Investing in Precious Metals Pros and Cons

Do you feel like your investment portfolio is missing something? It just might be precious metals. While they aren’t the most popular type of investment, precious metals can help you successfully diversify your existing portfolio.

Precious metals may not be ideal for everyone. Are they right for you? To find out, check out Benzinga’s rundown of investing in precious metals: pros and cons.

What is Precious Metals Investing?

Precious metals are valuable because they’re so rare. For millennia, gold, silver and similar metals have been prized as jewelry materials and traded as currency. The oldest known metal currency, the Mesopotamian shekel, dates as far back as 650 B.C.

In more recent times, precious metals have taken on a new kind of value: they make great investments. You can buy and sell gold, silver, platinum and palladium, just as you would stocks and bonds.

There are two main ways you can invest in precious metals:

• Buying physical precious metals: You can purchase gold and other precious metals (usually in the form of coins or bars) from bullion dealers.
• Buying precious metal investment products: These products include exchange-traded funds (ETFs), mutual funds and mining company stocks.

In any case, you can make money by waiting for the metal to go up in value and then selling it. Unlike some other investment types, precious metals don’t generate passive income; instead, the aim is for them to grow in value through asset appreciation.

Of course, that’s just a quick overview. Here are some detailed investing in precious metals pros and cons.

Pros of Investing in Precious Metals

Investing in precious metals offers plenty of advantages.

Diversification for Your Investment Portfolio

Research has indicated that investing in precious metals can give you a kind of safe-haven asset during market downturns. Precious metals outperformed the stock and bond markets in 2022.

Any financial adviser will tell you that the most durable investment portfolios are diverse. Precious metal investments give you variety, and that’s a good thing.

Hedge Against Inflation

You may see investment experts promote gold investment when inflation looms. That’s because precious metals tend to retain their purchasing power much longer than paper money does. If you don’t want the purchasing power of your existing funds to shrink, it’s worth investing at least some of them in precious metals like gold or silver.

Store of Value over Time

One thing that draws investors to precious metals is their steady value. Cryptocurrency and paper currency can fluctuate widely over time, but gold, silver and other precious metals tend to maintain their value. Sometimes, the value of precious metals goes up faster than inflation.

Low Correlation with Other Asset Classes

When two asset classes are correlated, the performance of one influences the performance of another. However, precious metals don’t seem strongly connected to any given asset class. 

That’s a good thing. It means that if your other investments stop performing well, your precious metal investments are less likely to go down with them.

Cons of Investing in Precious Metals

No type of investment is without its downsides. Here are some potential cons of investing in precious metals.

High Upfront Costs for Purchasing Metals

Whether you’re purchasing gold bullion or investing in a gold or platinum ETF, you need to spend a good bit of cash to invest in a meaningful quantity of precious metals. The good news is that after that investment, the precious metals are poised to hold their value well.

No Passive Income Generated

Unlike some assets, precious metals don’t generate passive income. You only make a profit if you sell after the metal has had time to appreciate. If you’re looking for an investment type with regular payouts like an annuity, precious metals investing isn’t it.

Liquidity Issues When Selling

You can liquidate precious metal ETFs faster than physical precious metals. However, you might still run into problems when selling shares. Precious metals aren’t as popular as stocks or bonds, so they can often be harder to sell quickly.

No Guarantee of Price Appreciation

Virtually nothing is for certain in the investment world. Precious metals have risen in value over time, but appreciation is not a given.

Factors to Consider Before Investing in Precious Metals

Smart investors think through every investment decision. Here are some things to consider.

Current Market Conditions

Every investor’s decisions are (or should be) informed by the state of the market. A well-timed investment can be infinitely more successful than a poorly timed one.

So what are the best conditions for purchasing precious metals? Most experts suggest buying right before a recession.

Precious metals tend to hold their purchasing power even as the purchasing power of the dollar plummets. As a recession takes hold, more investors focus on precious metals, driving up their value and your potential profits, if you choose to sell.

Investment Time Horizon

An investment time horizon is the period of time you plan to hold an investment before you sell it. Usually, people who purchase precious metals have a relatively long investment time horizon — they plan to hold the investment as a hedge against future inflation.

If you’re investing with a shorter time horizon in mind, precious metals might not be ideal. For instance, if you’re investing now in hopes of using your returns to pay college tuition in five years, it’s best to look into options with shorter time horizons.

Risk Tolerance Level

Before making any sort of investment, you need to take your own personal risk tolerance into account. 

Are you comfortable with the possibility of your investment appreciating slowly or not appreciating at all? Are you willing to invest in something that won’t generate passive income but might give you a handsome profit when you decide to liquidate?

Size of the Investment

If you’re ready to buy precious metals, you need to decide how much you want to invest. If you’re still somewhat hesitant, you can start with a smaller investment and add to it later. At this stage, it also can be helpful to seek out guidance from a financial adviser.

Invest in Precious Metals with These Top Brokerages

The right precious metals investment starts with the right broker. If you invest through a disreputable source, you risk compromising your return on investment (ROI). Here are some proven brokerages to consider.

Add Some Sparkle to Your Investment Portfolio with Precious Metals

Only you can decide whether investing in precious metals is right for your financial future. But if you want an investment that can hold its own against inflation and maintain value over time, precious metals might be the answer.

Frequently Asked Questions