Physical properties of precious metals make them ideal raw materials for many industrial purposes, including automobiles and electronics, jewellery and dental equipment. Occupying an important place in battery and nuclear energy production, precious metals are also widely used as an investment.
There are three major questions often asked by beginners:
Why should I invest in precious metals?
What are the best precious metals to invest in?
How to start investing in precious metals?
So let us find out how to trade precious metals and what makes them such widely speculated commodities in our precious metal guide.
Why should you invest in precious metals
Precious metal traders consider commodities as a form of money, which is capable to hold its value better and longer than paper money. Despite their investment popularity, there are many sceptics who argue that precious metals have little utility except their industrial uses.
Still, precious metals such as gold, silver and platinum group metals (PMGs) keep their leading positions among the top-traded commodities, alongside energy commodities such as crude oil and natural gas.
Top 4 reasons of buying precious metals as an investment
People invest in commodities for a number of reasons. Here’s why people invest in precious metals and use them as popular trading instruments:
Hedging against inflation
Precious metals are often used to diversify and hedge an investment portfolio. Precious metal commodities are relatively stable and negatively correlated to other investments like stocks.
Hiding from financial instability
In times of political instability, as in the case of Brexit uncertainty or extreme unrest in Venezuela and Zimbabwe, people gravitate towards precious metals, such as gold or silver as a stable asset to protect their wealth.
Speculating on prices
Precious metal commodities are unique in terms of volatility. Drastic price fluctuations make them extremely popular to CFD traders. They can try to profit from wild commodity price swings, regardless of the price direction.
Diversifying trading portfolios
If you have a stock-only portfolio, precious metal commodities can serve as an effective instrument to lower its risk and volatility as commodities have almost no correlation with other trading assets.
Long-term trends to boost precious metal trading
No matter what, precious metals always keep their place in a savvy trader’s portfolio. There are several long-term trends that have a potential to generate investment opportunities in precious metals for the next two decades. They include:
- Demand from China
As with other commodities, the Chinese market plays a crucial role in forming prices for precious and base metals. Massive industrialisation and urbanisation requires the construction of robust infrastructure, for which all kinds of metals will experience a strong demand.
- Technological innovation
Recently, the mining industry has been facing serious financial challenges. Many mining companies cannot develop, extract and process precious metals at a cost that will bring them profit. The high cost of mining as opposed to depressed prices for some metals pose a threat for mining businesses. Investment in technology is an ultimate solution for this problem. Electric vehicles, automated excavation equipment, and sensor-based mineral sorting can transform the industry to become more attractive for traders.
- Environmental regulation
The environmental footprint from the mining industry is a matter of primary global concern. Taking this threat seriously, China, for example, shut down over half of the zinc and lead mines in parts of the country. The mining industry is exploring new, cleaner ways of conducting its business with renewable sources of energy, less invasive exploration technologies and water reclamation efforts. Investors can also profit from investing in these trends.
- BRICS countries
The five BRICS participants (Brazil, Russia, India, China and South Africa) are considered the leading players in the mining and metals industry. The total value of mining assets in these countries exceeds $1 trillion. Recently, the Chinese state-owned gold mining company founded an investment fund with a Russian-controlled investment entity. Such a kind of cooperation can empower many businesses, operating on the metals market and influence precious metals pricing.
Best precious metals to invest in
To cut a long story short, the list of top 5 most-traded precious metals include: gold, silver, platinum, palladium and copper.
Top precious metals’ producing countries
|Commodity||Contract size||Futures Exchange||Top producing country||Thousand Metric tons|
|#1 Gold||100 t oz||COMEX||China||455|
|#2 Silver||5,000 t oz||COMEX||Mexico||5,600|
|#3 Platinum||50 t oz||NYMEX||South Africa||120,000|
|#4 Palladium||100 t oz||NYMEX||Russia||82,000|
|#5 Copper||25,000 pounds||CME Globex||Chile||5,500|
Gold is the number one precious metal used by traders and investors as an investment vehicle. Although it is widely applied for several industrial purposes, including electronics, computers, dentistry, aerospace and glassmaking, gold keeps its leading place on the commodities market.
Historically, the gold price reached its all-time high of $2,076 in February 1980. Since then it has fallen and risen many times, which brought many investment opportunities to gold traders. The latest gold price, as of November 25, 2019, was $1,460 (£1,134; €1,319).
Trade Gold Spot CFD
Also used in electronics, energy, medicine and jewellery, silver is another popular traders’ choice when it comes to commodities trading. For centuries people used it as a popular investment and a store of value.
Considered one of the world’s oldest currencies, silver has always been rather volatile. Industrial and investment demand can significantly drive the silver price in either direction. Experiencing a strong positive correlation with gold, silver tends to follow gold’s direction.
Major component of the platinum group metals, also known as PGMs, platinum has two major use cases: catalytic converters for cars and jewellery. One of the world’s most expensive commodities, platinum is even more rare than gold.
Platinum is also subject to strong industrial and investment demand, which affects its price. Supply of platinum from South Africa, which accounts for a large percentage of the precious metal’s production, also has a strong impact on its price.
Another member of PGMs, palladium is an extremely rare precious metal also used to produce catalytic converters, dental equipment and electronic parts. With the advent of modern emission standards for the automobile industry, palladium has become not only a luxury metal, but an essential commodity, which prevents air pollution.
The same as its peer precious metals, palladium has always been volatile, which makes it risky and attractive for profit-seeking investors.
Relatively inexpensive if compared to other precious metals, copper is extremely important for production of motors, generators, wiring and different machinery.
Copper’s importance for various industrial purposes makes it a popular barometer of the overall world’s economy. Included in the list of top 5 most-traded commodities, copper also experiences high volatility.
Investing in precious metals for beginners and professionals
- Are precious metals a good investment?
- Are they risky?
Trading precious metal commodities requires careful consideration. Occasionally, metals’ markets are extremely volatile and there are no clear fundamental analysis metrics, such as price/earnings ratios and interest rates. However, thinking of precious metals as an investment, you have a wide choice of available instruments, including futures, contracts for difference or commodity producing company’s stock.
Moreover, contracts for difference is a leveraged product. For example, a 10 per cent margin, provided by your CFD broker, means that you have to deposit only 10 per cent of the total value of your trade and the rest is covered by your CFD provider.
Contracts for difference can be the ultimate choice for traders who actually do not want to buy and physically own precious metals. Besides fixing the storage issue, CFDs allow traders to profit from either commodity’s price direction. No matter whether the precious metal’s price goes south or north, you can try to profit from any price direction.