Which Precious Metal
Should I Invest In?
Which Precious Metal Should I Invest In?
The history of trading in precious metals dates back centuries. While gold started being mined almost 7,000 years ago, silver mining dates back to 3,000 BC. Apart from being a medium of exchange, these precious metals have been considered as a long-term store of value for hundreds of years and used for investment purposes as their intrinsic value does not erode with time.
With their growing popularity, various other metals joined gold and silver as preferred investment options. Today, precious metals are popular for both investment and trading purposes and are a key component of a well-diversified portfolio. Precious metals enjoy a safe-haven status, and investors and traders flock towards them during periods of financial crisis and geopolitical uncertainty.
Apart from owning precious metals in their physical form, there are multiple ways in which traders and investors can gain exposure to this asset class. Among the most popular among these are CFDs, ETFs, mutual funds and buying metal company stocks. Let’s find out more about the various precious metals and ways of trading or investing in them.
Why Invest in
There are three main reasons to invest in precious metals:
Hedging Risks: Precious metals are an important risk management tool, as they are considered a hedge against factors that typically cause other asset classes to decline, like an economic slowdown or recession, periods of high market volatility, political instability, and geopolitical pressures.
Protection Against Inflation: Precious metals have intrinsic value and carry no credit risk, which is why they are not affected by inflation. While the value of other asset classes, especially currency, erodes with inflation, precious metals are insulated from this.
Diversification: The continuous high demand for precious metals, combined with their limited availability and increasing industrial applications make them a highly coveted form of investment. The high demand and scarcity of supply, or availability in limited quantities, causes the value of precious metals to appreciate over time. So, although their prices fluctuate hourly and daily, in the longer run, they tend to maintain an uptrend. The prices of precious metals are not directly correlated with other major asset classes, like stocks and bonds, and are therefore considered an ideal way to diversify one’s portfolio.
How Much to Invest
in Precious Metals?
Essentially the question is: what percentage of one’s portfolio should be allocated to precious metals investments or trading in precious metals? While most experts say 5%, the answer really depends on your financial position, risk appetite and how risky the other assets in your portfolio are. If your financial position is strong and you have a good risk appetite, you could limit the amount of precious metals in your portfolio. The weaker your financial position and more limited your ability to take on risk, you could choose for a higher percentage of precious metals in your portfolio.
The answer also depends on the currencies in which your portfolio is denominated. If you are holding assets in stable currencies, the percentage of precious metals in your portfolio can be lower. The reverse is true for unstable currencies.
What is the Best
Precious Metal to
While gold and silver have been the favourites for centuries, platinum and palladium have gained significant interest. Investment in each of these metals offers different opportunities and comes with its own risks. Let’s find out more about the various metals.
The lustre of gold has attracted investors for hundreds of years. Largely demanded for its emotional value and applications in various industries, this precious metal is by far the most popular among individual investors, traders, and governments alike. The properties that make gold an ideal candidate for industrial applications is its malleability and high resistance to heat. Traditionally used as a currency, gold is increasingly finding favour with the electronics, dental and medical sectors. Mainly used to make ornaments, this precious metal has high liquidity, meaning that it can be easily converted into money. Apart from being demanded by investors and traders, this metal forms a significant part of the foreign exchange reserves of several countries, which use it for hedging against inflation.
Another popular precious metal, silver is a by-product of mining other metals like copper, zinc and lead. This precious metal has the highest electrical and thermal conductivity of any element and the lowest contact resistance, making it very suitable for industrial applications. Highly demanded for its sheen and lustre, this metal is widely used in industries for making components for solar panels, phones, computers, and several other electronic devices. Silver is also used for manufacturing batteries, superconductor applications and microcircuits. This precious metal is also used for making jewellery and other ornaments and often called the poor man’s gold. Silver is a popular option among traders who are just starting out because it is cheaper than gold. It is also popular among experienced traders, as it is also a hedge against inflation, and the silver market is more volatile than the gold market, hence offering more attractive trading opportunities.
Traded widely across the world, the availability of this metal is limited, making it the most precious metal. Its high level of corrosive resistance makes it suitable for use in industrial applications. Platinum is widely used for making jewellery, petroleum, and chemical refining catalysts. The market price of this metal is largely driven by the demand for automobiles using catalytic converters. Mainly found in South Africa and Russia, platinum is popular for portfolio diversification, as platinum prices typically rise amid low volatility.
This shiny silvery metal is again widely used in electronics and industrial applications. A rare metal found mainly in the mines of the US, Russia and South Africa, palladium is also used in solar energy, fuel cells, dentistry, medicine, jewellery and groundwater treatment. In recent years, automobile manufacturers have also started using this metal for catalytic converters as it is a great catalyst for speeding up chemical reactions. More durable and harder than platinum, this malleable metal continues to find more applications. As an investment option, palladium has not gained immense popularity so far.
Originally categorised as a physical metal, copper is now considered as a precious metal mainly because it is becoming scarce. The rising demand for copper, one of the most conductive metals, for usage in industrial, manufacturing, and decorative applications has created a supply shortage. Although not as popular as gold bullion, silver bullion and gold coins and silver coins, copper bullion coins and bars find their way into the investment portfolios of highly discerning investors.
Ruthenium, rhodium, iridium, and osmium are used in industrial applications because of their strength and durability. But this category of precious metals is not used for investment purposes.
How to Invest in
Investment in precious metals is possible in the following ways:
When planning to invest in precious metals, a large number of people consider buying physical gold or silver, comprising mainly of bars and coins. Some even opt for numismatic coins. Such investments are, however, mostly driven by emotional reasons, as a symbol of wealth and financial security, rather than with the motive of earning money. Physical purchases come with the hassle of safely storing these metals. To avoid the risks associated with storing physical precious metals, investors can consider buying ETFs (Exchange Traded Funds) or derivatives like contracts for difference (CFDs).
Stocks of Metal Companies
One way of gaining exposure to precious metals is by mining stocks i.e. mining companies that are engaged in mining and production of these metals. These stock prices are linked to the prices of the metals, as well as to company-specific factors, like its management team, balance sheet strength, performance, and prospects.
Exchange Traded Funds or ETFs
Investment in an ETF represents the ownership of a small amount of the metal. This means that the price of the ETF is directly correlated to the price of the metal. Despite technically owning the metal, the investor in an ETF is not entitled to take possession of the physical asset associated with the fund. The ownership lies with the financial institution operating the fund and the investor is dependent on it for fulfilling associated obligations. Some ETFs also represent interest in precious metal mines or refineries. These types of ETFs may move in tandem with the value of the associated metal, but only to a limited extent.
An ETF is traded like a stock and experiences price fluctuations through the trading day. Since the ETF is bought and sold through the day, it sees much higher liquidity than mutual funds.
Contracts for Difference
A Contract for Difference, or CFD, is a derivatives instrument that allows traders to speculate on the rise and fall of prices of most fast-moving investment instruments, like commodities, currencies, equities, indices and precious metals. When trading CFDs, traders do not actually buy or sell the underlying metal. Instead CFDs represent a contract between a trader and an intermediary, typically a broker.
How Do CFDs
Work in Precious
The price of a CFD is based on the price of the underlying asset, in this case, a precious metal like gold or silver. However, instead of the absolute price of the metal, this derivative computes only the change in price or the difference between the trade entry and exit points. So, traders earn or lose the difference between the current price of the precious metal and its quoted price, depending on whether the market has moved in their favour.
A trader enters into such a contract based on their speculation of whether the price of the underlying asset will rise or decline. If the trader expects the price to rise, they will buy units of the associated CFD, while if they expect the price to fall, they will sell the units. If the prediction holds true, the trader makes a profit on the trade, even if the precious metal’s price has fallen.
The fact that CFDs offer trading opportunities even in a declining market is among the main reasons for their popularity.
Some of the Most
Important Terms in
When a trader opens a buy position for a CFD in anticipation of an increase in the price of the underlying asset, it is called going long.
When a trader opens a sell position in anticipation of a decline in the price of the underlying asset, it is termed as going short.
This is the upfront capital amount of money a trader needs to deposit in their account to open a position or enter into a CFD. This margin amount is typically a small percentage of the full value of the underlying asset.
This is the difference between the ask and bid prices for the underlying asset of a CFD. The spread is the transaction cost to the trader and is deducted from the overall profit made or added to the overall losses incurred. Hence, the tighter the spread, the lower is the transaction cost for the trader.
This is one of the most important terms to understand in CFD trading. Leverage is the ratio between the position value and the amount of money needed to open a position. A CFD is a leveraged financial instrument, which means that traders can get substantial exposure to the underlying asset, without having to invest the complete amount. While this allows you to magnify your returns, leverage should be used with caution, as your losses will also be higher in case the market moves against you.
What are the
Benefits of Trading
A major advantage of trading CFDs is that it offers trading opportunities in both rising and falling markets. This means an investor can find trading opportunities even if precious metal prices are declining. Some major advantages of trading in precious metals via CFDs are:
No Need to Buy Precious Metals
Buying gold or silver comes with several complications. Apart from that, there is a cost implication. Let’s say the gold price is $2,000 per ounce. This means you need at least $2,000 just to buy an ounce of the yellow metal. When trading gold CFDs, your exposure is limited to the difference between the current price of the precious metal and the quoted price.
Cost-Effective Way to Trade
You can choose a CFD broker that charges a very low commission and fees in precious metal CFD trading. Also, ensure that the broker is transparent about the fees and commissions being charged.
CFD trading becomes simpler if the trading platform is easy to use, while being advanced enough to offer technical analysis, backtesting, and other tools to ensure safe and fast trading. MetaTrader 4 is the world’s most popular platform for trading CFDs. It is possible to download MetaTrader 4 for free.
CFD trading is leveraged trading, which means it allows investors to gain exposure to a large position without having to commit the full cost at the beginning. The amount of leverage offered by brokers can range from 50:1 to 500:1. Let’s say the spot price of gold is $2,000 an ounce. If a broker is offering leverage of 50:1, you can gain exposure to an ounce of gold with only $40. If a broker offers leverage of 500:1, it allows you to gain exposure to an ounce of gold with only $4.
Thus, with leverage, a trader needs to invest only a small proportion of the cost of the precious metal. There is one thing to remember. The profits and losses are calculated on the full size of the position. This means the profits and losses will be significantly larger than the investor’s initial outlay. So, while returns will be significantly higher with leveraged products like CFDs when the market moves in the desired direction, losses too can be higher in case the metal prices move in the opposite direction of the trader’s expectation.
When investing in precious metals via CFDs, you need to deposit only a fraction of the total amount of the position. A maintenance margin may be required in case your trades are not going in your favour and your deposit margin is close to being exhausted. When trading leveraged products like CFDs, it’s a good idea to trade with a regulated broker and have knowledge of risk management techniques.
Hedging Losses in Another Commodity or Instrument: Investments in metal CFDs also allows a trader to hedge potential losses in another commodity or stocks. For example, if you believe your stock positions could head south due to some negative news, you can offset some of the risk by going long in metal CFDs.
How to Start
Some knowledge of the metals, the factors affecting their prices and some technical analysis tips help immensely in trading in metal CFDs. An established broker will provide customer support, learning resources and the demo account facility to help you get up to speed with trading metal CFDs.
Here are the steps in trading precious metals:
Find a Good Broker
Since the broker will be the medium allowing you to trade in the precious metals of your choice, it’s important to select one carefully. To make a sound decision, here are some factors to consider:
Regulated: Make sure the broker you choose is authorised and regulated by an esteemed regulatory body, like the Australian Securities and Investments Commission (ASIC). A regulated broker will adhere to capital requirements to meet trader pay-out obligations and comply with external audit schedules to be in constant compliance with regulations across their operations.
Segregation of Funds: Ensure that the broker keeps the funds of retail traders separate from its own capital, which is protected by leading banks.
Liquidity: Choose a broker that provides top-tier and multi-asset liquidity by establishing close partnerships with leading financial institutions.
Leverage: Choose a broker that offers flexible leverage. While you may generally trade with lower leverage, you can keep the option open of increasing the leverage on certain trades.
Platform: Select a broker that offers its tools and support for MetaTrader 4 or MetaTrader 5. These are fast, user-friendly and stable platforms that are trusted around the world.
Other Factors: Some of the other aspects to check include slippage, spreads, commissions and other fees, ease of depositing and withdrawing funds from your account and world-class customer support.
Open a Demo Account
Before jumping in to trade precious metal CFDs, it’s a good idea to practise trading by using a demo account, which simulates real-world trading. While such an account offers real-time trading conditions, positions are opened with virtual money and a trader neither profits nor loses real money. A demo account can help you get familiar with the platform and get hands-on experience in CFD trading.
Choose the Instruments You Wish to Trade
Once you have opened an account with an established broking firm, check the trading instruments available.
Select the Currency
You can trade gold or silver for US dollar, Australian dollars, or other currencies. Choose the one that suits your investment profile.
Do the Necessary Market Research and Analysis
Before beginning live trading in metals CFDs, it’s a great idea to get familiar with the factors that impact the metals market and stay abreast of news and the latest developments.
Begin Trading by:
Opening a long or buy position if you expect the market to rise or a short or sell position if you expect prices to decline.
Selecting the lot size according to your financial goals, the leverage you wish to use and your budget.
Using risk management tools like stop losses and limit orders.
Is Trading in Precious Metals Risky?
Like all other investments, precious metals carry a certain degree of risk. While they offer a hedge against economic collapse and political upheavals, a trader always faces the risk of making a wrong decision. With some knowledge of trading in precious metals and being disciplined about using risk management tools, traders can reduce the risks they face.
Precious metals are among the preferred choice of experienced traders for portfolio diversification. This is especially true for precious metals like gold and silver.