The Value of Precious Metals Investment

Precious metals are a type of commodity investment, and include gold, silver, platinum, and palladium. Many invest in precious metals to diversify their investment portfolio and secure against currency instability, inflation, and economic recessions. Investors use trusted sources to purchase and invest in precious metals.

Gold has long been used as a hedge against currency inflation. While platinum and palladium are relative newcomers to the precious metals markets, the underlying investment philosophy remains the same. Investment in precious metals means investing in a hard commodity that is not as dependent on the value of currencies or the state of the economy.

Investment in precious metals can take many forms, including various types of stocks, such as futures, options, exchange traded funds, and derivatives. Since precious metals are actually physical commodities, they can also be physically purchased and stored. For many individual investors, physical investment in bullion – coins and bars – is the investment method of choice. High-volume investments of institutions and corporations, however, usually involve a form of stock and take place through market exchanges, with the standard buy-low-sell-high methodology, where the trader hopes to earn revenue from the volatility of the metal’s market value.

The fluctuating prices of gold, platinum, and the other precious metals go hand in hand with the dynamics of global economy. On the one hand, precious metals’ market value is more volatile than many other types of investment, but unlike currencies of governments or stocks from companies — which can go bust – precious metals will always have some value in the world economy and will never run the risk of crashing forever.

The precious metals silver, platinum, and palladium are valued for their industrial uses, typically in electronics. Their value depends more heavily on the state of the industries that utilize those metals, such as the technology industry. The demand for gold, the oldest and most influential precious metal, is often dictated as much sentiment as by external market factors, and a look at the gold market can provide a good model for what to expect from precious metals investments.

A Look at the Demand for Gold

A picture of the gold industry’s supply chain will illustrate how complex, volatile, and confusing the precious metals market can be. At one point, Ben Bernanke, Chairman of the Federal Reserve, said, “Nobody understands gold prices, and I don’t pretend to understand them either.” Understanding the interplay between gold’s supply chain and the forces of market demand, however, can help give a better picture of the variety of factors that can influence gold’s market value.

The supply chain for a precious metal extends from a mining operation to the end user. For investment purposes, gold’s supply chain begins with gold ore and ends with the physical commodity, in this case, bullion in the form of coins and bars.

The mining industry includes companies which perform exploration for mines and mining companies which produce gold from that mine. Investment occurs anywhere along the supply chain, beginning with the exploration companies that look for new mines. The mining end of the chain can certainly be examined in more detail, but this is the overall picture. Since the mining industry forms the source end of the supply chain, it is clear that the state of the mining industry has a direct impact on the gold supply.

An example of gold’s volatility can be seen in recent events from this summer. Late June into early July saw the gold prices plummet to almost $1,200, a 3-year low. But in late July, physical demand outpaced the supply from over-leveraged bullion banks and market trading sent the price skyrocketing above $1,300. Some hoped the price hike would continue, but the rally dissipated quickly. After a sluggish year with record lows, this sudden jump had many investors wondering what their next move should be.

Though the futures market has been the driving force behind prices in the gold and silver markets for the past ten years, the long-term carry trades held by institutions are opening up and buyers around the world are stockpiling gold. The typical knee-jerk reaction to plummeting commodity values is to offload and exit, and some recommendations have been made to dump bullion based on its low prices and the notion that it won’t have any value in the future.

Despite the recommendations of some investment analysts to abandon gold, these “strategic” exits from the gold market are not being followed by individual investors, corporations, or governments. India, the largest importer of gold in the world, has unsuccessfully tried regulating and pleading with its banks and its people to stop hoarding gold. The country’s obsession with gold, however, has more due to with cultural and historical attachments than a sound investment strategy. China is the second largest gold consumer in the world. If they keep up their unflagging pace of consumption, they will consume 35% of the total precious metal supply globally.

Gold’s low prices may be what are pushing individual investors in the United States to invest in bullion. A week before July was over, the United States Mint had already sold 20% more gold coins than it had in July of the previous year. Clearly, gold is one of the most highly valued and in-demand commodities worldwide, regardless of what analysts may think.

After gold’s multi-year slide and bumpy rally in July, some have started claiming the bottom has been hit, and the downward trend is over. This volatility is typical of precious metals investing, and depends on a number of factors, including global demand, and the not-so-stable realm of precious metals production.

A Look at Gold Supply

While global demand for gold has clearly not slowed during the gold slump of the past few years, a sluggish mining industry will likely slow down the production of new gold. Investment in new mining projects – the supply end of the supply chain – has slowed to a crawl, and the mining industry will likely not recover for at least a couple of years.

Andy Jackson of the Sprott Group feels that mining investors should be aggressive during downturns, rather than waiting for projects to reprice higher in the future. Since major mining firms have cut spending and investing in exploration, now is the time to bid cheaply on exploration projects that may yield a new mine. Unfortunately, he says, that is not happening. Investors and major mining firms alike are hunkering down, and will probably continue to do so until the mining slump is over.

Rick Rule of the Sprott Group has stated that a downturn in mining is positive in the long run, to flush out poor management. Ken Cunningham, CEO of Mirando Gold Corp, agrees, stating that many exploration companies are no longer exploring, but simply maintaining their salaries until the industry recovers and they can obtain more funding. This, he says, is questionable activity, and purging these companies “should be positive for the sector.” Rule has had some bleak things to say about the mining industry’s management, so investment in the mining industry may not be the wisest choice. He asked, essentially, whom do you have more faith in: the miners, or the metal?

Precious Metals: Short Tern Versus Long Term

For many, the underlying philosophy behind precious metals investment is that they will always be valued. Precious metals offer many avenues for investment, including everything from high stakes trading floors to investments in mining projects to gold coins kept in a safety deposit box. Investing in precious metals means investing in a hard commodity that has sentimental value, such as gold and silver, or industrial value, such as silver, platinum, and palladium. Each will be more or less valuable in different circumstances, unlike paper currency, which is only as valuable as the governments which issue it. Gold, for instance, will always be in demand. As such, its value may fluctuate up and down over the years, relative to a given currency, but it can protect against that same currency’s inflation and act as a security blanket during economic downturns.

The Value of Precious Metals Investment
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