Precious metals have always been used as a means of exchange between traders and as a store of wealth. The most popular metal is gold. Precious metals certainly have their place in an intelligent investor’s portfolio, but which precious metal is best to invest in and why are they so volatile? Gold is considered a safe-haven asset. It is commonly used to hedge against volatility in the U.S. dollar, and is one of the most widely traded commodities in the world today.
Silver is another commonly traded metal and is used as a form of hedging against volatility in the currency markets. The biggest international locations for trading precious metals are London, New York and Shanghai
The London market for precious metals is a wholesale over-the-counter market for the trading of gold and silver. In several other locations around the world, exchanges have developed to provide metal trading facilities. The Shanghai Gold Exchange is one of the most active of these, providing a centralised spot market for gold and silver bars.
There are many ways to invest and trade in gold and other precious metals. You can invest in precious metals in different ways. Read on to discover the different options that are available.
- Commodity Exchange Traded Funds (ETFs). Exchange-traded funds (ETFs) are a convenient and liquid means of purchasing and selling gold, silver, or platinum. ETFs though do not give you access to the physical commodity, so you do not have a claim on the metal in the fund. With exchange-traded funds, equity in the fund is traded on a stock exchange, with the most active of these funds being listed in New York and London.
- Futures and Options. The futures and options markets provide liquidity and leverage to investors who want to speculate on metals. The greatest potential profits and losses can be gained with derivative products. It allows you to trade in both price directions. If you expect the price of a currency pair to rise, you may take advantage of that movement by buying a Call. On the other hand, if you expect the price of a currency pair to fall, you may take advantage of that movement by buying a Put.
- Bullion. Coins and bars are more for investors who have a place to put them like a safety deposit box or safe.
- Certificates. Certificates provide investors with all the advantages of owning physical gold without the inconvenience of transportation and storage.
What affects the price of precious metals?
As with any stock, currency or commodity, the price of precious metals is affected by external factors.
- Supply and demand. The global supply and demand of precious metals has a significant impact on their value. With an increase in demand, the prices of metals increase, and when demand is low, their value falls. This mainly happens in the longer term and does not affect short-term prices.
- Economic uncertainty. During economic and political instability, precious metals are traditionally viewed as safe havens due to their lasting value.
- Industrial output. Precious metals are widely used in industry, including in the manufacture of automotive parts, medical devices, electronics and jewellery. When demand for these goods goes up, the demand for precious metals also increases.
- Strength of the dollar. As precious metals are dollar-denominated, they are particularly affected by fluctuations in the value of the dollar. When the dollar falls, precious metals are a good place to store USD which means that it is likely to push the price of precious metals higher.
- Interest rates. Precious metals offer a preferable alternative for fixed-income investors, whose investments offer a lower return when interest rates are cut. Therefore, Fed decision-making may push investors to look for safe-haven opportunities.
- Quantitative easing. Precious metals usually perform better in an environment where inflation is rising. This is because quantitative easing (or money-printing) weakens the value of the currency in circulation, making it more expensive to buy assets which are considered as a reliable store of value.
Are precious metals a good investment?
Precious metals are regarded by many investors as a good investment, especially gold, which is known for its safe-haven status. Investors will often move their money into gold during market uncertainty and because of their applications in jewellery, electrical components, car parts and industry, precious metals are usually in high demand.