughly in line with gold as an item to be hoarded (investment demand), the industrial supply/demand equation for the metal exerts an equally strong influence on price.
Several factors cause an increased desire to hoard or buy the precious white metal:

1. Silver's once predominant role in the photography industry (silver-based photographic film), which was been eclipsed by the advent of the digital camera. (Lesser Demand)
2. The rise of a vast middle class in the emerging market economies of the East, which created an explosive demand for electrical appliances, medical products and other industrial items that require silver inputs. From bearings to electrical connections, silver's properties made it a desired commodity.
3. Silver's use in batteries, superconductor applications and microcircuit markets.
It's unclear whether (or to what extent) these developments will affect overall noninvestment demand for silver. One fact remains; silver's price is affected by its applications and is not just used in fashion or as a store of value. (Like Gold)

Though the usage of silver in the above said 3 areas may drive the price of silver, analysts and experts agree that the price of silver is moving in-line with gold and in fact, the % in rise of price of Silver has been much higher than the % rise in price of gold in the past few years.

Platinum Unleashed

Platinum has been unleashed into the world jewellery markets only recently. It has even surpassed Gold as the costlier precious metal. Like gold and silver, platinum is traded around the clock on global commodities markets. It tends to fetch a higher price than gold during routine periods of market and political stability, simply because it's much rarer and far less of the metal is actually mined from the ground annually.

Other factors that determine platinum's price include:

1. Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalysts, which are used to reduce the harmfulness of emissions. After this, jewellery accounts for the majority of demand. Petroleum and chemical refining catalysts and the computer industry use up the rest of the available platinum.
2. Platinum mines are heavily concentrated in only two countries: South Africa and Russia. This creates greater potential for cartel-like action that would support, or even artificially raise, platinum prices.

Investors should consider that all of the above factors serve to make platinum the most volatile of the precious metals.

Now that we know how good and useful these 3 precious metals are, lets take a look at how you can buy them.

1. Commodity ETFs:

Exchange traded funds exist for all three precious metals, but apart from the London Stock Exchange (LSE) I am not sure if there are exchanges that offer ETFs for platinum. ETFs are a convenient and liquid means of purchasing and selling gold, silver or platinum.

2. Common Stocks and Mutual Funds:

Shares of precious metals miners are leveraged to price movements in the precious metals. Unless you're aware of how mining stocks are valued, it may be wiser to stick to funds with managers with solid performance records.

3. Futures and Options:

The futures and options markets offers liquidity and leverage to investors who want to make big bets on metals. The greatest potential profits - and losses - can be had with derivative products. (You can check out Trading options Gold and Silver Futures Contracts to leverage this option.)

4. Bullion:

Coins and bars are strictly for those who have a place to put them. Certainly, for those who are expecting the worst, bullion is the only option, but for investors with a time horizon, bullion is illiquid and downright difficult & risky to hold.

To finish with, the million dollar question “Will Precious Metals Shine?”

Precious metals offer unique inflationary protection - they have intrinsic value, they carry no credit risk and they themselves cannot be inflated (you can't print or produce more of them). They also offer genuine "upheaval insurance", against financial or political/military upheavals.
From an investment theory standpoint, precious metals also provide low or negative correlation to other asset classes like stocks and bonds. This means that even a small percentage of precious metals in a portfolio will reduce both volatility and risk.

So, to sum it all up, Precious metals provide a useful and effective means of diversifying a portfolio. The trick to achieving success with them is to know your goals and risk profile before jumping in. The volatility of the precious metals can be harnessed to accumulate wealth, but left unchecked, it can also lead to ruin.