What does trading in metals mean?
Gold and silver are recognized as valuable metals and have long been sought after. Even today, precious metals still have their place in the portfolio of an experienced investor. But which precious metal is best suited for investment purposes? And why are they so volatile?
There are many ways to buy into precious metals such as gold, silver and platinum, and a lot of good reasons why you should give in to the treasure hunt. So if you’re just starting to study precious metals, read on to learn more about how they work and how to invest in them.
Precious metals can be a good portfolio diversifier and good inflation hedging – but gold, perhaps the best known of these metals, is not the only metal available to investors. Silver, platinum and palladium are all commodities that can be added to your precious metal portfolio, and each of these metals has its own unique risks and opportunities. In addition to owning physical metal, investors can also gain access through the derivatives market, metal ETFs and mutual funds, as well as through shares in mining companies.
We begin with the grandfather of all: gold. Gold is unique for its durability (it does not rust and corrode), its malleability and its ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, but we know it mainly as a base for jewelry and as a form of currency.
The value of gold is determined by the market 24 hours a day, seven days a week. Gold is traded largely on sentiment – its price is less influenced by the laws of supply and demand. This is because the supply of the new mine is far outweighed by the sheer size of the gold hoarded above ground. Simply put, if hamsters feel like selling, the price drops. If you want to buy, a new offer is quickly absorbed and the price of gold is pushed up. Several factors are responsible for the increase in the desire to hoard the shiny yellow metal, e.g.:
Systemic financial concerns: When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought as a safe store of value.
Inflation: When real returns on equity, bond, or real estate markets are negative, people regularly flock to gold as a stable asset.
War or political crises: War and political upheaval have always put people in a gold hoarding mode. The savings of a whole life can be made portable and stored until they have to be exchanged for food, shelter or a safe passage to a less dangerous destination.
Unlike gold, the price of silver varies between its perceived role as a store of value and its role as an industrial metal. For this reason, price fluctuations in the silver market are more volatile than in gold.
Thus, while silver is traded as an item to be hoarded in roughly accordance with gold, the industrial supply-demand equation for the metal exerts an equally strong influence on its price. This equation has always fluctuated with new innovations, such as:
The once predominant role of silver in the photo industry – silver-based photographic film – has been eclipsed by the advent of the digital camera.
The rise of a huge middle class in the emerging market economies of the East, which triggered an explosive demand for electrical appliances, medical products, and other industrial goods that require silver. From bearings to electrical connections, the properties of silver made it a sought-after commodity.
The use of silver in batteries, superconductor applications and on the market for microcircuits.
It is unclear whether or to what extent these developments will affect all non-investment demand for silver. One fact remains: the price of silver is influenced by its applications and is not only used in fashion or as a store of value.
Like gold and silver, platinum is traded around the clock on global commodity markets. In times of routine market and political stability, it often tends to achieve a higher price (per fine ounce) than gold simply because it is much rarer. In addition, far less platinum is produced annually than is the case with other metals. There are other factors that determine the price of platinum:
Like silver, platinum is considered an industrial metal. The greatest demand for platinum is for autocatalysts, which are used to reduce the harmfulness of emissions. After that, jewelry accounts for the largest part of the demand. Petroleum and chemical refining catalysts and the computer industry consume the rest.
Due to the heavy dependence of the car industry on this metal, platinum prices are largely determined by car sales and production figures. Clean air legislation could force automakers to install more catalysts, which would boost demand. In 2009, however, American and Japanese automakers began using recycled autocatalysts or using more of the reliable – and usually cheaper – platinum sister metal palladium.
Platinum mines are highly concentrated in only two countries– South Africa and Russia. This creates greater potential for cartel-like measures that would support or even artificially drive up platinum prices.
Investors should bear in mind that all these factors contribute to making platinum the most volatile of all precious metals.
Less known than the three metals mentioned above is palladium, which has more industrial uses. Palladium is a shiny, silvery shiny metal used in many types of manufacturing processes, especially for electronics and industrial products. It can also be used in dentistry, medicine, chemical applications, jewelry making and groundwater treatment. Most of the world’s supply of this rare metal, which has atomic number 46 in the periodic table of elements, comes from mines in the United States, Russia, South Africa, and Canada. Jewellers first used palladium in 1939 in jewellery. When mixed with yellow gold, the alloy forms a metal that is stronger than white gold. In 1967, on the occasion of the coronation of King Taufa Ahau Tupou IV, the government of Tonga issued palladium coins in circulation. This is the first recorded case of palladium used in coinage.
Metalworkers can produce thin palladium plates up to a diameter of two hundred and fifty thousandths of an inch. Pure palladium is malleable, but it becomes stronger and harder as soon as someone works with the metal at room temperature. The sheets are then used in applications such as solar energy and fuel cells.
The largest industrial use of palladium is in catalysts, as the metal serves as a great catalyst that accelerates chemical reactions. This shiny metal is 12.6% harder than platinum, making the element more durable than platinum.
Risk of precious metals
Each investment entails its own risks. Although they can bring a certain degree of security, there is always a certain risk that comes with investing in precious metals. Prices for metals may fall due to technical imbalances (more sellers than buyers). In times of economic uncertainty, however, sellers benefit, as prices tend to soar.
Precious metals are a useful and effective means of diversifying a portfolio. The trick to succeeding with them is to know your goals and risk profile before getting involved. The volatility of precious metals can be used to build wealth. If it remains uncontrolled, it can also lead to ruin.