Since the dawn of history, people have invested in precious metals as a way of saving resources for the future. In the modern financial markets, these metals continue to play a central role in how people invest their money.
While metals like gold no longer act as backing for world currencies as they did in the past, they still serve as “hedges” and “safe havens” for investors. Additionally, many people include these metals as an essential part of their long-term portfolio strategy.
Four precious metals
The four precious metals of the investing world are gold, silver, platinum and palladium.
• Gold — One of the oldest metals mentioned in ancient texts, gold has long associations with wealth and many cultures also thought of it as a sacred metal. Jewelry-makers use gold profusely and, at one time, the metal acted as a standard for valuing world currencies. Gold is a heavy metal and it is malleable and ductile. The metal is resistant to oxidation and rusting making it a favorite for high quality jewelry and for plating of many types of high value objects.
• Silver – Like gold, the ancients placed high value on the metal silver. In addition to its worth as a metal for jewelry-making, silver is also a favored metal for utensil and flatware manufacture. The metal also has significant industrial uses due to its unique properties in conducting electricity. Like gold, silver served as a currency over many ages of human history.
• Platinum – The metal is very rare and has a number of applications in which its use is similar to that of silver. This lustrous white noble metal is the most valuable of all the four precious metals due to its rarity.
• Palladium – A metal that resembles platinum in appearance and also in having exceptional catalytic properties. Among the industrial uses of palladium include utilization as a catalyst in organic chemistry and in car catalytic converters.
Why people invest in precious metals
One of the important features of precious metals is that they have an inherent value due to their practical usages and rarity. Unlike modern fiat currencies, which have no inherent value, the belief is that precious metals can only sink so low in price over extended periods.
Because of their general rare occurrence and the demand for the metals for practical uses, they should always maintain a certain base value even in the toughest economic times. In comparison, the value of currencies depends entirely on supply and demand.
Any country can print as much of their currency as they wish but they risk running into inflationary problems if they do. However, it is much more difficult to produce precious metals like gold, silver, platinum and palladium.
The only way to increase worldwide stocks of these metals is through mining or discovery of hidden hoards. Because of the nature of precious metals, they are seen generally as more stable than most other types of investments.
Precious metals as safe havens
One type of thinking that prevails among investors is that one should buy these metals during periods of economic turbulence. Because of their inherent value, the belief is that precious metals cannot sink below a certain level.
What happens actually is that as investors flock to these metals during financial shocks, their value actually rises or even skyrockets. History provides many examples of this type of phenomenon.
The most recent example was after the financial crisis that started in 2007. Gold, silver and the other precious metals rose rapidly as all other investments plummeted. In particular, history shows us that precious metals do very well during times of high inflation, runaway debt and falling real estate prices.
Part of this is simply due to the mentality of many investors who know of the traditional importance of these investments during periods of economic instability.
In addition to flocking to precious metals during tough economic times, many investors look at including them in their long-term investment portfolios. They tend to act as a hedge in case other investments go in the wrong direction.
History shows us that in times of political chaos and war, sometimes the only things of value that one can carry with you are items made of precious metals. For this reason, there is always a strong impulse to include at least some of these metals in an investment portfolio.
Traditionally, precious metal investors concentrated more on owning bullion or coins as available from sellers , however, more recently we also see a trend toward precious metal stocks and similar investments.
Trends in precious metals
While the precious metals market has moved up and down in recent times, many analysts remain optimistic over mid to long-term trends.
Investors may be riding the “bull” stock market, but experts will point to the actions of the big players including the central banks of the major world economies. Central banks in general are increasing their gold stocks significantly despite the recent jumps in stocks and bonds.
If we look at China, for example, despite having huge U.S. dollar reserves, it is continuing to buy gold at a high rate. The general feeling in the country is that it is necessary to diversify out of currencies since there are signs of possible future instability. Many other central banks share the same sentiment.
Many analysts believe a currency war is likely in the mid-term to long-term range. Additionally, nations like the United States may still print money in the future. The Federal Reserve is embarking on another round of quantitative easing known as “QE3.”
Analysts believe that this could set off a new round of inflation that will, in turn, cause precious metal prices to rise.
How much gold are central banks buying?
During 2012, central banks across the world ignored the stock market and increased their gold reserves. According to the World Gold Council (WGC), Turkey led all nations by adding more than 160 metric tons of gold to its central bank holdings.
Russia followed with nearly 80 metric tons and Brazil came in third with nearly 40 metric tons added to its central bank reserves.
In addition to buying gold, a number of countries are also repatriating gold stocks held in other countries. The idea here is that it is safer to have gold in country if economic turmoil should break out. Germany, for example, is bringing home all its gold stocks in France and most of its holdings in the U.S.
Is a stock market bubble forming?
Many experts from around the world are wondering whether there is a bubble forming in the stocks and bonds markets.
The recent rise in the Dow, for example, shows a euphoria that is not justifiable when one looks at the economic and corporate data. While the U.S. is in recovery, progress is very slow and there are many signs pointing at the possibility of a double dip recession.
Indeed with the situation surrounding the federal budget still very much up in the air, it is difficult to understand why investors would be rushing into stocks and bonds. What we do know, however, is that many insiders are actually selling at the moment.
According to a number of analysts, the high current market is attributable to swing trading and a tendency to follow the “herd.” Investors like the action on the market now and they are allowing themselves to think that this is a long-term trend.
However, the fact that insiders are cashing in may be an indication that they believe the bubble is nearing full capacity. Over the last two years, insider selling increased the number of available open market shares by nearly two million.
If the stock market does witness a sharp correction, we should see a corresponding rush toward precious metals. History shows up repeatedly that when investors flee stocks and bonds, they traditionally turn toward gold, silver and other metals.
In the U.S., the current negotiations over budget cuts will have an impact on the direction of the U.S. economy. Both political parties see the need for spending cuts that will have an immediate impact on job and economic growth.
For example, the defense industry is already preparing for these cuts by downscaling future operations. What we will see is future job cuts in both public and private sector unless Democrats and Republicans can agree on a jobs bill.
Currently, there is strong opposition to any type of economic stimulus or jobs assistance from certain sectors and this could weigh down heavily on economic growth. The nation will not only see cuts at the federal level but state and local governments will also need to cut back their workforces.
If the U.S. economy does stall or start moving downward again, investors will like turn to precious metals just as they did when things starting falling in 2007-2008. A particular danger is automatic sequestration that could occur this March. If that happens, across the board budget cuts occur automatically leading to sharp decreases in government spending.