There’s money in metal. Let’s start with gold. There’s no dividend or yield. It’s hard to value. It’s rubbish at keeping pace with inflation. You have to store it somewhere. There are lots of reasons to reject it. Which is to rather miss the point.
- Gold gives you a level of security. It’s a hedge against the sky falling in
- It’s an insurance policy against central bankers losing their minds, soaring debt levels and elitist groupthink. In mad monetary times it offers a measure of grip
- A small – think 5% max – part of your portfolio in a gold investment may be worth a think
An exchange traded fund (ETF) or a unit trust/investment trust are good options.
1. Easy access
You can buy gold ETFs, though watch for annual fees, buying and selling charges. An ETF is a stock market-based mutual fund. Buying into a gold ETF, for example, is practical and cheap compared to a lump of bullion on the kitchen table.
You can also buy exposure to the gold price (and a huge range of other commodities) via options. But…
- Options mean you speculate on future price movements. Perhaps daily or over a long time period
- Their spreads – the difference between the profit buy and sell price – can be wider, making them more expensive
- Buying into options and futures is complex with bolt-on costs many aren’t aware of. As commodities can see their value halve (or soar) in a very short time, the leveraging potential and risk can be enormous
2. Huge range
ETFs also release the drawbridge to a massive world of commodities. From hops and cocoa to oil and sugar. Even cattle. Plus metals such as silver, copper and palladium.
- Most commodity ETFs are passively managed. They’re run by computers to keep fees down (a big advantage)
- ‘Smart’ ETFs may be actively managed, upping costs
- Some commodities are a better match for ETFs. Ingredient-based commodities can go ‘off’; gold and silver, by comparison, just sit there. Only their spot price moves, up, down or sideways
3. Shorting potential
A leveraged approach can allow you to ‘short’. You can’t do this with ETFs or owning metal bullion. Be aware some markets are far smaller than others. For example, the silver market is 10% of the gold market in value terms. That means increased volatility as buyers and sellers test valuations.
- Remember, the more you fund your account the less leverage you use – that means lower risk and more room for (inevitable) error and hasty decisions
- There’s a range of potential operational commodity risk well beyond the control of average investors. Currency, political, financial, legal, environmental
- There are sound reasons why commodities are less ‘liquid’ than other asset classes
4. Some metals give income
In-the-hand cash, even. If you invest in a mining metals company you will have an annual management report. And possibly a quarterly dividend (the compounding effect of dividends long term are phenomenal).
Plus you will receive regular performance updates so you can decide whether to eject or stay invested. Down the road there may be mergers, acquisitions and takeovers, allowing you to benefit further.
Bear in mind:
- Commodity stocks are cyclical. If basic demand suffers – perhaps from China or other emerging market economies – commodities usually suffer disproportionately compared to other asset classes
- Consider buying when no-one else wants them; then wait for a recovery
- A quarterly dividend is nice but it’s not the main reason to buy
5. The end of King Dollar?
Some predict the value of the US dollar will deteriorate long term. Central bank mismanagement will see the wider international monetary system collapse. Hyperinflation…a new Sino-Russian hegemony. Some theories are wilder than others.
- The global 2008 financial global crisis did pull ‘safe haven’ alternative assets into focus. Gold appreciated sharply between 2009 and 2013
- Yet the US dollar has continued to rise (at least as far as early 2017) while other countries deflate their own currencies to induce inflation and exports
- The US dollar remains the global reserve currency for the forseeable future, despite enormous US debt levels
6. Ownership has value
’Metal money’ is tangible. It doesn’t need feeding. It can’t be hacked. It’s awfully…analogue.
- If World War III kicks off and you crawl out of your mini-shelter post-apocalypse, your metal shares will likely have out-performed Sainsbury’s, easyJet and BT
- You may have a barter scenario on your hands: neighbours with pitchforks, a lack of fresh food and water. You can’t hack off a bar of gold for bread
- So, have silver coins around for smaller purchases. Coffee, blankets, freeze-dried food, ammo
Commodities players includes hedgers, arbitrageurs and other financial market players. Most are attempting to profit from pricing inefficiencies. There’s a lot of competition.
- Liquidity can look high but may close down rapidly
- The risks include market risk, margin and leverage to name three; small price and currency moves will make a big impact on a trading account
- Commodity valuations are easily misunderstood, especially when you’re starting out. Trade small and trade safe