How to Invest in Precious Metals: An Alternative Asset to Diversify Your Portfolio
When uncertainty lingers, it is common for investors to wonder about how they should secure their investment portfolios. Is it properly diversified? What assets can I invest in to ride out this wave? Now, more than any other time in our generation, it is worth asking these questions.
We saw the extraordinary collapse of the housing market in 2008 and many of us thought we were finally going to be able to get off the roller coaster. Housing rebounded, the economy normalized, and regulations were put in place to prevent disaster from taking its toll again.
However, as one disaster ends, another begins.
We currently face inflation like we haven’t seen in decades. Gas prices are surging, with the national average now above four dollars per gallon and rising. And the threat of World War III has markets reeling.
An Alternative Asset That Provides Stability
One asset class that brings investors back time and again is precious metals. When traditional assets are under threat of losing value from inflation (like they are today), precious metals offer a tried and true method for diversifying a portfolio.
Everyone is familiar with gold and silver, but other precious metals exist and can provide investment value. Other metal options include platinum, copper, aluminum, palladium, lead, rhodium, and zinc.
Multiple studies have confirmed the value of precious metals as a hedge against volatility in traditional equity markets. When currencies are perceived as unstable or inflation damages the real rate of return seen in equity markets, precious metals can provide portfolio stability.
Investing in this asset class is a proven way to diversify and protect.
Why Does Investing In Precious Metals Provide Value?
It is reasonable to ask questions about metals as an asset class. Why exactly are precious metals so “precious?” What gives them value? To answer these questions, you need to understand the utility of individual metals and how people generally perceive them.
Gold
Since the dawn of time, gold has held captive the hearts of men. From a perception standpoint, no metal is more valuable. Its price is determined almost exclusively by market activity and less by supply and demand. When those who have gold decide to sell, the price will drop. When they decide instead to buy, the price will rise.
In terms of utility, gold has many distinct properties which make it valuable. Gold is eternally durable, never suffering rust or corrosion. It is able to conduct heat and electricity and is extremely malleable. Gold is used in everything from jewelry to dentistry and has functioned as a form of currency since man first walked the earth.
Silver
Perception does play a role in the value of silver. However, its value will swing more with supply and demand because of its wider use in industrial applications. This metal is used in medical products, batteries, appliances, and microcircuits. Its ability to conduct electricity also allows it to be used in superconductor applications.
Platinum
Another well-known metal, platinum, is also a regularly traded precious metal. Due to its rarity, platinum has been known to collect higher prices than gold during times of stability.
Similar to silver, platinum has many industrial uses. It is used in jewelry, computing, as well as chemical refinement. Platinum’s greatest demand comes from the automotive industry. Car manufacturers use this metal in catalysts which reduce the harm caused by vehicle emissions.
Since the automotive industry drives a major portion of the platinum market, this metal’s value is often tied to vehicle production and sales numbers.
Investors should be aware platinum is perhaps the most volatile precious metal because of certain market and production factors.
Palladium
Perhaps a lesser-known precious metal, palladium has many of the same industrial uses as the others we’ve addressed. What sets it apart from some is its rarity and strength. Just like its sister metal, platinum, palladium sees strong demand from the automotive industry.
A How-To For Precious Metals Investing
There are numerous ways to invest in precious metals, either directly or indirectly. Investors need to consider whether they want to hold it in their hands or just in their portfolio.
Bullion
The first option for precious metal investing is to buy bullion. If you want to keep gold or silver on hand, you cannot. A third-party depository has to receive and store the bullion directly for your retirement account. You can NEVER take personal possession of the bullion owned in your retirement account. A couple of things to note about buying bullion, however:
Selling bullion can be more difficult, making bullion an illiquid option
Storing and securing precious metals can be difficult and expensive
If you buy precious metals in the form of bullion and hold for more than a year, you will be stuck paying the IRS a 28% capital gains tax on your profits
In the event of complete social and economic upheaval, bullion provides the surest bet you’ll have something of value to trade for food and shelter. If you think this sounds a bit dramatic or the logistics of holding bullion simply don’t appeal to you, there are other ways to invest in precious metals.
Exchange-Traded Funds (ETFs)
Exchange-traded funds (ETFs) are a very liquid method of investing in precious metals. This option will allow you to buy and sell with relative ease. However, you have no ownership of the actual metal in a fund.
Common Stocks and Mutual Funds
Investing in metal miners is also a possibility. The companies that mine and “produce” precious metals are often listed on traditional equity markets, allowing investors to buy shares.
Futures and Options
Offering liquidity and the huge boom or bust opportunities, these derivative products allow investors to bet big on precious metals. These investments offer the greatest potential profit and losses.
Certificates
Certificates are a more direct investment than a fund or stock. You get precious metals ownership without the difficulties of physically holding onto the metals themselves. Unlike bullion, however, if true disaster strikes, nobody will trade you anything for your fancy piece of paper.
Let Chicago Trust Administration Services Help You Invest In Precious Metals
A popular method for investing in precious metals is to do so through a self-directed IRA (SD-IRA). This provides investors the ability to take advantage of the tax benefits associated with IRA accounts.
At Chicago Trust Administration Services, we specialize in helping high-net-worth individuals navigate the complexities of self-directed IRAs. We are SD-IRA custodians who can help you make simple, fast, and IRS-compliant transactions as you invest and build your retirement portfolio.
To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.