Precious Metals Investing

Good returns come to long-term precious metals investors. As part of a properly diversified financial portfolio, precious metals hedge other assets against the ravages of inflation and protect purchasing power. In addition, precious metals investments–including gold, silver, platinum and palladium–protect investors and central banks from the devastating impact of financial crisis.

Future financial crisis is unlikely to remain contained to a single country or region.
Investors must anticipate the impact of rising interest rates and bond defaults. Sovereign governments and corporations around the world raised debt at an unprecedented rate from 1990 to present. According to the Bank for International Settlements, the global debt market expanded four times during this short period! As bond issuers raised money at cheaper rates, investors accepted lower coupon rates and, consequently, more risk.

Precious metals investing. Precious metals help investors around the world to retain and stabilize the value of financial assets. For this reason, all financial portfolios benefit from precious metals investing. Unlike get-rich-quick trading or speculation, investing in precious metals requires a strategic perspective. Buying precious metals for the long-term can include purchasing metals on dips to decrease average cost basis.

Investors deploy capital in precious metals to achieve capital gains. The most recent bull market in precious metals started in 2001. Precious metals didn’t rise in an unbroken straight line thereafter. During subsequent 12 to 18 month cycles, investors received opportunities to buy on pullbacks, called corrections, of 10 to 30 percent. Precious metals investors understand that volatility, demonstrated by frequent price corrections, is part of precious metals investing. Long-term success in precious metals investing requires the investor’s ability to maintain or decrease cost basis to maximize ultimate returns. When compared to other financial instruments’ performance, gold, silver, platinum and palladium handily outperformed stocks, bonds or certificates-of-deposit.

Owning tangible assets, like silver and gold, is actually a safer way to enjoy potential long-term appreciation of precious metals than other investment strategies, such as trading options on gold futures. Highly leveraged trading is high risk-high reward strategy. Traders can lose 100 percent of capital or, depending on how much leverage is used, more than 100 percent of capital invested! That’s why investors committed to long-term investment in gold, silver, bullion, platinum, palladium, coins and precious metals understand the importance of buy-and-hold strategy. This important capital preservation strategy distinguishes investors from traders.

Investment potential of platinum and palladium. Interest in the “two Ps” has increased as some listed financial vehicles–known as ‘exchanged-traded funds (ETFs)–included platinum and palladium mining companies. Precious metals mining stocks actually don’t always track the rise and fall of precious metals themselves. However, ETFs called attention to the high investment potential in precious metals other than silver or gold.

Investors buying hard assets like gold purchase platinum and palladium to diversify a precious metals portfolio. The inherent scarcity of these precious metals available on the market offers potential high long-term rewards. New mines for either metal don’t appear overnight. Mining platinum and palladium is an expensive, longer-term proposition. Central banks don’t focus on ownership of either metal, so there is no interference from larger buyers or sellers. (Alternatively, gold prices are subject to the buying and selling of governments and central banks.) High demand of both metals from Asia is an important reason to own platinum and palladium. The global auto industry also creates demand for these metals. Most investors choose to own platinum and palladium by purchasing bullion, ingots and bars to establish standard metal weight and content. Large dealers offer price performance information about platinum. Like other precious metals, platinum investors must be prepared for volatility and use correction periods to reduce average platinum cost basis.

Collectors also purchase platinum for its rarity. They may choose expensive watches, e.g. Vacheron Constantin, Rolex and Breitling, or platinum jewelry as a way to own this precious metal.

Inherent small supply, mining and extraction costs and global demand continue to add upward pressure to platinum prices. About half of the country’s platinum supply–only 130 metric tones–is consumed by manufacture of auto emissions control devices. Platinum production occurs as a byproduct of other mining activities (e.g. copper or nickel mines). Extracting platinum is expensive and tends to support the metal’s high value. Almost 80 percent of the world’s platinum originates from the Bushveld mine complex in South Africa. Other producers include the Choc√≥ department of Colombia; Ontario, Canada’s Sudbury Basin; and Russia’s Ural Mountains. A small amount of platinum originates in Montana’s Absaroka Mountains.

More than half of the world’s palladium is mined in Russia and occurs as a secondary product of mining copper. New annual supply is remarkably small: about 200 metric tons. Manufacturers of catalytic converters (responsible for consumption of about half of supplies), electronics, watch making, spark plugs, jewelry and dentistry use palladium.
Investors buy palladium bars, palladium Maple Leaf Coins, and commemorative palladium coins (e.g. items from Russia). Palladium bars and coins help investors to buy and sell a standardized weight and purity of this valuable precious metal.

Historical price performance comparison of palladium and platinum. Palladium prices have sometimes exceeded platinum prices (e.g. during 2000). Platinum and palladium price trends typically move in the same direction. In the early 2000s, palladium prices declined from over $1,000 per ounce (2001) to just $265 per ounce (2003). The importance of buying volatile precious metals on corrections is demonstrated by palladium’s recovery. By 2008, palladium rose to $590 per ounce. Thereafter, palladium prices continued to rise as more manufacturers substituted more expensive platinum with palladium. Weakening global supply with no new supply in sight supports the longer-term performance of both metals.

Precious metals bullion and numismatic coins. Upon immediate minting, silver, gold, palladium and platinum bullion coins accurately reflect precious metals’ market values. In other words, the coins possess little other value, e.g. ‘rare coin’ value. With time, some bullion coins gain investor or collector interest and become ‘collectible.’ Specific coin dates or other specifics guide investors to choose some mint dates over others. That is why some older bullion coins trade at premiums to precious metal content. This premium value represents a coin’s investment value.

Importantly, bullion coins offer potential liquidity to investors. Specifically collectible mint dates’ specimens aren’t so rare in number that widely varying prices for the coins exist. Owners of the coins can therefore find ‘the market’ for the coins. With time, investors identify advantageous buy-sell spreads and purchase attractive collectible bullion coins.

Creating a precious metals investment portfolio usually involves careful selection of readily liquid bullion and numismatic coins. Author-investor David L. Ganz reports that a $10,000 portfolio of gold coins selected in 1998 was comprised of 103 coins from various currency markets (54 countries). Each of the coins had an average value of just $85.73; none of the coins was exceptionally rare. The total precious metals weight of the portfolio was only 17 ounces (12 troy ounces of gold is the equivalent of a troy pound). Each gold coin averaged 0.16 troy ounces; gold prices per ounce averaged $303 in 1998: the ‘intrinsic’ melt value of the portfolio was just $5,100. Ganz paid an investment premium of slightly more than 100 percent. In 2011, the unrealized profit of the portfolio’s gold value only increased to $$27,776.43. Gold prices averaged $1,420 per ounce that year. The gold coin portfolio’s compounded annual report (for gold prices’ value only) is approximately 9.8 percent per year over 12 years. Average gold prices outperformed inflation (i.e. CPI) by 2.5 percent per year over 12 years. In comparison over the same period, the DJIA returned an annual 2.75 percent (1998 to 2011)!

How to own precious metals and collectible coins. The historical performance of precious metals is well established. Precious metals prices often ‘rest’ for years or decades before moving in response to inflationary environments or crisis conditions. Owning precious metals, e.g. gold, silver, palladium and platinum, is a conservative portfolio diversification strategy for investors concerned about inflation, rising interest rates, political or social disturbances. The wisdom of owning gold and other precious metals is as old as history itself.

Works Referenced:
“The Essential Guide to Investing in Precious Metals,” David L. Ganz: 2011.

Precious Metals Investing
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