Precious metals

Should I Invest In Precious Metals?

Should I Invest In Precious Metals?

The Pros, Cons, and Benefits of Investing in Precious Metals

Investing in precious metals can be a lucrative way to grow your money while protecting against inflation and safe-guarding your financial position in the face of economic uncertainty. But, investing in precious metals comes with its own unique set of risks and rewards. If you’re intrigued, here is an overview of whether investing in precious metals makes sense for you.

What are Precious Metals?

Precious metals are a class of commodities consisting of gold, silver, platinum, and certain other metals that are commonly used as currency. Gold, silver, and platinum are all investment commodities in their own right, but there are also a large number of products made from these metals which helps support the demand for them and therefore their intrinsic value.

The two main types of precious metals are gold and silver. Other, less common precious metals include palladium, rhodium, and – in very small quantities – a number of other rarer metals.  These metals are naturally occurring, but mining is expensive and supply is extremely limited, resulting in a supply and demand price point that is relatively stable and comparatively high.

How to Buy Gold and Silver

There are two main ways to buy gold and silver: Gold bullion and gold/silver exchange-traded funds (ETFs).

  1. Gold & Silver bullion - physical gold and silver that you own. You can purchase it by dealing with a gold bullion dealer, who will supply the gold and silver to you. You can either store it yourself or pay a third party to securely store your precious metals for a small monthly fee.
  2. Gold/Silver Exchange-Traded Funds. Similar to stocks listed on a stock exchange, ETFs track the prices of various assets like gold and silver. ETFs provide various benefits, including the fact that they are easily purchased and stored by the public.

The Benefits of Investing in Precious Metals

  • Protects against inflation: Investing in gold and/or silver can help protect your money against inflation. Why? Because as the pound loses value, it becomes harder to purchase everyday items with the same amount of money. Gold and silver, on the other hand, are rarer and more valuable than paper money and over the long term retain their value. Plus, they have been used as money for thousands of years. Adding precious metals to your portfolio can help you shield your savings from the effects of inflation. If you hold gold and/or silver in your investment portfolio, you are hopefully contributing to a healthy financial position that is better insulated than a currency that is gradually, or rapidly, devaluing. 
  • Protects against economic uncertainty: Gold and silver can also act as a form of insurance against economic uncertainty. In uncertain times, fear can lead to increased volatility, share price crashes, business failures, and the destruction of otherwise reliable asset classes. Precious metals can be an effective way to insulate yourself in this scenario, protecting your savings from the worst of this, ensuring that you have something relatively liquid that can will retain both value and demand both during and following an economic crisis.
  • Direct ownership has no counter-party risk: Unlike most other investments, excluding land and property owned outright, direct gold and silver bullion ownership (as long as you can protect it from theft) is not impacted by the actions of others.  Your precious metals cannot be lost due to financial mismanagement, stock market collapse or monetary policies.  
  • Provides financial insulation in the event of national societal collapse or political revolution: Whereas most financial assets are jeopardised when catastrophic societal events occur, precious metal tend to be the investment of choice in these circumstances.  For example following the recent riots and revolution in Sri Lanka, many financial investments were destroyed by runaway inflation and economic breakdown, however the price of precious metals were maintained as their value is dictated on a global level.  Actions or events within any particular nation is unlikely to have a significant negative impact on the price of gold or silver - in fact the opposite is often true: that national crisis' push up demand, and thus prices, for precious metals.

The Risks of Investing in Precious Metals

Unlike other assets, investing in precious metals provides no regular income, no dividend or interest, and hence it doesn't maximise the potential financial return.

Precious metals do not generate a benefit to society, the community or the nation, through jobs and tax receipts - if you want to contribute to the overall economy, perhaps other investments are more suitable.

Whilst benefiting from relative price stability and low risk, precious metals also don't provide high returns, unlike investments in high risk/high reward stocks for example. 

Holding precious metals, whilst more liquid than certain other asset classes such as property, is still not as liquid as holding currency or other financial investments that can be bought and sold with almost immediate effect.  This reduced liquidity might influence the proportion of your portfolio that you allocate to gold and silver.

Should You Invest In Precious Metals?

If you want to protect your money against inflation and build your peace of mind during economic uncertainty, precious metals such as gold and silver can be a useful investment tool. There are a few things to keep in mind, however.

First, investing in precious metals when timed badly can result in poor financial returns.  

Secondly, precious metals, when stored at home, also pose their own security risk - you need to be able to remain completely confidential about their existence and conceal them adequately to prevent them being located and stolen by thieves.

Silver, when stored at home, takes up considerable space and in larger quantities is extremely cumbersome and heavy - difficult to manoeuvre and transport.

Finally, whilst precious metals reliably hold their value in the long term, it is usually only sensible to invest money that you definitely won't be needing to cover your household requirements at any point - if you are forced into selling them in order to pay your mortgage or for bills or groceries, it is likely that your timing won't help deliver a good financial return.

Final Note

Precious metals like gold and silver can be a good way to protect your savings against inflation, economic uncertainty and during societal chaos. However, they can be seen as not a particularly good investment in a normal trading environment. Investing in precious metals comes with many benefits and risks and should be done with care. In order to protect yourself and make the right decisions, you should consider your specific personal circumstances, your overall portfolio and the likely current and future economic and societal risks.

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