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Seven things to consider when investing in precious metals
Precious metals are something many people covet. On the podium, they represent peak performance. On the red carpet, they represent elegance and prestige. At home, precious metals arrive in everyday items, like cars and smartphones. But for investors, they represent a way to maintain and grow wealth.
There is a reason governments and institutional investors invest in precious metals. While inflation can erode the value of cash over time, precious metals — particularly gold — tend to hold their value. At one point, many countries tied the value of their currencies to the price of gold.
Many investors choose to hold previous metals in their portfolios too. But because each metal is different and has its own investment characteristics, investing in precious metals can be confusing if you don’t know what you’re doing.
Before asking yourself whether it makes sense for you to hold metals in your portfolio, here are some things to consider.
What are precious metals?
Precious metals are scarce metals that are high in value. While gold, silver and platinum are the precious metals investors focus on, there are five other metals that are also considered precious: palladium, rhodium, ruthenium, iridium and osmium. Generally, investors tend to focus on gold, silver and platinum because they are more liquid, meaning they are easier to buy and to sell, and therefore less risky than lesser-known precious metals.
What are some of the reasons to consider investing in precious metals?
The main reason to invest in gold, silver or platinum is to diversify your investment portfolio with assets not correlated to the stock and bond markets. In 2022, when stocks and bonds widely recorded double-digit losses, gold climbed by 0.4%, silver rose 6.3% and platinum jumped by 12.2%1. Holding a small portion of your wealth in such assets could help ensure a part of your portfolio is less likely to experience the same swings in value that your stocks and bonds might.
You may have heard the expression “a dollar doesn’t go as far as it used to.” The same can’t be said for gold. Consider that in 1935 you could buy a basic car for about US$500, or the equivalent of 14 ounces of gold, when it was trading for about US$35 an ounce. Today, those same 14 ounces of gold would be worth roughly US$28,000, which would still be enough to buy a basic vehicle2.
How can you invest in precious metals?
There are several ways to gain exposure to gold, silver and platinum:
- Buy it in physical form
Buying gold, silver or platinum bars (bullion) or commemorative coins is easy enough to manage in small quantities but can raise a risk of theft when kept at home. Safeguarding against these possibilities inevitably costs money, whether you decide to invest in a safe and security system, store it with TD Secure Storage or even look into insuring it. Those extra expenses can eat away at your returns. - Buy gold, silver or platinum futures
A futures contract is essentially an agreement to buy or sell a specific commodity at a set date in the future for a set price. These agreements can allow investors to trade on the price movements of an asset, without physically possessing it. Since the contracts come with a "delivery date" on which you must either take possession or sell the asset futures contracts may be impractical for many investors.
Invest in an exchange-traded fund (ETF) or exchange-traded receipt (ETR)
Today there are multiple ETFs and ETRs that trade on stock exchanges and hold physical reserves of gold, silver and platinum bullion. One of the best-known ETFs holds gold in multiple vaults in London, England. While ETFs and ETRs can make it easier for retail investors to get direct exposure to metals prices, they come with management fees. In addition to owning physical precious metals, you can also buy precious metal certificates2; this allows you to own gold or silver without taking possession of physical bullion, coins or bars. Precious metal certificates are available in electronic form only and can be bought and sold through TD Wealth.
- Invest in shares of mining or royalty streaming companies
Another way investors can gain indirect exposure to the commodities is by owning shares of the companies that mine the metals themselves. Going this route, however, may expose you to company risk — such as the possibility a mine contains less gold or silver than expected, or that management makes decisions which impact stock performance. There are ETFs available that hold multiple mining companies, though you can then consider that you may be adding a layer of management fees to your holdings. Similarly, by investing directly in companies, there is a chance their performance could be more correlated to equity markets, which may not be ideal if your goal is diversification away from stocks.
What are precious metals used for and what influences their price?
To understand the value of an investment, it helps to know something about how it is used.
How gold is used: Apart from its use in jewelry, coins and bars, gold’s electric conductivity and resistance to corrosion has made it an ideal material in industries like dentistry and electronics. Unlike most commodities, the value of gold is more tied to economic factors and demand from traders.
How silver is used: Although silver is used in many of the same ways as gold — including in jewelry and silverware — it’s also considered to be an industrial metal, and used in solar cells, cars, batteries, electronics, water purification and more. Silver tends to trade in line with gold, although its demand as an industrial metal can also affect its value.
How platinum is used: As one of the harder precious metals, platinum is used in optical cables, LCDs, pacemakers, dental fillings, catalytic converters in vehicles, computers and more. Because platinum is mined in so few places around the world, its price can be influenced by geopolitical concerns.
Where is gold, silver and platinum stored?
The largest holders of gold and silver remain national governments. The U.S., Germany, Italy, France and Russia represent the top five holders of gold. Governments of all sizes have used gold and silver reserves for millennia to back up their currencies. Though most have abandoned the gold standard, many governments retain large reserves of metals, along with foreign currency, to help stabilize their own money.
One of the more famous gold repositories is the Fort Knox Bullion.
Depository in Kentucky, which is where the U.S. houses a large portion of its gold reserves. The largest gold vault in the world, however, is in the basement of the Federal Reserve Bank of New York. That vault is said to house 6,000 tons of gold on behalf of account holders, including the U.S. government, foreign governments, other central banks and official international organizations3.
About a fifth of the world’s refined gold is in private hands4, most of which is also held in vaults maintained by financial institutions5. Some of it is held for individual clients and some on behalf of funds. The New York Mercantile Exchange operates a network of vaults in New York City to back up its futures contracts in gold, silver and platinum6.
Individual investors also hold precious metals in bank vaults and safety deposit boxes at financial institutions around the world. And, finally, there is the gold, silver and platinum held in people’s homes (such as coins and silverware) or worn in the form of jewelry.
How liquid are precious metals?
In some countries, gold and silver can be used as cash. According to the World Gold Council, US$130.9 billion worth of gold changed hands in an average day in 2021, making it one of the most liquid assets in existence7. For a retail investor, physical precious metals are less liquid than financial assets, but more liquid than real estate. Depending on the dealer, the trading format and the volume you buy, fees and commissions can be as high as 5% of the amount traded.
Gold has the largest and most liquid market of the three. The silver market is similarly liquid, but it has been known to experience bigger price swings as large players attempt to influence the market. The platinum market is small and, therefore, less liquid than gold or silver.
How do I decide what metal to buy?
Novice investors who are interested in owning precious metals and those with portfolios under $1 million can weigh the benefits of sticking with gold against investing in other metals. The yellow metal has the largest market with the greatest liquidity and the most options for exposure, including physical gold, futures, ETFs and stocks of gold miners and streaming companies.
Silver and platinum could also represent options for investors looking to further diversify their portfolios. It may be important to consider that, with the possible exception of mining stocks, precious metal holdings don't tend to generate a lot of income. As such, some investors will cap their combined holdings of gold, silver and platinum at no more than 5% of their portfolios. Held in larger quantities, precious metals could create a drag on overall investment returns.
