Investing In Gold And Other Precious Metals

Investing In Gold And Other Precious Metals 5.00/5 (100.00%) 9 votes

Unless you’ve been shutting off your eyes and ears to current events for the past several years, you’ve probably become used to hearing about investing in gold, silver, platinum and other precious metals on television, radio and just about every other news and advertising medium. Bullion, which in most instances simply refers to any precious metal with the primary purpose of holding monetary value, is always looked after very closely by investors of all sorts and can even play an extremely important role in the financial markets of entire nations. The precious metals markets are sometimes difficult to understand – especially if you don’t have much knowledge of investing in general – but here you can learn the basics of how trading bullion works.

The Inherent Value of Gold
It was previously mentioned that investors and financial professionals always have a close eye on gold and its fluctuations in price. But why is that? Why has gold maintained its place as one of the primary methods of trade for centuries, even millennia? The answer to this question lies in the way most countries use money today. For example, American citizens in the United States use dollar bills as the primary means of exchanging goods and services, even if those dollar bills are only represented by a balance in a checking account. These dollar bills, properly called “Federal Reserve Notes,” don’t actually have any inherent value. They are only worth anything because the United States government says they are.

To make this a little clearer, imagine what would happen to the bills in your wallet if the government backing it collapsed tomorrow. Those bills would be utterly worthless because they have no actual practical use. Gold and other precious metals, on the other hand, are a different story. Bullion has been used for trade for so long because it does have inherent value; people don’t use it for trade just because some authority says it’s valuable. For starters, the aesthetic beauty of gold, silver and platinum are always highly sought after. Many precious metals also have special properties that make them useful. Gold, for instance, is one of the best conductors of electricity available on earth and is often used in computers and other electronics.

Gold’s Recent Rise In Popularity
Gold and other precious metals have been especially popular as potential assets for investors for the past several years, and this also goes back to what was discussed previously with traditional notes having no inherent value. Most of the world’s population holds their money in government-backed notes, but economies around the world have been extremely unstable since the financial crisis began in late 2008. The instability of the world’s economies had investors everywhere afraid that there would be a widespread meltdown, and that real economic implosion would leave government-backed notes totally worthless.

Naturally, fear of losing entire fortunes led investors to turn to assets that have value universally: gold, silver, platinum, palladium and other precious metals. Economic meltdown would not render investments like these worthless, as precious metals have value whether the government says they do or not. As a result, prices on bullion have been skyrocketing for years as investors look to protect their wealth.

The word protect is used here because typically when people choose to invest in gold, it is to make certain that the value of their assets is stored as opposed to having the value grow. However, that is not to say that it’s impossible to make a profit off of investing in gold. Many people often do. Rather, people typically resort to gold as a hedge; that is, to make sure that even in a worst-case scenario, part of their wealth is preserved.

How To Get Started Investing In Precious Metals
Now that we’ve discussed some of the properties of bullion and the basics of how it functions in the marketplace, it’s time to learn how the actual investing happens and how you can get started if you think it’s right for you. There are lots of different ways to invest in gold and other precious metals, so here are some of the most basic and most common methods.

  • The simplest way to get started investing in precious metals is to purchase the traditional bullion coins or bars directly from a mint or from a distributor that gets its product from several different mints. For example, Monex Gold is a distributor that offers a wide selection of bullion, from American Gold Eagles to Vienna Philharmonics. There are pros and cons to purchasing coins and bars using this method. You will own and house the physical metals, but transporting, storing, securing and insuring your assets can be expensive.
  • Another way to get started investing in precious metals is to allocate money to an ETF, or and exchange-traded fund. In an ETF, you as the investor buy shares of the fund and are allocated a portion of the gold the fund owns in return. The most commonly used ETFs have millions and millions of investors. The largest is called SPDR Gold Shares, which has over 34 million ounces of gold in its vaults. ETFs are an extremely popular way to invest in gold and silver bullion because you don’t ever receive the physical gold, which means you also don’t have to pay to transport, store and secure it.
  • Another way to make sure you tie your portfolio to the gold market is to invest in gold mining companies rather than the actual gold itself. Buying stock in gold miners is considered much riskier than buying actual bullion, but it can also return much larger cash flows if you as the investor choose the right companies. Buying stock is riskier than bullion because some gold mining companies, especially smaller ones, are subject to the same business risks as others. The miners could go bankrupt, experience the sting of poor management, or may never literally “strike gold.” As is the case when purchasing any stock, the safest way to go about investing in a miner is to go with the established companies that have a history of strong positive cash flows.

When Is the Best Time to Invest In Precious Metals?
Traditionally, gold appreciates in an inverse relationship to the country’s national currency. That is to say, when the American dollar is strong, gold and other precious metals will depreciate. When the dollar is weak, gold will appreciate. This is another reflection of the fact that precious metals become popular when economies are unstable. With metals, as with all other assets, the best time to buy is when you expect the price to increase in the future, and you should sell if you expect the price to decrease. Since gold and metals are inversely tied to the state of the economy, you should invest if you expect the economy to worsen.

While this is the case if you are attempting to make a profit off your gold investment, there really is no bad time to purchase bullion. This is because precious metals can always be a store of value, a way to ensure that you will have valuable assets no matter what happens. If you decide investing in gold is right for you, remember to continually do your research and consult a financial adviser if you have questions to which you can’t find answers.

Sources:

http://www.usatoday.com/story/money/columnist/waggoner/2013/05/23/gold-investing-waggoner/2355939/

http://www.thestreet.com/story/10389829/1/how-to-invest-in-gold.html