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The Risks of Precious Metals Investing

Jun 30

The precious metals of gold, silver and platinum can offer a diversifying asset to a fractional investment portfolio. Their price movements typically do not correlate well with stocks and bonds, so they may rise when other investments decline. However, they are not immune to stock market volatility or global political uncertainty. It is important to understand the risks associated with precious metals investing before making any decisions.

Physical precious metals are the most traditional way to invest in these commodities, but they come with high overhead costs, including the cost of manufacturing and shipping, storage and insurance. Furthermore, they are not liquid assets and can be difficult to sell if needed for cash. Additionally, they are taxed as collectibles at 28% instead of capital gains rates.

A more convenient and liquid option is to invest in precious metals-based funds. These include shares of precious metals mining, streaming and royalty companies, exchange-traded funds (ETFs), closed-end bullion funds and precious metals certificates. ETFs are funds that aggregate sums of money from investors and manage them on their behalf, either actively or passively. These funds can track the price of individual precious metals or a basket of metals, and they typically charge low management fees of 0.1-0.2% compared to 0.5%-1.0% for active managers.

Another option is to purchase precious metals directly from a dealer. Often, this involves using leverage. This means you pay a portion of the total cost in cash, and borrow to cover the rest. This can be risky because if the value of your precious metals declines, you could lose more than what you paid for it. This is known as a margin call and could result in the sale of your metals without your consent or notice.

When it comes to investing in gold, silver and platinum, the most critical aspect is knowing how each one fits into your personal financial goals and situation. Understanding their history of providing store-of-value benefits, economic sensitivities and technical characteristics can help you determine whether they might benefit your portfolio.

For example, silver is a popular choice among those who seek to diversify their holdings because it has a wide range of industrial and technological uses. It is used in everything from automobile electrical systems to solar-panel cells, according to the World Silver Survey. However, it is more sensitive to changes in the economy than gold is.

For this reason, it is also important to avoid the lure of speculative trading in precious metals. This can lead to price volatility that is not supported by fundamentals, and it could make a potentially volatile portfolio more risky. In addition, speculative trading in precious metals can carry legal and regulatory risks. For this reason, it is important to consult with a registered investment professional before buying physical precious metals. Finally, it's crucial to avoid any high-pressure sales tactics from a potential investor. This could be a sign of fraud or at least unethical behavior.