How to Invest in Gold and Other Precious Metals

Precious metals are seen as one of the most durable investments because their rarity keeps the supply very fixed. Also, certain metals have been valuable for ages. Gold has been a valuable metal since antiquity, and for people who want at least to conserve their wealth, it seems like a place to park your money. It is frequently cited as an inflation hedge, and as having the potential for great returns in times of uncertainty and economic struggle. Other precious metals can function in similar ways, but both silver and platinum have industrial applications that make them far more cyclical than gold. Investing in these metals through the stock market is very straightforward. A more direct investment would require trading in the commodities market, which is much harder to get approved for and is far more complex. The simplest direct investment is to buy the actual metal yourself, but storage might be a problem.

Investing in Metals Through Traditional Brokerage Accounts

Step 1

Identify the precious metals in which you would like to invest. Gold is the most common choice, but others include silver, platinum and palladium. Understand that each of those metals has different forces, both psychological and physical, that affect them. Silver and palladium are industrial metals, and so is platinum, but to a lesser extent due to cost.

Step 2

Choose the investment vehicle appropriate for your situation. For a direct investment in metals, you can use exchange-traded funds (ETFs). Mutual funds are also a method of investment, but they do not have the focus that ETFs have. The capital in mutual funds is controlled by the fund's bylaws, but these are not necessarily as strict as the focus that a physically-backed ETF would have. Also, mutual funds have restrictions on how long you have to wait to withdraw money without a penalty, which can differ from fund to fund. Mutual funds are not traded on a stock exchange and therefore are not as liquid. It is possible to invest in mining companies as an indirect investment in metals that they mine. However, this also involves investing in a company and its decisions.

Step 3

Identify the ETFs you would be interested in based on the metals and whether leverage is used or not. Leveraged ETFs can provide larger returns, but are also harder hit if the market for the metal turns bearish. Buy shares in the ETFs best suited to your portfolio. Take into account expense ratios and transaction fees. Expense ratios pay for the administrative costs associated with the ETFs, and higher ones can eat into returns, as well as deepen losses. Transaction costs are one-time costs associated with buying or selling. Different brokerages offer different ETFs without transaction costs.

Step 4

Monitor your ETFs periodically. Industrial metals require more attention as they tend to follow business cycles, but even gold is prone to wild swings depending on government policies. Palladium, for example, is an important part of catalytic converters. When the automobile industry is at full production capacity, or is expanding production, it can increase the price of palladium as demand increases. Conversely, when the economy took a dive in 2008, demand for cars shrunk, and government policies helped reverse the trend. When the tsunami hit Japan, palladium took a tumble as Japanese car production declined. Other metals have their own industrial uses and factors that drive demand, and such investments require monitoring.

Direct Investment in Metals Through a Commodity Futures Account

Step 1

Apply for futures privileges through your brokerage, or find a brokerage with which to open a commodities account. Be aware of all the capital requirements and fees when enabling an account for commodities or opening a new one.

Step 2

Learn how to trade futures because they are not the same as trading stocks. They are more like options than securities. A futures contract represents a trade that is guaranteed to happen in the future, and the buyer and seller agree in advance on a date and a price. Contrast that to options, in which the trade is conditional on the option holder.

Step 3

Start trading during the time of day when the futures market is open for metals. For the most common contracts, the hours are 18:00-17:15 Eastern time on every weekday and Sunday.

Items you will need

  • Brokerage account

Warning

  • The futures market requires a substantial financial commitment because the number of units per contract is fixed, requiring a substantial amount of capital to cover the trade.

Photo Credits

  • Comstock/Comstock/Getty Images

About the Author

Nihar Patel covers finance and investing for several online publications, including Seeking Alpha. He also runs his own investment analysis website. Patel holds a J.D. from UC Hastings College of Law, as well as a bachelor's degree in political science and history from UC Davis.

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