Precious metals are an important part of the financial market. They refer to metals that are often rare and whose value tends to be substantially high. Examples of these metals are gold, silver, and platinum group metals (PGM) like platinum and palladium.
Gold, the most popular precious metal has no major industrial use. Instead, it is mostly seen as a store of value and as a hedge against inflation. Silver, platinum, and palladium are both industrial and precious metals.
Physical vs CFD precious metals investing
There are two primary methods of investing in precious metals. First, you can buy and store real physical metal either in your home, office, or in a custodian like a bank or a metals dealer. In the United States, this is common among people who invest in precious metal coins and Individual Retirement Accounts (IRA).
Second, you can invest in these metals in a contract for difference (CFD) that tracks their price. A CFD is a financial derivative that gives you exposure to an asset’s price without you having to take physical ownership of it. Traders speculate on the price movements of precious metals like gold and silver with CFDs. Other investment vehicles similar to CFDs are futures and exchange-traded funds (ETFs). For example, the iShares Gold Trust (IAU) tracks the price of gold, and you can buy it just the way you buy shares.
Pros of investing in physical precious metals
One of the prime benefits of investing in physical precious metals is that you can keep using them as their value appreciates. For example, investing in a gold watch or jewelry means that you will realise its utility value over time. As such, you will have the best of both worlds when you use the gold asset while its price increases. In 2019, a legendary golfer, Jack Nicklaus sold his gold watch for $1 million.
Other reasons why people buy precious metals like gold are that it is seen as a hedge against inflation, an easy way to save money has price stability, and may be used as backing for a loan.
Cons of investing in physical precious metals
Investing in physical precious metals like gold, platinum, and silver has several cons. First, it can be expensive to store your metals. In most cases, people who buy and store these metals use intermediaries who charge a monthly storage fee. Taken together, this can be an extremely expensive process since these companies spend a lot of money on security and insurance.
Second, it has security risks. At times, your metals could be lost or stolen.
Third, investing in physical precious metals also has a liquidity risk. Liquidity refers to how easy it is to convert a financial asset into cash. When you own a gold bar, finding a buyer can become difficult or time-consuming. At times, you may need to travel from one city to another to find a buyer. With CFD metals trading, you are able to avoid and minimise this risk.
In addition, there is the risk of dealing with counterfeit precious metals. This risk is most common among inexperienced investors. In fact, the value of the counterfeit metals market is estimated at billions of dollars every year.
Further, it is almost impossible to get leverage to invest in physical gold and other metals. With a forex and CFD broker, you can use leverage to invest in these metals. For example, if you have just $1,000, you could use a 30:1 leverage to buy gold worth $30,000.
Investing in physical precious metals is a lengthy and often risky process. In general, the cons of allocating funds to physical metals often outweigh the benefits. This is why many traders prefer to take advantage of their price movements with, the more convenient method of CFD trading.