6 Strategies to Invest in Precious Metals
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The price of gold is steadily rising in the midst of the pandemic. This is one of the key attractions of precious metals for investors. They are a certain value in times of market volatility and during a crisis. There are different methods to invest in precious metals, each has disadvantages and advantages. Choosing an investment strategy often boils down to your personal goals, the available capital, and your current or projected needs. Many prefer buying physical metals in the shape of bullion bars, coins. While others opt for financial products such as gold exchange-traded funds (ETFs). There is no right or wrong. That’s why this article goes over the pros and cons of the 6 strategies to invest in precious metals most used by investors.
1. Purchase of physical precious metals
The key advantage of buying physical precious metals, most commonly gold and silver, is that you own them. Moreover, this asset is your physical possession and can be kept outside the financial system. This is perceived as leverage against collapse, crisis, and as a guarantee that counters risk connected to the volatility of the market. Most people interested to invest in this asset seek to purchase precious metals in the shape of bars, coins, ingots, and jewelry.
On the other hand, there are some disadvantages to investing in physical precious metals. Mainly, you will face high commissions for buying and selling your asset. Furthermore, storage must be carefully considered. These precious stocks require safe storage in a vault, which may involve additional fees or some risk of theft. And finally, you are limited by business hours to trade your physical assets.
2. Shares of companies extracting precious metals
Another popular way to invest in precious metals is the purchase of shares of companies that extract these commodities. From the stock market, you can buy in the largest mining companies, which include the world’s most prolific gold producers Newmont Mining and Barrick Gold, silver miners such as Pan American Silver and Fresnillo.
The biggest attraction of this type of investment is the high liquidity of the stock market. Therefore, investors can get the real market prices at a lower cost. Consequently, transaction fees and commissions are lower than those for physical precious metals. Another very appealing side to buying company shares is creating a passive income.
But there are some sides to investing in mining company shares that may not be so alluring. The first being the lack of physical possession of the precious metals. And the second is the potential inaccurate reflection of the price of a share in relation to the price of metals.
3. Exchange-Traded Funds for precious metals
There is no doubt that investing in precious metals online through ETFs is very convenient. Currently, Exchanged-Traded Funds are one of the fastest-growing methods of investment. This is due to the ease of trading it offers. The main difference between stocks and ETFs is that the latter represents a basket of securities that are available for buying and selling on the stock exchange via an investment intermediary. One of the pros is that you can diversify your portfolio with lower initial capital. Furthermore, you are building a stream of passive income while having fewer commission fees.
The drawback of ETF investing is that you down own the metal. In addition to that, the risk lays in that the other party may default, or fail to comply with its obligations. That’s because investors rely on financial institutions to hold up their end of the bargain.
4. Contracts for Difference (CFDs) on precious metals
A CFD is a financial derivative that represents an agreement between a trader and a broker to exchange the difference in the price of an asset. This type of investment for precious metals offers all the advantages of real investment but without actually having ownership of any asset. One of the main pluses is the possibility to take short positions. Therefore benefiting from rising and falling precious metal markets. Using leverage, CFDs offer the ability to manage amounts larger than those in your trading account. Investors can take advantage of short-term price changes and have easy and flexible access to global markets 24 hours a day, 5 days a week. On the other hand, there is no ownership of the precious metal assets and CFDs may be less regulated. In the end, the leverage effect can be both beneficial and detrimental, based on your trading style.
5. Precious metals futures
Futures are a derivative that represent an agreement, on the one hand, to buy and on the other hand to supply a precious commodity. The buyer of futures pays and the seller delivers. There are many advantages to this investment type. The future market is more liquid than the physical market. There are also lower costs involved and opportunities for portfolio diversification. Finally, the market is open 24 hours a day, 5 days a week, which gives investors a lot of flexibility. However, futures expire on fixed dates which can make it difficult for traders if they prefer long-term positions. Furthermore, trading in precious metal futures may require a larger initial capital.
6. Precious metals options
Options are yet another financial derivative that allows you to invest in any type of precious metal. As a buyer, you have the right to buy or sell the asset. And the transaction must be set with a specific price and completed prior to a fixed date. The price of Options varies according to market volatility. And a major advantage is that losses are limited to the premium paid for the Option.
What the Future of Precious Metal Investment Looks Like
There are several strategies and ways to invest in prized commodities, each has a certain appeal to different types of investors. And while there are more ways to benefit from precious metals, these 6 are the most common ones to date. But the future holds something none would have expected a few years back: precious metal-backed cryptocurrency. As the financial markets evolve with further digitization of services, the ultimate digital asset is set to connect with the oldest form of currency. When crypto and gold meet, what will the future look like? Some say this union defeats the purpose of precious metal ownership, others consider it may bring back a more secure currency. Whatever the outcome, the future of precious metals is on its way.
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