Inv101 – WSS/HTMW – 1-09 Gold and Other Precious Metals

1-09 Gold and Other Precious Metals

When we covered commodities, we mentioned iron and copper, but not Gold and Silver. That is because Precious Metals operate by different rules than other commodities – and are very different to investors.

This is because unlike iron or copper, which is just used as inputs for other industry powering the economy, Gold, Silver, Platinum and other precious metals have value in and of themselves – people want to own them.

Why People Invest In Precious Metals

You may have met people who insist in buying gold because it has “real” value, unlike stocks (or even cash). But the price of gold, silver, and other precious metals is determined by the same factors that impact a stock’s price – how much is someone else willing to pay for it?

After all, if you had a huge vault of gold at home, but nobody was willing to trade you something else in exchange for that gold, it really is not doing you very much good. In the real world, other people DO want to buy gold – which means its price goes up and down, and so it can be considered an investment. Before you start jumping on buying gold and silver, we should first think about WHY people buy precious metals.

Gold bar

To Own It

This is the most basic reason – because they want to own it! If you buy a gold ring for your spouse, you just invested in gold (whether you realize it or not). Your grandmother’s special silverware is made of actual silver – and there is status involved in having the “real thing”.

There is only so much gold in the world (all the gold ever mined could fit into one large house) – the more people want to buy, own, and keep to themselves, the less is available for purchase. Due to pure supply and demand, this can make the price of gold go up.

Commodity Trading

Gold, silver, and precious metals do have the same price pressures as regular commodities too. For example, gold is an essential component in many electronics, and silver has properties making it important to produce solar panels.

Precious metals are both recycled and mined out of the ground. If demand for goods that require precious metals is higher than the amount currently being mined, the price can go up because there is a shortage.

Inflation Hedge

First, in investing terminology, a “hedge” is insurance – something you buy to protect against some other loss. So when we say “Inflation Hedge”, think ” as protection against inflation”.

A bar of gold you buy in America is the same bar of gold you can buy in Japan or France. This means that its value is “stable” between currencies. If a country starts to have high inflation (meaning the prices of all goods and services goes up – and the value of that currency goes down), many people put their money into precious metals to keep their value “stable” relative to the rest of the world.

This is referred to as an “Inflation hedge” – the price of precious metals usually goes up when there is inflation, keeping value even if money itself becomes worth less. When inflation is low, investors using precious metals as an “inflation hedge” usually start to sell it off, causing the price to go down.

Instability Hedge

Gold in particular is often called “End-of-the-world” insurance, because many people believe that if the economy completely collapses, precious metals will be the only way to trade.

While this is an extreme viewpoint, times of political and economic instability often see many people buying precious metals and hoarding it until the world calms down. When the world is chaotic, the price of precious metals tends to go up. When things are calm and stable, they often start falling back down.

How To Invest in Precious Metals

The most direct way to invest in precious metals is to buy it and take it home. If you own a piece of gold and silver jewelry, you’re already doing this – the amount of money your jewelry is worth if you resell it is directly due to the price of its underlying gold or silver (and not the craftsmanship or beauty of the jewelry itself).

But if you are really looking at precious metals as an investment, you will probably looking at different paths:

  • Buying Bars. You can buy physical bars of gold and silver and keep them in a safe deposit box or at home. This is how “End of the World insurance” people usually invest in precious metals.
  • Investing in mining companies. Companies that mine gold and silver, like Barrick Gold (ticker: GOLD), have their stock price go up and down based on the value of the precious metals they mine. This is a popular method of investing for regular investors looking for an inflation hedge.
  • Precious metal ETFs. GLD and SIVR are popular ETFs focusing on gold and silver investing. There are dozens of ETFs focusing on precious metals, giving regular investors the ability to invest. Some of these ETFs are based on a combination of mining companies, futures contracts, and physical bars – some are based just on a vault full of silver, and the value of the metal itself.
  • Spot and Future contracts. Just like other commodities, investors could purchase spot and futures contracts to invest in precious metals, but this is less popular than the other options.

At the end of the day, most regular investors choose the ETFs, as they are easy to understand, based on the metal you want to buy, and can be purchased from a regular brokerage account.

Mark's Tip

We all wear gold around our necks and fingers, it’s used in electronics, and if you are King Tut, you are buried in a gold casket. I have also read that if all of the gold in the world was melted into one big cube, the cube would only be 20 yards wide. That means limited supply so that is why the price is on a solid upward slope. Buy GLD when you think the world is in chaos, but only if you beat everyone else to it!