Though the American economy has shown a glimmer of progress toward real recovery from the recession that began over a half-decade ago, the truth is that traditional stock indexes remain an uncertain bet for many investors who are looking to ensure their long-term fiscal health. Because of the wild swings in stock values and index levels, many Americans simply feel that they cannot trust all of their money to the S&P 500, or New York Stock Exchange members. That’s a perfectly logical conclusion. Luckily, precious metals investing can actually help create a sound, long-term investment strategy that includes plenty of long-term value and a strong “buffer zone” against the recession-era fluctuations of the major stock market indexes around the world.
Like stock market investing, though, precious metals investing requires a great deal of knowledge and know-how in order to get the best deal and enjoy the best chances at long-term success. Those new to the practice should familiarize themselves with the metals available for investing, the outlook for precious metals values, and other areas of nuance that will guide their investments toward a greater chance of value-driven success.
The Differences: How Precious Metals Differ From Typical Stocks
One of the major draws of investing in precious metals, particularly in gold, is that it tends to move in the opposite direction of stock market values. That is, when the stock market declines, the value of precious metals is typically driven up. This allows them to serve not only as a great buffer zone for stock market losses, but also as a “hedge” against larger losses that can result from traditional investments. Smart investors know how to leverage precious metals like gold, silver, and platinum, to offset potential loses from stocks, bonds, 401(k) accounts, and a host of other traditional investment tools.
The tendency of gold and other precious metals to serve as protection and “insurance” against more traditional investments makes them an especially smart choice for retirement accounts. As was learned in the most recent recession, a downturn in traditional stocks that are not paired with precious metals investments can mean a significant loss of retirement funds and unnecessary financial hardship.
Plenty of Choices: What to Know About Gold, Silver, and Other Precious Metals
Though virtually all precious metals offer a great way to hedge against more traditional investments, and all precious metals can help safeguard a retirement account against significant loss, there are considerations unique to each metal. Gold, for instance, is often touted as the most solid precious metal investment. Platinum and palladium, meanwhile, perform a bit differently and therefore might be a good match for only certain types of investors. Before investing, it’s important to get familiar with each metal in order to determine which one is best for each investment tactic.
There is perhaps no precious metal more well-known or more widely used than gold, which finds its way into everything from high-end jewelry to electrical components and even dental or medical equipment. Gold itself is quite versatile, and that means the metal is always in quite high demand around the world. Because gold itself is a finite resource, this rather elevated level of demand ensures that its price remains rather elevated as well.
Gold, therefore, is a great choice for virtually all investors, offering a stable source of investment maintenance and, in most cases, modest gains. Gold is traded not only in the United States, but also in virtually all countries around the world, giving it the ability to increase in value on a 24-hour basis. Furthermore, its value tends to rise dramatically as stock markets drop in value, making it the best precious metal to use when hedging against losses. Beyond this non-correlative relationship with stock market values, gold is known to increase or decrease in price based on three key factors:
– Recessions and Declines: Gold is widely appreciated as a “stored value” investment, and that makes it more attractive during periods when “variable value” mechanisms, like stocks and bonds, are headed the wrong direction. When recession hits, gold typically rises in value.
– Inflation: While the rate of return decreases in stocks, bonds, and real estate transactions, gold typically rises. Unfortunately, of course, the opposite is also true.
– Political Uncertainty or Armed Conflict: When the future of a country’s political system is on the line, gold tends to increase. This is also the case during times of armed conflict or drawn-out wars. That’s because gold is, as stated earlier, a “stored value” investment that will retain its worth even after the dust settles.
While it’s often mentioned in the same sentence as gold, especially when investors are discussing precious metals investing, the simple fact of the matter is that silver tends to be quite a bit more volatile than the average gold investment. That’s because silver has historically served two functions: In many circles, it has served as a very effective “stored value” investment that mirrors the nature of gold. In other economies, and at other times, silver has performed more as an industrial metal. Industrial metals are well known for serving as entry-level investments that don’t build value very well over time.
Getting involved with silver does present a bit more of a risk, but those considering precious metals investing should be aware that the metal is increasing being viewed as a great source of stored value. Its industrial uses do still abound, but a number of factors are helping it better serve as a hedge:
– Silver’s one-time use in photographic film production is now a thing of the past, as digital cameras have taken over the industry.
– The emerging markets that depended so heavily on silver have stabilized, and their pace of development has largely leveled out during the most recent economic downturn.
– Silver is still used in many batteries and superconductors, but next-generation batteries are exceedingly light on silver as a source of power and conductivity.
Investors should seriously consider silver as a strong source of investment, given these developments, but they should be aware that silver’s value overall will still depend on its use in practical applications around the world. If some new use of silver in industrial or commercial applications arises, it’s likely that the metal’s use as a stored value mechanism could once again decline.
If silver is considered to occasionally be an industrial metal, then platinum is surely considered to be almost entirely a metal used in heavy industry and scientific applications. While the market for platinum jewelry is large and growing, platinum’s largest buyer around the world comes in the form of automakers. The metal is increasingly being used in cars at all price points and by virtually every major automaker around the world. It maintains a high level of value in most economies only due to the very rare nature of platinum worldwide. Indeed, it’s much more rare to come across a large amount of platinum than it is to find a large amount of either silver or gold. To that end, the biggest factors driving platinum’s pricing up or down include the following:
– Platinum’s value largely corresponds to its value at any given time, especially when producing automotive catalysts or creating fine platinum jewelry for the consumer market.
– Larger demand for cars around the world will drive platinum demand, and thus platinum races, upward in worldwide indexes. Furthermore, platinum’s use in todays emissions-reducing car components means that any new legislation regarding clean emissions could drive its price higher.
– Platinum is largely found in only South Africa and Russia, and those countries are occasionally subject to platinum cartels or other schemes that can temporarily and artificially raise the price of an ounce of the precious metal.
How to Invest: Turning the Right Metal into the Right Mechanism
Any investment in precious metals requires not only deciding between the three major players offered by most investment firms, but also between the many mechanisms that are built to drive a portfolio’s value up over time. Generally, today’s investors have a variety of great choices when making their first investments.
1. Bullion: For those who want to keep their hands on their actual investment, direct bullion investments offer coins, bars, and other amounts of the precious metal that can be stored in a safe or vault. Available from Precious Metals Merchants and other major firms, bullion investments are one of the most popular ways to enter the market.
2. Certificates: In essence, certificates are the theoretical form of gold bars. They guarantee a certain amount of gold to the person holding the certificate, and that gold can be traded, redeemed, or exchanged, at any time. This is a great option for those who don’t have a safe or vault in which to store bullion.
3. Traditional Investment Mechanisms: Stocks, bonds, futures, options, and commodity exchange traded funds can all be tied to the value of a precious metal. This gives investors a way to transition to precious metals while staying with the investment mechanisms that are already familiar to them.
Great Ways to Reduce Risk and Build Long-Term Value
Precious metals are a great way for investors to protect themselves against the threat of recession and the volatility of worldwide stock markets. By using these investments to sore value, hedge losses, and create long-term value, investors can create a more sound fiscal picture for their current financial needs and their eventual retirement.