Investors typically view precious metals as a defensive asset. By purchasing gold and silver, they seek to hedge against a fall in the value of stock market instruments, as well as the national currency. options for investing in precious metals - from direct purchase of bullion to alternative ones - purchase of securities of mining enterprises.
From this article you will learn:
- Features of investing in precious metals
- Pros and cons of investing in precious metals
- What kind of profitability should you expect?
- How to diversify a “metal” portfolio?
- Investment options in precious metals
- Alternative ways to invest in metals
Features of investing in precious metals
- Gold is always in price, especially physical gold. Demand for it remains at all times, so it can be confidently called a liquid asset. Bullions made of precious metals can always be sold quickly and profitably. Moreover, during times of crisis, governments and large investment funds look for salvation in gold and begin to actively buy it - quotations of precious metals are rising. Over the past 10 years, gold has risen in price more than 4 times. Considering that it is traded on world markets in dollars, when the ruble weakens, the investor’s profitability increases even more.
Gold price growth chart from 2000 to 2021 - Silver is more volatile due to its lower price and wider use compared to gold. It reacts quite sharply to news, and is more susceptible to outside influences and “storms” in the markets. Therefore, prices for silver rise faster, but also fall faster than for gold.
- If you buy bullion silver, you will have to pay attention to the costs of its maintenance - the metal darkens over the years.
- Platinum and palladium prices mainly depend on industrial demand. Both of these precious metals are used in the automotive industry, computers and gadgets. For example, in 2021, due to the active growth of the Tesla company, which produces electric cars, the engines of which use a large amount of palladium, quotes for this metal increased by 50%.
All these points should be taken into account when planning your investments in precious metals.
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Pros and cons of investing in precious metals
The main advantages of investing in precious metals are:
- high liquidity – both bullion and investment coins are quite easy to sell and buy;
- the price of metals rises during crises, which protects against losses on other “fronts”;
- the price of gold is rising in dollars, which makes ruble investments even more profitable;
- low entry threshold - literally 1000 rubles are enough for investment;
- you can diversify within a “metal” portfolio;
- There are different ways to invest in precious metals - buy bars, investment coins, shares of mining companies, or open impersonal metal accounts.
But it is necessary to note the disadvantages of investing in precious metals:
- gold itself does not generate income, like, say, a deposit or bonds;
- during periods of stability, prices for precious metals fall or freeze;
- not all assets are liquid - for example, assets on compulsory medical insurance can only be sold in the bank where they were purchased;
- bars and coins need to be stored somewhere and taken care of (for example, silver quickly tarnishes and its price drops), and this is an additional expense;
- When selling bullion, you will have to pay not only personal income tax, but also VAT in the amount of 18%.
In short, without proper experience and accurate calculations, investments in precious metals can bring losses instead of income.
What kind of profitability should you expect?
As mentioned above, gold has more than quadrupled over the past 10 years. However, its growth is largely due to the fall of the ruble against the dollar, and not just the increase in the value of the asset. If the ruble strengthens, the growth in the value of gold will slow down.
However, in general, it is not possible to calculate how much you can earn from metal. Prices for gold and silver are formed due to various factors independent of each other.
Only one thing can be said for sure: if markets prepare for a global crisis, then the price of protective assets, including precious metals and American Treasuries, will rise.
Over the past decade, gold has grown by an average of 4% per year, silver by 6%, and palladium and platinum by 10%.
Palladium price chart from 2003 to 2021
Precious metals stored by themselves do not generate income. The investor can make money only if the price of the asset increases. This also needs to be taken into account.
History of gold trading.
Gold is one of the most traded commodities in the world. As we discuss below, opinions on gold range from very negative to very positive. One thing that is not open to opinion is that gold is a volatile commodity and is not for novice traders. Gold is considered the first metal used by humans, tens of thousands of years before the Neolithic Revolution.
We already mined it more than 3,000 years ago. And 2500 years ago we used it for currency. During much of this time, gold (and other commodities) was used as the basis for most currencies. This changed after World War I and after the Great Depression, when countries switched from such commodity currencies to fiat currencies.
Despite this, gold is still used as a store of value. It is sold more widely than ever, in many different forms.
How to properly diversify a “metal” portfolio?
Experts advise that you allocate no more than 20% of your total assets to precious metals in your portfolio. For example, you might have 40% stocks, 40% bonds, and 20% precious metals. This is necessary to reduce risks and not depend on only one type of asset in terms of profitability.
Moreover, it is necessary to diversify your “metal” portfolio internally, since prices for different types of precious metals move independently of each other. Proper diversification will make you more likely to make money.
Experts recommend the following ratio of investments in precious metals:
- 60% – gold;
- 20% each - silver, platinum or palladium.
It is recommended to purchase when the asset price decreases. That is, it is not necessary to form a portfolio immediately in an unchanged form - it is enough to make purchases as funds become available. The main thing is to achieve the established proportion and then maintain it. If the cost of one precious metal increases excessively, a rebalancing must be done, i.e. sell an asset that has become more expensive and use this money to buy one that has fallen in price.
Investment options in precious metals
Ingots
The most obvious and simple way to invest in precious metals is to buy physical gold or silver bullion. The cost of an ingot is determined by its weight and fineness. The higher the quality of the metal and the greater its weight, the more expensive the purchase will be - but you will also be able to sell it at the highest margin.
Precious metals in the form of bars are the most liquid asset. They can be purchased at any bank and then sold - to the same or to another bank, to other investors, to a jewelry workshop, etc. Physical gold can be used as collateral if necessary.
But this option has a significant drawback: the ingot must be stored in special conditions so that it is not damaged. If there is even the slightest scratch on it, the product will lose tens of percent in value. Most often, bullion is stored in safe deposit boxes, the rental of which can cost a pretty penny.
If you are planning to invest a large amount in precious metals , then bullion is an excellent option, since the benefits from the investment will exceed the costs. However, if you have small savings, it is better to choose other options.
Anonymized metal account
Compulsory health insurance is essentially paper gold. The investor actually invests money in virtual precious metals - the bank contains a record that a specific person owns a certain number of grams of gold or silver.
Compulsory medical insurance quotes change in accordance with the quotes of physical precious metals, so it makes sense to buy paper gold when the value of the main asset falls. An investor can make money by buying metals on an impersonal account at a lower price and selling them at a higher price.
Advantages of the method:
- metals do not need to be stored anywhere;
- no need to pay VAT on sales (only personal income tax);
- Compulsory medical insurance is free;
- the entry threshold is minimal - gold can be purchased from 0.1 grams, other metals - from 1 gram.
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Minuses:
- high spreads - some banks mark up 30-40%;
- no interest is accrued on the account balance;
- funds for compulsory medical insurance are not protected by the DIA, and therefore, in the event of a bank bankruptcy, they can only be returned during bankruptcy proceedings.
It should also be mentioned that gold can only be sold through compulsory medical insurance to the bank where the metal account was opened. You cannot open a compulsory medical insurance at Sberbank and sell it at VTB at a better price.
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Investment coins
Another option is to buy special investment coins. In Russia, most of them are sold at a nominal price through branches of Sberbank and VTB.
Numismatic experts advise giving preference to foreign coins. The most popular ones are American, British, Australian, Austrian, German, Chinese, for example, the Austrian Philharmoniker and the Australian Kangaroo are highly valued on the market.
Foreign coins have a higher gold content because the global coinage standard is the ounce. Russian coins contain only a quarter of an ounce of gold. Therefore, they are generally cheaper, but they can also be sold at a lower markup. The most popular domestic coins are the Soviet “Sower” and the Russian “St. George the Victorious”.
Silver bullion coins are also popular, especially among private collectors. They are an order of magnitude cheaper than gold (since silver is cheaper than gold) and are often purchased as a spectacular gift.
Jewelry
Buying some jewelry is another way for an unqualified investor to invest in gold. You can buy rings, chains, crosses and other jewelry. All this looks very nice and can even bring some benefits. If you look at it from the profit perspective, investing in jewelry is a worthless investment. Because it is unlikely that you will be able to resell your jewelry at a higher margin. I won’t say that many fakes are sold in Russia, so you need to buy jewelry only in large stores. In pawnshops everything is much cheaper, but no one there will give you a guarantee that it is even gold.
Alternative ways to invest in metals
If the options for investing in precious metals described above are not suitable for some reason, then you can use alternative methods:
- Acquisition of shares of gold mining companies . There are few of them in Russia - these are Buryatzoloto, Lenzoloto, Polyus, Seligdar and Polymetal. You can buy them through any broker with access to the Moscow Exchange. In addition to the increase in the value of the shares themselves, you can count on receiving dividends, the size of which will depend on the company’s revenue and, in general, on the prices of precious metals.
- Purchase of bonds of the same companies . At the moment, bonds are not publicly traded, but if they appear, they can be purchased to diversify investments. The main difference between debt securities and shares is that bonds have a guaranteed coupon income, which brings them closer to bank deposits in terms of the method of generating profit.
- Purchasing a gold mutual fund . Many management companies, including Sberbank Asset Management, VTB, Raiffeisen, Gazprombank, offer mutual funds that invest in securities of gold mining enterprises and directly in precious metals. In this case, asset management is carried out by professional market participants, and the investor receives income due to the growth in the value of the share.
- Purchasing ETF Gold . There is no opportunity to buy a “gold” ETF through Russian brokers yet. But you can find access to a foreign broker and buy shares of the desired fund through them.
- Options, futures, forex . Particularly risky ones can try to work in the derivatives market, purchasing options and futures on precious metals, or in Forex, making money on CFDs (contracts for difference), but this already relates more to the area of speculation than investment.
Thus, there are many ways to invest in precious metals. The simplest and most effective is buying bullion or investment coins. For novice investors, the option with paper gold is suitable - opening a compulsory medical insurance in a reliable bank. There are also alternatives - you can invest in “gold” mutual funds and ETFs or directly in shares of gold mining companies. Or even speculate on price differences within a day or between days.
Why Forex?
Until recently, stock trading was available only to large corporations, banks and professional financiers. Online trading platforms, among which Forex occupies a leading position, have opened up new opportunities for everyone who wants to make money on the stock exchange. People of different professions and social status were able to achieve success and material well-being, even without having large start-up capital.
Experienced traders and beginners have appreciated the benefits of working on Forex:
- the ability to trade 24 hours a day, 5 days a week;
- availability of a demo version that allows you to acquire the necessary skills without any risk and completely free of charge;
- leverage, ensuring profit with minimal investment of your own funds;
- Russian-language version of the interface, facilitating the work process.
It is worth keeping in mind that Forex trading involves certain risks. However, the possibility of failure is inherent in any investment activity. A balanced and thoughtful approach to work, the use of available risk minimization tools will allow the trader to receive a stable profit.
