Investing in Precious Metals: A complete guide

January 21, 2021 08:30 UTC
Reading time: 22 minutes

Are you curious about investing in precious metals? If so, you’re in the right place. For millennia, precious metals have been recognized as a real treasure and tool for transferring value. This is especially true when it comes to metals such as gold and silver. Due to their rarity, precious metals are too expensive to act as modern currencies, but investing in precious metals are very popular and are used to protect against inflation and economic downturns.

 

Let's not waste any more time. Let’s dive into this essential guide to investing in precious metals!

Investing in precious metals - What are they?

Before I get into the details of investing in gold and silver, we need to start this guide on ‘investing in precious metals for beginners’ by defining what exactly precious metals are.

Precious metals are chemical elements from the group of metals that are rare in nature and known for their catalytic properties and ability to facilitate and control the rate of chemical reactions. 

These metals are resistant to corrosion and oxidation, and are also of high economic value.

Historically, precious metals have been used as a means of payment, but nowadays they are seen more as investment instruments or raw materials for industry.

The history of the term ‘precious metal’ can be traced back at least to the end of the 14th century and may have slightly different meanings in different areas and applications.

Prior to the publication of Mendeleev's first widely accepted periodic table in 1869, in 1864 William Odling published a table in which the "precious metals" rhodium, ruthenium, palladium, platinum, and iridium were grouped together and were close to silver and gold.

Investing in precious metals - What are the different types?

I have listed the different types of precious metals, but let's rephrase them:

  • Gold
  • Silver
  • Members of the platinum group ruthenium, rhodium, palladium, osmium, iridium, and platinum

At one time, aluminum was considered a precious metal, although it’s actually one of the most common chemical elements on Earth. This was due to its high cost in the past as a result of the difficult means of extracting it.

Investing in precious metals - Their use

Apart from being a currency, precious metals also have many different applications. Here are some of the most common modern uses of precious metals:

  • Jewelry - gold, silver, platinum, palladium
  • Electronics - gold, silver, platinum, ruthenium
  • Medicine - gold, silver, platinum, iridium
  • Solar and nuclear energy - silver
  • Photo - silver
  • Automotive industry - platinum, palladium, rhodium, ruthenium, osmium
  • Oil industry - platinum, osmium

The serious industrial and investment demand for precious metals makes them very interesting for a large part of investors around the world. However, there is a list of investing in precious metals pros and cons. I’m going to discuss the general ones now, before discussing them in more detail later.

Investing in precious metals - Why?

You already know that precious metals have many different applications. But this fact may not yet have convinced you to make your investment in precious metals.

Let's discuss the additional benefits of investing in precious metals:

  • Protection of capital from inflation. This is especially true at a time when interest rates in many parts of the world are zero or negative and central banks and governments are increasing the money supply through their stimulus programs.
  • Global central banks are able to buy unprecedented amounts of gold and more. In each of the last 10 years (2010-2020), central banks have been net buyers. Demand from major players, such as central banks, can definitely support the price.
  • Hedging against multiple economic and political risks such as economic collapse, military and trade conflicts, natural disasters, global pandemic, etc.
  • Opportunities for capital gains when the price of the precious metals you have invested in increases.
  • Opportunities to diversify a portfolio of assets such as stocks, bonds, bank deposits, etc., due to an inverse or lack of a correlation with these assets.
  • High liquidity, which means that you can quickly and easily buy/sell your investment at a low cost (this is important mainly for online investing in gold and precious metals).

Citigroup Inc predicts that demand from the formal sector will rise to about 450 tonnes after falling to 375 tonnes this year, the lowest in a decade. HSBC Securities Inc. (USA) expects a slight increase to 400 tonnes from approximately 390 tonnes in 2020.

Although the forecasts are far from the almost record purchases of over 600 tons per year observed in both 2018 and 2019, the increased activity of central banks may help strengthen the price of gold.

Russia may return to the market next spring and China's central bank looks set to resume an increase in reserves after the US election, a Citi report said this month.

A chart of net gold purchases by central banks around the world, as well as Citigroup's forecasts for purchases in 2020 and 2021, can be found in the chart below:

Source: Bloomberg, December 7, 2020

Risks when investing in precious metals

Like investing in any other asset or market, there is always a certain risk when investing in precious metals. Even gold, often described as "recession-proof," can be volatile. This is even more true of investing silver and other precious metals.

Here are the main risks of investing in precious metals:

  • Periods of high price volatility
  • Political instability in the regions where precious metals are mined
  • Decline in demand for certain precious metals due to their replacement with others, for example
  • Decline in industries that are responsible for much of the demand for a precious metal
  • New regulations (elimination of old ones) for the environment

Of course, with the right strategy for investing in precious metals and accurate monetary and risk management these risks can be reduced and actively managed.

Investing in precious metals - What does the price depend on?

Precious metal prices are important not only for producers and end users. They have long been used as a tool to monitor economic and market conditions. But, what they depend on, we are going to see here:

  • Demand and supply and expectations for supply and demand in the future. Higher demand and expectations for higher demand in the future raise metal prices and vice versa.
  • The price of the US dollar. As precious metals are traded in the US dollar, the weakness of the dollar can lead to a rise in the price of precious metals. Respectively, a strong dollar can affect the prices of precious metals.
  • Interest rates and monetary policies. The lower the interest rates and the looser the policies of major central banks around the world, higher prices of precious metals can be expected due to potential inflation and lower yields on other assets such as bonds. The opposite is also true.
  • Economic data. Weak data on the global economy can increase demand for asylum assets, such as gold, and lower demand for riskier metals that depend on economic growth, such as palladium. Strong economic data can weaken shelters and support riskier assets.
  • Political uncertainty. Political uncertainty can affect the risk of investors' appetites and push market participants to seek more risk or more security. In addition, political uncertainty in the regions where precious metals are mined could disrupt the supply chain, reducing supply and increasing prices accordingly.

Of course, there may be other factors that have an effect on the prices of precious metals, but these are the leading ones.

You can try trading precious metals without risking your funds in a completely risk-free environment with a demo account from Admiral Markets. Get your free demo account today by clicking on the banner below and registering:

How much money to spend investing in precious metals?

You already know what precious metals are and why you should invest in them. Now is the time to look at another key issue. If you want to invest in silver or make a platinum investment, for example, how much money should you spend?

The answer to this question depends mainly on three personal factors:

  • Personal opportunities
  • Personal financial goals
  • Personal tolerance for risk

Personal opportunities can be very individual for different investors and, therefore, it’s not possible to determine an exact amount for everyone to start with.

You can look at the investment horizon, or the time for which funds can be set aside without needing them. This will depend on whether you focus on short-term investments or long-term ones. Cumulative investments (a certain amount each month, for example) can make a seemingly small return look serious when it comes to longer periods of time.

At the same time, start identifying your financial goals. What will you need in the future? You may want to buy a house or a car, finance your child's education, plan vacations abroad, start or develop a business or a new venture, or just have enough money when you retire.

The answers to these questions will give you an idea of ​​your financial goals.

The next aspect you need to consider is your risk tolerance or your ability to take risks. This depends on factors such as current income, savings, expenses, financial obligations and adequate financial coverage for life and health. And, last but not least, on your own temperament.

Both extended deadlines and higher rates of return could give you similar results. This makes different investments interesting and suitable for different purposes.

Investing in precious metals - How to start?

In this part of the article I am going to discuss the different opportunities for investing in precious metals. Each of these options has its advantages and disadvantages.

Each investor must choose the right tools for themself, taking into account their personal capabilities, personal financial goals and risk tolerance.

Here are the six main options for investing in precious metals:

  • Purchase of physical precious metals
  • Shares of companies extracting precious metals
  • Exchange Traded Funds for precious metals
  • Contracts for Difference (CFDs) on precious metals
  • Precious metals futures
  • Precious metals options

Let's give a little more detail about each of these options and look at the pros and cons of investing in precious metals.

Purchase of physical precious metals

When it comes to investing in precious metals, most people think of physically buying bars, coins, ingots and even jewelry. This is definitely the most popular method for metal investing, but are they the most appropriate and least expensive?

Advantages of the physical purchase of precious metals:

  • Physical possession, which inspires calm and confidence in investors

Disadvantages of the physical purchase of precious metals:

  • High commissions for buying and selling.
  • Storage fees. After physically buying precious metals, some people even decide to insure it or keep it in a vault, which involves additional costs.
  • The exact amount of investment cannot be selected. When buying the precious metal you need to buy the weight of a coin, ingot, bar, etc., but not less.
  • You can buy/sell only during business hours. Precious metal traders have working hours and you can benefit from your investment only during this period.

However, these disadvantages of physical buying should not discourage you from your metal investing plans, because there are several alternatives on how to make online investments in precious metals and each investor can choose a preferred option that meets their needs.

Shares of precious metals companies

One of the most popular options for online investing in precious metals is related to the stock market - buying shares of companies that extract precious metals. These companies benefit from higher prices for their mining, which in most cases leads to a rise in their shares.

Advantages:

  • High liquidity. Stock markets are much more liquid than the physical market for precious metals, which gives you the opportunity to get a real market price at low cost.
  • Low fees and share purchase commissions (with Admiral Markets commissions start at $0.02 with a minimum of $2 per transaction).
  • You can build a stream of passive returns by receiving dividends from the companies in which you have invested.
  • Lower initial investment than the purchase of physical precious metals
  • Opportunities for diversifying the asset portfolio

Disadvantages:

  • A company's share price may not accurately track the price of the precious metal at times
  • Lack of physical possession of the precious metal

The list of the largest mining companies includes giants such as the world's largest gold producers Newmont Mining and Barrick Gold, major silver miners Pan American Silver and Fresnilo and leading platinum producer Anglo American Plc .

In the following image you can find the price chart of the second largest gold producer in the world Barrick Gold:

Source: Admiral Markets MetaTrader 5, #ABX, Weekly chart with data range from February 17, 2013, to December 8, 2020. Accessed on December 8, 2020, at 8:26 p.m. Please note that past performance does not guarantee future results.

Exchange Traded Fund (ETF) for precious metals

An opportunity for online investments in precious metals, which is rapidly gaining more and more popularity, is through an Exchange Traded Fund (ETF) that invests directly in precious metals or in shares of companies for precious metals.

An ETF is a basket of securities that you can buy and sell on the relevant stock exchanges through an investment intermediary. These ETFs can track the performance of various asset classes such as indices, a basket of stocks or bonds, currencies and commodities, including precious metals.

Therefore, through an exchange-traded fund you can get exposure in a basket of shares of precious metal companies or follow the price of the precious metal in which you have chosen to invest. In most cases, ETFs that try to closely follow the market price buy the precious metal for you and store it in a bank vault.

Advantages of investing in ETFs for precious metals:

  • Higher liquidity than the physical purchase of a precious metal
  • Lower costs. Most often, fees and commissions are the same as when trading stocks and by buying one share you can get exposure in many companies, which reduces costs
  • Storage costs (in the case of ETFs for physical precious metals) are distributed among all investors in the ETF, which significantly reduces them
  • Building a flow of passive profitability by receiving dividends
  • Quick and easy opportunity to diversify the portfolio
  • Low initial investment

Disadvantages of investing in ETFs for precious metals:

  • Some ETFs (often those that invest in stocks) may not exactly follow the price of the precious metal
  • Lack of sense of physical possession of the precious metal

The largest exchange-traded fund for physical metals related to physical ownership is the SPDR Gold Trust, which manages assets of over $76 billion (as of December 8, 2020). Below you can find a chart of its price:

Source: Admiral Markets MetaTrader 5, #GLDAR, Weekly chart with data range from February 10, 2013, to December 8, 2020. Done on December 8, 2020, at 8:50 p.m. Please note that past performance does not guarantee future results.

Contracts for Difference (CFDs) on precious metals

A Contract for Difference (CFD) is a financial derivative that is an agreement between a trader and a broker to exchange the difference in the price of an asset. This contract is active until it is closed by the trader, and payments under it are through a broker, instead of the actual delivery of the traded asset.

In practice, CFDs provide investors with almost all the advantages of real investment in financial instruments, but without actually owning them.

Let's first note the advantages of trading contracts for difference:

  • Short position. One of the main advantages of today's CFD trading lies in the possibility of short positions. In this way, you can potentially benefit from both rising and falling precious metals markets.
  • Use of leverage. CFDs allow you to manage a larger amount than you have in your trading account. This happens through the use of leverage.
  • Opportunity for transactions within a day or even shorter. CFDs allow traders to take advantage of short-term price movements in the precious metals markets.
  • Easy access to global markets. Easy access to many financial instruments, such as stocks, bonds, currencies, commodities, cryptocurrencies, etc. through an intermediary of your choice.
  • In CFD trading with Admiral Markets, there are often no fees or commissions for opening and closing positions.
  • The working hours of CFDs on precious metals is 24 hours a day, 5 days a week, which allows you to buy and sell at any time of day.
  • Many trading styles are available (at least for some brokers, such as Admiral Markets).

Like any investment, CFDs have their drawbacks:

  • No ownership of the underlying asset (this may be an advantage for some investors).
  • CFDs may be a less regulated product, ie. to be offered by unlicensed brokers.
  • The leverage effect can be a double-edged sword. This means that, in addition to increasing potential profits, the financial lever also increases potential losses.
  • Swap fees to hold the position at night.

The following chart is a CFD on platinum, which may be interesting for those considering a platinum investment:

Source: Admiral Markets MetaTrader 5, Platinum CFD, Weekly Chart with Data Range from February 17, 2013, to December 8, 2020. Accessed on December 8, 2020, at 10:22 AM. Please note that past performance does not guarantee future results.

To start trading CFDs in gold, silver, platinum and palladium with a licensed and award-winning broker, such as Admiral Markets, click on the banner below and register:

Precious metals futures

Futures contracts are a derivative that is an agreement on the one hand to buy and on the other hand to supply a commodity, in this case a precious metal. The buyer of the futures undertakes to pay and the seller to deliver.

In fact, the first futures contract dates back to 1851, with the raw material corn and was listed on the Chicago Board of Trade (CBOT). Nowadays, trading in precious metals futures can be done through the Chicago Board of Trade.

Advantages:

  • The futures market is much more liquid than the physical market for precious metals.
  • Like the other options considered, futures offer lower costs for trading and investing in precious metals than physical buying.
  • Futures do not have swap fees, unlike contracts.
  • Opportunities for diversification of a portfolio of assets.
  • Working hours of precious metals futures 24 hours a day, 5 days a week, which allows you to buy and sell at any time of the day

Disadvantages:

  • Futures contracts expire on certain dates, which can make it difficult for a trader or investor if they want to take a longer-term position.
  • Trading in precious metal futures contracts may also require a larger initial investment, as the size of contract is usually quite large. This problem can be solved by using CFDs on futures

In the following image, you can find a chart of the price of CFDs on gold futures with delivery in February 2021:

Source: Admiral Markets MetaTrader 5, Gold Futures CFDs, Daily Chart with Data Range October 9, 2019, to December 8, 2020. Accessed on December 8, 2020, at 10:58 AM. Please note that past performance does not guarantee future results.

Another financial derivative that allows you to start investing in precious metals of any kind, such as a silver investment or a platinum investment, are Options. They are less popular than those listed above.

Options give the buyer the right, but not the obligation, to buy (call option) or sell (put option) the underlying asset, which, in our case, is a precious metal. The transaction must be concluded at a certain price before a certain future date.

The price of Options depends on market volatility. However, they have advantages, such as that the loss is limited to the premium you paid for the Option when you are a buyer.

You can start online trading in precious metals and more than 8,000 financial instruments with the number one platform in the world for trading in multiple assets - MetaTrader 5 from Admiral Markets. Download your MetaTrader 5 now, completely free by clicking on the following banner:

How to start investing in precious metals?

Maybe you’ve been asking yourself, “Is silver a good investment?” or, “Is platinum a good investment?”. Now that you know what precious metals are, the reasons for investing in precious metals, how much money to spend and how to invest in these assets, it's time to move on to the more interesting and practical part - namely, starting investing in precious metals.

You can do this in just three steps:

  1. Open a trading account.
  2. Download a trading platform.
  3. Open a New Order window and make your first trade!

For more information on how to open a trading account with Admiral Markets, watch the following short video:

Let's give an example of how to buy/sell CFDs on precious metals. I’ll use CFDs on gold as an example.

How to buy shares in precious metals

  • Log in to your account with Admiral Markets (MT4/MT5/WebTrader/Mobile application)
  • Go to Market Condition
  • Look for Gold
  • Right-click on the shares and then select "Chart Window"
  • Once the graphic appears, click on the "New Order" button (in the Toolbar below the menu)
  • Select the number of lots in the Volume field, as well as the stop loss and take profit levels, if you want to place these
  • Click on the blue "Buy on Market" button

When you buy (long position) CFDs in gold, you expect this precious metal to rise in price so that you can make a potential profit from your trade.

How to sell shares in precious metals

  • Log in to your account with Admiral Markets (MT4/MT5/WebTrader/Mobile application)
  • Go to Market Condition
  • Look for Barrick Gold shares (#ABX)
  • Right-click on the shares and then select "Chart Window"
  • Once the graphic appears, click on the "New Order" button (in the Toolbar below the menu)
  • Select the number of lots in the Volume field, as well as the stop loss and take profit levels, if you want to place these
  • Click on the red "Market Sale" button

When you sell (short position) CFDs on gold, you expect this precious metal to become cheaper so that you can make a potential profit from your trade.

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