Precious Metals
In the past, people have invested in gold or silver as a method for storing value when a currency was losing its value. But today, our currency is no longer backed by gold per se. It is backed by the gross domestic production of the nation. Now there are many other reasons people have for investing in these precious metals. For the last several years, the consumption of gold, silver, platinum and palladium has far exceeded its production. This is coupled by the fact that the market price of these precious metals has been kept relatively down by the selling of gold reserves by central banks. In addition to this, rich foreign investors from developing countries have been increasingly looking for an investment to store away their personal wealth. They are moving out of their governments, which are often in the hands of corrupt politicians. It would take a global recession to slow the demand for gold and other such precious metals. Precious metals have long been looked to as the repositories of absolute value--not the relative value of paper currency.
When most people think of investing in gold and precious metals, they think of bullion (bars and wafers). Although many people do invest in bullion, there are investments in many different forms. Precious metal investments can be made in jewelry, coins, bullion, futures, options, mining stocks, or mutual funds. In this sense, they have tremendous liquidity and can be bought and sold without problems. Platinum and palladium, however, are less liquid than gold and silver. Each of the above types of precious metal investments is easy to get into and to get out of.
For these and similar other reasons, many investor's allot a portion of their portfolios to precious metal assets. Like other investments, the gold/silver market prices go through tremendous cycles. Prices moved from about $140 an ounce in early 1977 to over $887 an ounce in early 1980. When confidence in other assets causes their values to plummet, precious metals often do well. But as a result, investing in gold has been especially speculative, as you can see.
Physical ownership is one way of owning precious metals. This, as mentioned, is available in bullion form from 400 Troy-ounce gold bars to 1-ounce platinum ingots. Silver can be bought in bags containing US coins of $1000 total face value. The drawbacks of physical ownership is that there is often high premiums that must be paid, in addition to the safekeeping and insurance costs and sales tax.
Many banking institutions, dealers, full-service brokers, etc. will sell you certificates of the four precious metals. There is typically a 3% fee involved (or higher). The certificates are usually in units of $1000, and for a small additional charge, many of the dealers will provide insurance and storage.
Many investors chose to own securities that deal with precious metals, especially in the mining and processing aspects of the industry. Still others invest in precious metal mutual funds.
Of all of the precious metals, gold funds are the most popular investments. Over the past 20 years, gold has returned investors 6.9% on their investments. Although this is not bad, it is not the most lucrative of investments. In addition, there is a lot of risk involved with investing in this. Over the past 10 years, gold actually returned -1.0% and over the past five years it has returned -4.2%. Then, all of a sudden, in 1993, gold returned 9.6%, behind only stocks and bonds. As you can see, market timing is especially important when investing in gold in particular. The market is very fickle! These funds may or may not have any correlation with the general market.
Gold funds do provide professional management and diversification within the gold sector. They are managed by professional people. They are more volatile than the S&P index. In addition, their prices move daily with the price of gold, but not always. Finally, they move proportionally more than gold, up and down.
Precious metal funds are not generally invested in for income. Whereas precious metal mutual funds and securities may yield income, physical ownership will not. Be careful before deciding to invest in precious metals. As with all investments, determine your investment objectives, determine your risk tolerance and then invest accordingly!!