The past few years have been rocky, especially for individuals heavily invested in the stock market, as major exchanges showed double-digit losses. This has led to countless investors turning toward alternative investments to hedge against inflation and other market risks.
One alternative investment gaining popularity is precious metals. In this article, we’ll explore the basics of precious metal investments, including the benefits and how you can add this investment avenue to your portfolio in the new year.
What are Precious Metal Investments?
Precious metal investments generally involve exchanging money for physical possession of rare metals that maintain their economic value. Common precious metal investments include gold bars, gold coins, silver bars, silver coins, and platinum. There’s a difference between precious metals and general metals. Base metals, like iron, don’t retail a significant value and can be easily found. On the contrary, precious metals are much rarer and have a higher value.
Precious metal investments are one of the most popular forms of alternative investments. Alternative investments are financial assets outside of stocks, bonds, and cash. Contrary to what many investors believe, precious metals do generate a stable return on investment through portfolio growth. In fact, the average annual return of gold has been 7.78% since 1971.
Why are Precious Metal Investments Gaining Traction?
Precious metal investments are gaining traction, and for good reason. First, gold and other precious metals have maintained their value, even during turbulent times. Just recently in December 2023, the price of gold reached record highs, trading for $2,135 per ounce. This breaks the previous record from 2020. Minimal volatility in the gold industry is partly due to economic reasons. Even though the US government does not back its monetary supply with gold, it still retains 8,000 metric tons.
Furthermore, precious metals allow you to diversify your portfolio. Physical gold and silver are often looked upon as insurance against the worst-case scenarios, like a repeat of the Great Financial Crisis of 2008, where major banks collapsed, constricting liquidity in the financial system. In such situations, paper assets like stocks and bonds may fail and even go to zero. With precious metal investments, you can be certain that that fate will not befall them.
Moreover, gold loans and silver loans are also possible when investing in the precious metal industry. There are certain lenders that allow you to obtain loans using your gold and silver as collateral. For example, if your gold bar is worth $50,000, you might be able to take out around 62.5% of the gold’s value, or a loan for $31,250. Investing in the stock market doesn’t provide you with the same flexibility.
Precious Metal Investments Outside of Gold Bars
When you think of precious metal investments, the first thing that might pop into your head is gold bars. Although gold bars are a popular investment avenue, they’re not your only option when it comes to the precious metal industry. In fact, there are numerous other channels that can provide stable returns and help you diversify your portfolio.
For one, there are precious metal stocks. This type of precious metal investment is purchased through an exchange, like any other stock. There are a few different types of precious metal stock investments. First, you can invest in an ETF that is comprised of multiple companies. Another option is to invest in an individual company that specializes in one type of precious metal.
Sometimes, precious metal investments can be made through private mining companies. These companies often take years to generate a stable return. Why is this the case? Mining precious metals is a complex process, with the company first needing to find a location that holds gold. Then, outbuildings need to be constructed to house operations and employees need to be hired. Finally, precious metals can be mined from the site.
Private mining investments can be hard to find and can be reserved for accredited investors, which is why physical investments are the go-to method for novice investors. In addition, private mining investments can be very volatile compared to holding physical precious metals. There’s no guarantee that the company will strike a large gold deposit, which is why purchasing physical gold and silver bars is the easiest method and comes with greater peace of mind.
How are Precious Metal Investments Held?
Precious metal investments can be held in a few different ways. First, it depends on your investment avenue of precious metals. If you choose to invest in precious metal stocks, you will have electronic ownership. However, a far more common avenue is holding physical precious metals, like gold bars and silver coins.
Since precious metals are valuable, you want to keep your investment safeguarded. This can be done by securing your physical assets with a safe. If you don’t have the room to store gold or silver, you can utilize a precious metal vaulting service. These companies will safely store your investment and serve as your silver or gold vault, similar to a safety deposit box. This can take the stress out of holding your investment.
Debunking Common Precious Metal Myths
Precious metals often get a bad name in the investment community. Let’s debunk some of the common myths that you might have heard.
#1: Gold is Illiquid
This isn’t the case. Gold can be a very liquid investment, especially as demand continues to climb. In addition, most pawn shops and jewelers will gladly purchase gold and other precious metals.
#2: You Need Significant Startup Funds
One of the benefits of precious metal investments is the ability to choose your initial investment. You don’t need to buy an entire bar of gold. Instead, you can choose your investments based on your available funds, starting at 1 gram of gold.
#3: Precious Metals Provide No Return on Investment
This is a common myth. Although the stock market can reach higher returns compared to certain precious metals, this investment avenue does provide a consistent return of around 8%. Moreover, physical gold and silver cannot be compared to other paper assets solely based on returns, since they also function as insurance against a financial crisis.
#4: Precious Metals are Hard to Store
Although storing bricks of gold and silver can take up space in your home, you have other options. One of which is partnering with a storage company, like BUSINESS. This ensures your investment is safe and does not take up space in your home.
Getting started with your precious metal investment doesn’t have to be daunting. In fact, when you work with a reputable precious metal company, like Silver Bullion, the possibilities are endless. Reach out to one of their team members to discuss your purchase, storage, and valuation options.