Beginner’s Guide to Investing in Precious Metals: Diversify Your Portfolio
When you invest in a variety of stocks, bonds, mutual funds and other investments, you diversify your portfolio — there’s less risk and a greater rate of return. Do precious metals deserve a place in your portfolio? How would you get started? Precious metals can be a good way to add diversity, but they’re not without risks.
What Are Precious Metals?
Precious metals differ from stocks, bonds and other types of investments because they’re commodities. A commodity is any type of good that can be bought and sold. Examples of commodities include:
Since commodities aren’t tied to the stock market, they can be a good place to invest your money in times of economic uncertainty.
When the dollar weakens, the price of gold and other commodities tends to rise. COVID-19 has caused some wild fluctuations in the stock market over the past year, whereas precious metals have remained mostly stable or experienced gains. Even if you’re a beginning investor, you may want to consider making precious metals part of your portfolio.
Best Precious Metals To Invest In
Price, demand and volatility may all play a role in determining your interest in different metals. Take a look at these five popular options.
Gold is a luxury item with practical applications. It’s part of almost every electronic device, including personal computers, cell phones and televisions. The price of gold is around $1,700 an ounce, down from a high of $2,070 in August 2020. This makes the price of investing in gold a bit steep for many investors.
Just like gold, silver can be considered a safety net when times are uncertain. Silver is trading at just under $27 an ounce, making it a much more affordable proposition than gold. Silver has even more practical applications, including dental alloys, photography and batteries.
Platinum is expensive because there’s much less of it available, especially when you compare it to gold and silver. It’s trading at about $1,257 an ounce now, and the price has increased 16.64% in the past year. Most platinum is mined in South Africa, and the lockdown this past year affected its output.
Like most precious metals, platinum has practical applications — it’s not just for jewelry. Platinum is used for fire resistance, dental work and electrical contacts.
Good To Know
The greatest demand for platinum is in making catalytic converters, which control the harmful emissions that cars spit out and turn them into less harmful gases. This is why the price fell in March 2020 — with the worldwide COVID-19 lockdown, not many cars were being produced.
Palladium is a precious metal like platinum, only even rarer. Palladium is trading at about $2,425 an ounce, making it more expensive than gold at the moment. The first quarter of 2021 has seen a slight dip, but over the course of 2020, prices rose over 28%.
Palladium is often used in catalytic converters, especially for cars that use gas instead of diesel. The metal can also be used in dentistry, jewelry and electronics. Since the price of palladium has skyrocketed, the theft of catalytic converters is on the rise, as they can be stripped for the precious metal.
With supply outstripping demand, the price of palladium isn’t coming down anytime soon, making it an extremely expensive option for the average investor.
Copper is the third most frequently used metal in the world, although it’s often overlooked by people taken in by its flashier cousins, gold and silver. Copper is relatively inexpensive, trading for $4.25 a pound. Due to growth in industrial activity and the demand from China, prices are forecasted to rise in 2021.
How To Invest in Precious Metals
If you’re interested in adding precious metals to your portfolio, you can go about it several ways.
Bullion is the physical metal.
- Many people like having something to hold.
- It’s easy to transfer.
- It can be purchased in any amount.
- You must have a physical space to store it.
An ETF is a collection of securities, like a mutual fund. Some ETFs offer gold, silver and platinum.
- It’s easy to buy and sell.
- It’s liquid.
- You can invest any amount.
- It has no physical representation.
- If the company that holds the ETF goes bankrupt, you lose.
If you want to invest some of your retirement money in precious metals, you could consider self-directed IRAs. They allow you to invest in real estate, precious metals or private equity.
- You have a wide range of options in addition to precious metals.
- There are tax advantages. You can defer taxes in a traditional IRA or avoid taxes on investment gains when you go to withdraw.
- IRAs usually charge higher fees to manage and maintain.
- Money invested will be tied up until you retire–unless you pay penalties.
- Self-directed IRAs are higher risk.
Futures and Options
If you’re willing to bet and take risks, you may want to consider futures and options in precious metals.
- They have the potential for enormous gains.
- You could lose more than you invested.
- Futures are extremely volatile.
- It takes a great deal of knowledge and research to successfully make money in futures.
If you’re interested in investing in precious metals, you can contact your broker to invest in stocks, mutual funds or ETFs. Some companies specialize in selling bullion, which could be an option if you’re interested in the physical form. Do your homework and research before buying.
It’s difficult to tell what the economy will do in 2021. Some experts predict the stock market will continue to do well, and some feel the U.S. dollar will weaken. Precious metals are a great investment either way. Gold and silver hold their value when the dollar weakens, and they aren’t as vulnerable to inflation.
Precious metals are a hedge against a volatile market. 2020 turned out to be far more volatile than anyone predicted, and precious metals could help protect your wealth during these times.
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