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Investing in Precious Metals

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Investing in Precious Metals

Especially during periods of economic turbulence, people often turn to gold or silver as an alternative store of wealth and a hedge against the effects of inflation--the devaluing of currency against other goods and services. Other investors simply want to diversify their retirement portfolio, or have something valuable and tangible to pass on to their posterity. Due to these multifaceted uses, a number of factors deserve consideration when one chooses to invest in precious metal products.

Goals

Ultimately, what are your motivations for buying gold or silver, or another investment metal? There are many reasons for adding precious metals to your holdings, and although they may overlap in some instances, there ought to be a clear-cut intention behind your investment strategy. Your motivations can have a significant influence on what products you buy, which metals you choose, and how you manage a budget.

There are several questions you should ask yourself as you plan out an investment in bullion. Are you planning for the long term, or are you looking for medium-term asset protection? Do you want your precious metals strictly for their fine metal content, or are you interested in rare or collectible keepsakes and heirlooms as well? Again, the answers to these--and similar--questions can overlap, and are not intended to be presented as false dichotomies. Nonetheless, it is important to determine why you have decided to buy precious metals, lest you pay for an item that you later realize does not serve your purposes ideally.

Liquidity

There are different secondary markets, with varying levels of liquidity, where your assets can be sold, depending upon what kind of bullion you purchase. Standard size 1 oz bullion coins, guaranteed for their metal content by a national government, are usually the most liquid and easily exchangeable precious metal products. They’re easily recognizable and are in demand all over the world.

On the other hand, highly collectible and rare items such as certain numismatic coins or modern collectible coins are usually more illiquid, requiring a willing buyer to make a reasonable offer. It all depends on the current demand for a particular item. If you’re concerned about quickly selling your precious metal assets, choosing popular products that form the industry standard may be preferable. If you’re planning on holding onto your bullion for the long haul, then liquidity is less of a pressing matter.

Evaluating Your Costs

You certainly must consider your budget and the nature of your costs before jumping into investing. (This applies to any investment, as a matter of fact.) Here are a few cost-conscious strategies which may come into play if you are making frequent purchases of bullion.

  • Dollar cost averaging: This is a method for mitigating your exposure to potential volatility with a commodity, stock, or some other security. Rather than purchasing a lump quantity of an investment product, you can use dollar cost averaging to meet your investment target over a longer period of time. This helps ensure that you don’t buy at just one price point. By acquiring a consistent amount of bullion at regular intervals, you are likely to spread out your cost over several different price points so that when you reach your investment target (say, 400 ounces of silver), you will have bought that quantity of silver for the average price over that interval, avoiding the potential scenario of making a high volume purchase when the price was at its highest.
  • Exchanging gold for silver or silver for gold: Sometimes, investors can take advantage of changes in the relative value of gold and silver to one another. By watching the gold-to-silver ratio, it is possible to identify times when it makes sense to convert an amount of one precious metal to another. Although the spot prices of the precious metals tend to track in the same direction together, they may not always do so evenly. In other words, even if gold and silver both gain in value, one may do so by a greater percentage. When this dynamic goes on long enough, converting your holdings in one metal to another may be profitable, depending on what you originally paid for the them.

Conclusion

In the end, you have to stick with what you want out of an investment in gold, silver, platinum, or palladium. This is why identifying your true motivations for buying precious metals is so important. There is an overwhelming amount of information available about investing and about the gold and silver markets, which can sometimes be frustrating to sift through. Consequently, trusting your own judgment and making self-informed choices are the most advisable practices.

The information provided herein is intended for general reference purposes only, and should not be construed as professional investment advice, nor as an endorsement of any product or service.

Key Terms

  • Bullion: a highly pure form of gold, silver, or platinum that is used as a commodity or investment product.
  • Inflation: the progressive rise in the general prices for good and services due to a fall in the purchasing power of the local currency.
  • Liquidity: how easily an asset can be exchanged for equity.
  • Portfolio: an individual's total and current collection of assets that have accrued through investment.
  • View Other Terms

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