What Are Precious Metals?

Precious metals have been valued for centuries, not only for their beauty but also for their role as a stable investment. Gold, silver, platinum, and palladium are the most well-known, each offering unique benefits to investors looking to diversify their portfolios. But what exactly makes these metals "precious," and why do they hold such enduring value? In this article, we’ll explore the key characteristics of precious metals, their uses, and how they can fit into a long-term investment strategy.

Definition and Classification of Precious Metals

A precious metal is a rare metal that occurs naturally. Silver and gold are the most popular — the other six are part of the platinum group of platinum and similar metals.

Common Types of Precious Metals

There are eight main kinds of precious metals traditionally used as investment assets.

• Gold: Gold is one of the most well-known and sought-after precious metals, prized for its rarity, durability, and timeless appeal. As a chemical element, it is highly resistant to corrosion and tarnishing, which has made it a symbol of wealth and power throughout history. Its unique properties, such as malleability and conductivity, also make it valuable in various industries, from electronics to jewelry. In addition to its practical uses, gold holds a strong position as a safe-haven asset, often serving as a hedge against inflation and economic instability, making it a popular choice for investors.
• Silver: Silver is most often used to make jewelry, conductors and other electronic components. It’s one of the most popular precious metals to invest in, thought it historically hasn’t been as steady in terms of its performance over time but it’s much more volatile than gold.
• Platinum: Platinum can sometimes be used for expensive jewelry, but it’s also an important component in catalytic converters for cars, some types of medications, LCDs and spark plugs.
• Palladium: This metal is used a lot like platinum. However, palladium investments usually include other metals because it’s so rare.
• Rhodium: Rhodium is mostly used in the aerospace and chemical industries. It’s extremely rare and expensive, so it hasn’t always been viewed as the most stable investment option. But it's worth a look for investors who want to potentially diversify their portfolios with something a little different (so long as they can afford it).
• Ruthenium: This one is much rarer than gold, silver, platinum and palladium. It can be used to coat other metals to give them extra shine and protect them from scratches and corrosion damage. But like many platinum-group metals, it’s mostly used in the automotive industry to make catalytic converters.

Factors Influencing Rarity and Value of Precious Metals

What exactly makes precious metals rare and appreciated by consumers and industry alike? There are several factors, including the following.

Geological Conditions

Metals — and especially rare metals — aren’t available everywhere in the world. Depending on their location, only certain mining companies may be able to access them. If only a few mining companies can access a type of precious metal, they can control the price.

Mining and Extraction Process

Sometimes, mines produce more or less of a given type of precious metal. If a mine is less productive than normal, there might be a supply bottleneck. In this scenario, prices may increase. Likewise, if mines produce more of a metal, prices may drop for a time.

The complexity of mining and extraction also can shape the value of a metal. For instance, if the process of obtaining and purifying it is lengthy or difficult or requires specialized equipment, the metal might be more expensive.

Relationship with Global Economy and Market Demand

What are precious metals worth? The answer depends in part on how in demand they are.

For example, platinum and similar metals are an important part of catalytic converters. During the COVID-19 pandemic, the manufacturing of cars dropped off considerably from a combination of a worldwide slowdown in the industry and a lack of raw materials. There was less demand for metals in the platinum group, so prices fell. We can’t predict what will happen in the future with precious metals prices — As COVID-19 showed us, anything is possible. That’s why it’s so important to do your due diligence before investing and not play with money you can’t afford to lose. Precious metals can dip in value just like any other asset class.

Role of Precious Metals as an Historically Steady Asset Class

Steady assets have typically maintained a certain level of consistency during inflation or economic turmoil — sometimes, in fact, their value increases.

Understandably, smart investors have diversified their capital during market downturns in ways that add a layer to correlated assets. As a result, metals that have traditionally held steady value tend to be popular choices.

Gold is a great example. Of all the precious metals, it’s historically been one of the best hedges against inflation and other turbulent economic times, even though its practical uses have become more limited over the centuries. For this reason, it’s arguably been the top choice for investors interested in diversifying with precious metals.

Investing in Precious Metals

These investments can be a great way to round out and add diversity your portfolio. Here are some traditional aspects of investing in precious metals:

• Usually solid long-term investments
• Can buttress your correlated assets during inflation
• Aren’t generally tied to other asset classes, so they have performed steadily even when others take swings
• In demand due to rarity

You shouldn’t invest everything in precious metals, just as you shouldn’t sink all your resources into any single investment type. The smartest investors understand that only a portion of their savings should be held in a precious metals IRA. And you should always speak with an advisor before you go down that route, as it may not be the best decision for your particular savings plan. Nonetheless, these natural materials can play an important role in a balanced investment strategy.

Risks of Investing in Precious Metals

No investment type is without risks. Here are some potential downsides to investing in precious metals.

• Metals market can be unstable
• May have high capital gains taxes
• No guarantee of future performance from past performance
• Potential for geopolitical problems

Comparing risks and benefits is an essential part of making sound investment choices. If you’re newer to the investment world, an experienced financial adviser can help you weigh the pros and cons and decide whether a given investment is right for you.

How to Begin Investing in Precious Metals

If you want to ensure a smooth procedure, you’ll need to take a few things into account.

Evaluate Your Risk Tolerance

Take a look at what risks you’re willing to take. All precious metals have different risk profiles. Make sure you investigate each one before choosing to invest in it.

Create Clear Investing Goals

If you don’t know what you want to achieve, it will be hard to come up with a good investment strategy.

Talking to an investment adviser can help you develop clear goals. Once those goals are set, you’ll be able to decide what types of precious metal investments you want to pursue.

Decide How You Want to Invest

There are many different ways to invest in precious metals. One option is to actually buy physical metal, usually in the form of bars or bullion coins. Exchange-traded funds (ETFs) can make investments as well. Futures are riskier, and they should not invest in them without speaking to a trusted advisor first. Some investors also choose to invest in mining stocks.

Decide What You Want to Invest In

Once you have set goals and know your risk tolerance after speaking with a trusted advisor, you can choose one or more metals to invest in. Popular precious metals like gold and silver usually offer the most options.

Where to Invest in Precious Metals

Precious Metals: A Shiny New Addition to Your Diverse Portfolio?

Precious metals have been a great choice for smart investors looking for an alternative investment to further diversify their portfolios. Best of all, there are several precious metals out there, each with their own risk profile, so interested investors have the opportunity to educate themselves on several different options.

Frequently Asked Questions