What are precious metals? (2023)
Gold, silver and other metals could help diversity your portfolio
Precious metals such as gold and silver have been exchanged for thousands of years, and are universally accepted as valuable currency. But modern financial markets have given more people access to precious metals than ever before, with the ability to order precious metals online or invest in related stocks, exchange-traded funds (ETFs) or derivatives.
In addition to gold and silver, several other precious metals have become a popular investment due to their utility, scarcity and mining production. But investing in precious metals isn’t a guaranteed path to riches, and there are many things you should consider before investing.
*Precious metal investments carry risk. Be alert to claims of making a lot of money in these or any investment with little risk. As with any investment, you can lose money, and past performance is not a guarantee of future performance. You should also obtain a clear understanding of the fees associated before agreeing to invest.
- You can invest in physical precious metals or in related stocks, ETFs and derivatives.
- Investing in precious metals can help diversify your portfolio, but precious metals may be more volatile in price than traditional markets.
- Gold, silver, platinum and palladium are the most popular precious metal investments.
Precious metal as an investment
Precious metals are considered an “alternative asset” in the investing world, as they are typically uncorrelated with traditional markets and often carry more price volatility.
As such, the precious metals market can be a way to diversify your holdings, hedge against price inflation and balance your returns in an uncertain economy. But precious metals don’t have guaranteed returns, and you can lose money by investing in them.
There are several ways to invest in precious metals, including:
- Physical metals — You can purchase physical coins or bars, known as “bullion,” and take custody of your investment. However, this can carry high fees and insurance costs.
- Precious metals stocks — You can invest in the stocks of companies that are in the precious metals mining and production industry.
- Precious metals ETFs — You can purchase ETFs that hold physical bullion or stocks in precious metals companies.
- Precious metals derivatives — You can buy precious metals futures and options contracts, essentially placing a bet on the price action of a particular metal.
» MORE: What is a good investment?
Types of precious metals
There are several types of precious metals, each one a different naturally occurring element. Precious metals are generally in limited supply, giving them relatively high values.
Here are a few of the more popular precious metals and what to look for in them:
- Gold is the most popular precious metal. It's durable, malleable and a good conductor, so it can be used in various industrial applications (such as electronics). However, it's more common in jewelry and coins.
“Gold reigns king in terms of its stature as a primary monetary metal and has done so over millennia,” said Eric Muschinski, gold investor and founder of Gold Investment Letter.
The value of gold changes continually, but it's largely based on sentiment rather than changes in supply. This means gold’s value generally moves based on factors such as political crises, central banking policies and economic uncertainty.
You can purchase gold in physical form, such as coins or bars, or in paper assets, like stocks and contracts.
- Silver is another popular precious metal. Like gold, it's used as a store of value, but it's more heavily used in industrial applications than gold. It's also more volatile than gold, so its value is likely to rise and fall more quickly.
Silver prices rise when the economy is doing well and manufacturers are producing goods. Unfortunately, this means its value can fall when industrial demand is down.
Muschinski speculates that silver has a much more important role as a long-term investment than just its utility, though.
“Silver may prove the best performer of the four [precious metals] in the latter stages of a bull cycle, as the public views shift toward the historic monetary properties versus just an industrial metal,” he said.
» MORE: How to buy silver
- Platinum tends to have a higher price point than gold in some situations — especially in times of political stability and good market health. Platinum is used in various applications, including in the automotive industry as a component in catalytic converters.
Platinum mostly comes from South Africa. It has a relatively limited supply, and its price is vulnerable to interference.
Muschinski says the rarity and utility of platinum makes it very valuable.
“Platinum is actually 15x more rare than gold but has broader industrial use cases, causing many to believe that it is the ‘most precious’ precious metal,” he said.
- While it might not be as well-known as other precious metals, palladium is still quite valuable. It's heavily used in industrial applications, such as the manufacturing of electronics and catalytic converters, and chemical applications like groundwater treatment. Most of its supply comes from mines in Russia and South Africa.
It is possible to purchase palladium in its physical form as well as in stocks and investment contracts. Like silver, the value of this metal may change as industrial demand goes up or down.
How to buy precious metals
You can purchase precious metals in either physical form or by investing in securities such as stocks or ETFs.
Physical precious metals
To purchase precious metals in a physical form, you can do so online through the U.S. Mint, or by working with a certified precious metals dealer. Gold and silver coins are available from the U.S. Mint website, but precious metals dealers can provide access to gold, silver, platinum and palladium in the form of coins, bars, ingots (large bars) or other jewelry options.
Precious metals stocks
Most precious metals are mined and produced by publicly traded companies that allow you to purchase their stocks. You can purchase precious metals stocks through your favorite investing app or through a full-service brokerage.
Precious metals ETFs
Precious metals ETFs own a basket of precious metals stocks or are backed by the physical metal itself. Metal-backed ETFs allow you to purchase a precious metal for close to the spot price without the additional fees and markups of owning the physical asset. Precious metals ETFs can be purchased through most major brokers or investing apps.
Precious metals futures and options contracts
Precious metals futures and options trading allows you to buy a contract based on the spot price of a precious metal. You can purchase a “long” contract that makes a profit if the price goes up, or a “short” contract that makes a profit if the price goes down. You can also trade futures and options contracts with leverage, making them the riskiest way to invest in precious metals.
Pros and cons of investing in precious metals
There are both pros and cons of investing in precious metals.
- Some precious metals are a hedge against inflation
- Highly liquid markets available
- Uncorrelated with traditional markets
- Highly volatile investments
- Risk of losing physical precious metals
- Precious metals have underperformed the overall stock market in the long run
Are precious metals a good investment?
Precious metals can be a good investment as part of an overall investment strategy, but as a stand-alone investment, they can be volatile and underperform. Gold, silver and other precious metals have not matched the S&P 500 returns over the past 100 years, making it difficult to recommend them as a core part of an investment portfolio.
What is the safest precious metal to invest in?
Gold is the safest precious metal to invest in, as it has the most liquidity in the market, has held its value well over time and is in constant demand globally. But no precious metal investment is truly safe, and gold can lose value in a hurry in certain market conditions.
Are precious metals taxable?
Precious metals investing is considered a “collectible” according to the IRS, and if you buy or sell physical precious metals or precious metal ETFs, you may be hit with a higher tax rate. The current long-term capital gains rate for precious metals is 28%, which is higher than the 0% to 20% for other investments.
Investing in precious metals should be a thoughtful strategy and part of an overarching investment plan that includes other assets as well. Precious metals are a unique asset class that doesn’t follow traditional markets and can act as a hedge in times of economic uncertainty.
But precious metals are highly volatile, and you can lose money investing in them. Research investments for yourself before you buy, and consider talking to a financial advisor for help.
- ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
- Macrotrends, “Gold Price vs Stock Market - 100 Year Chart.” Accessed May 16, 2023.
- IRS, “Topic No. 409, Capital Gains and Losses.” Accessed May 16, 2023.
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