Since the dawn of time, gold and silver have been recognized as valuable. And even today, precious metals have their place in a savvy investor’s portfolio. But which precious metal is best for investment purposes? And why are they so volatile? If you’re just getting started in precious metals, read on to learn more about how they work and how you can invest in them. There are many ways to buy into precious metals like gold, silver and platinum and a host of good reasons why you should give in to the treasure hunt.
TUTORIAL: Commodity Investing 101 All That Glitters IS Gold. We’ll start with the grand-daddy of them all: gold. Gold is unique for its durability (it doesn’t rust or otherwise 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 jewelry 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 size of above-ground, hoarded gold. To put it simply, when the hoarders feel like selling, the price drops. When they want to buy, new supply is quickly absorbed and the gold prices are driven higher. (Learn more in Does It Still Pay To Invest In Gold?)
Several factors account for an increased desire to hoard the yellow metal:
The Silver BulletUnlike 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. That equation has always fluctuated with new innovations, including:
It’s unclear whether (or to what extent) these developments will affect overall non-investment 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. (Find out how everyday items you use can affect your investments in Commodities That Move The Markets.)
Platinum Bombshell. 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; far less of the metal is actually pulled from the ground annually. Other factors that determine platinum’s price include:
Investors should consider that all of the above factors serve to make platinum the most volatile of the precious metals. (For more on this entire industry, check out The Industry Handbook: Precious Metals.)
Filling Up Your Treasure ChestLet’s take a look at the options available to those who want to invest in precious metals.
Will Precious Metals Shine for You?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 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.
Conclusion: 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. This is timely when the fiat currencies of the world are behaving in such a volatile manner. China has recently bought 16 tons of gold and dumped USD$94 billion in August 2015. Could the Renminbi be getting ready to be THE global trading currency, backed solidly by gold ??
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