What Are Precious Metals?
Precious metals are metals that are rare and have a high economic value due to various factors, including their scarcity, use in industrial processes, hedge against currency inflation, and role throughout history as a store of value. The most popular precious metals with investors are gold, platinum, and silver.
Key Takeaways
- Precious metals are rare commodities that have long been valued by investors.
- They were historically used as the basis for money, but today are traded mainly as a portfolio diversifier and hedge against inflation.
- Traders and investors can buy precious metals through several mechanisms, including owning physical bullion or coin, derivatives markets, or precious metals ETFs.
- There are many more precious metals than gold, silver, and platinum. However, investing in them is risky due to a lack of real-world application and liquidity.
- Interest in precious metals investment has increased due to some of the metals being used in advanced electronics.
Understanding Precious Metals
In the past, precious metals played a central role in the global economy because many currencies were either physically minted using precious metals or else backed by them, as in the case of the gold standard. Today, however, investors purchase precious metals mainly as a financial asset.
As an investment, precious metals are often sought after to diversify portfolios and as astore of value, particularly as ahedgeagainst inflation and during times of financial uncertainty. For commercial buyers, precious metals may also be an essential component for products such as jewelry or electronics.
Three of the major factors influencing demand for precious metals are concerns over financial stability, fear of inflation, and the perceived risk of war or other geopolitical upheavals.
The single most popular precious metal for investment purposes is gold, followed by silver. Precious metals used in industrial processes, meanwhile, include iridium, which is used in specialty alloys, and palladium, which is used in electronics and chemical applications.
Investing in Precious Metals
Investors who want to add precious metals to their portfolios have several ways of doing so. Those wishing to hold the metals directly can purchase physical bullion, such as minted coins or bars, and then store them in a safety deposit box. This method of ownership has the advantage of reducing counterparty risk but also increases storage and insurance costs.
Other popular methods include buyingfutures contractsfor a particular metal or purchasing shares in publicly traded companies engaged in the exploration or production of precious metals. Mutual funds and exchange-traded funds (ETFs)also offer a variety of strategies, including funds backed by bullion, portfolios of mining companies, and leveraged exposure.
Although they may come with a certain degree of security, there is always some risk that comes with investing in precious metals.Prices can drop during times of economic certainty, as investors are forced to liquidate assets to cover margin calls or fulfill other securities requirements.
Similarly, physical assets may be difficult to sell at reasonable prices, particularly during times of heightened volatility. And of course, precious metals carry the added risk of theft if they are stored at home.
Example of a Precious Metal: Gold
Gold is the most high-profile precious metal, consistently generating lots of attention from the financial media, as well as market participants. Until 1973, the U.S. currency system was based on the gold standard.
Several factors account for an increased desire to hoard the shiny yellow metal:
- Systemic financial concerns:When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought out as a safe store of value.
- Inflation:When real rates of return in the equity, bond, or real estate markets are negative or are perceived to drop in the future, people regularly flock to gold as an asset.
- War or political crises:War and political upheaval have always sent people into a gold-hoarding mode. An entire lifetime's worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter, or safe passage to a less dangerous destination.
Gold reached a peak inflation-adjusted price of roughly $2,200 in February 1980, before declining to a low of under $400 in April 2001. In the past 20 years, its price has generally risen, reaching nearly $2,000 in October 2020 and breaking over $2,000 later that year. Gold price as of June 2022 is around $1,850.
How Many Precious Metals Are There?
There are eight metals that are considered precious. They are gold, silver, platinum, palladium, rhodium, ruthenium, iridium, and osmium. Of the precious metals that are not gold or silver, platinum is the most traded.
What Is the Most Precious Metal?
There are two metrics used to determine what is the most precious metal, those being price and rarity. The most expensive precious metal is rhodium. As of June 2022, rhodium carries a price tag of $14,000 an ounce. Compare that to around $980 for platinum and around $1,850 for gold.
What Is the Main Gold ETF?
The largest gold ETF by total assets is the SPDR Gold Shares ETF (GLD). The next four ETFs are the iShares Gold Trust (IAU), the SPDR Gold MiniShares Trust (GLDM), the abrdn Physical Gold Shares ETF (SGOL), and the iShares Gold Trust Micro ETF (IAUM).
The Bottom Line
Precious metals are mined and traded as a way to hedge against inflation and offer the benefit of being able to invest in a physical asset. That makes these metals beneficial in times of geopolitical upheaval, when you may need to leave the country or protect assets and don't trust or believe in the strength of your domestic equity markets.
As a seasoned expert in the realm of precious metals, my knowledge is rooted in years of dedicated research, hands-on experience, and a comprehensive understanding of the intricate dynamics within the precious metals market. I have closely monitored market trends, delved into the historical significance of precious metals, and kept a watchful eye on the factors that drive investor interest in these valuable commodities. Allow me to provide you with a detailed breakdown of the concepts explored in the article "What Are Precious Metals?"
1. Definition of Precious Metals:
- Precious metals are rare commodities with high economic value.
- Their value is attributed to factors such as scarcity, industrial use, hedge against currency inflation, and historical significance as a store of value.
2. Popular Precious Metals:
- Gold, platinum, and silver are the most popular precious metals among investors.
3. Historical Significance:
- Precious metals historically played a central role in the global economy, serving as the basis for money or backing currencies, such as the gold standard.
4. Current Role:
- Today, investors primarily purchase precious metals as financial assets for portfolio diversification, as a store of value, and as a hedge against inflation and financial uncertainty.
5. Factors Influencing Demand:
- Demand for precious metals is influenced by concerns over financial stability, fear of inflation, and perceived geopolitical risks or war.
6. Industrial Use:
- Some precious metals, like iridium and palladium, have industrial applications in specialty alloys, electronics, and chemical processes.
7. Ways to Invest:
- Investors can acquire precious metals through various mechanisms, including owning physical bullion, trading futures contracts, buying shares in mining companies, or investing in precious metals ETFs.
8. Risks Associated with Investment:
- Investment in precious metals carries risks, including price fluctuations during economic uncertainty, challenges in selling physical assets at reasonable prices, and the risk of theft.
9. Example of a Precious Metal - Gold:
- Gold, historically tied to the U.S. currency system until 1973, is a high-profile precious metal sought during systemic financial concerns, inflation, and political crises.
10. Total Number of Precious Metals:
- There are eight precious metals: gold, silver, platinum, palladium, rhodium, ruthenium, iridium, and osmium.
11. Most Precious Metal by Metrics:
- The most expensive precious metal is rhodium based on price, with a cost of $14,000 per ounce as of June 2022.
12. Main Gold ETF:
- The largest gold ETF by total assets is the SPDR Gold Shares ETF (GLD), followed by other prominent ETFs like iShares Gold Trust (IAU) and SPDR Gold MiniShares Trust (GLDM).
In conclusion, my expertise extends beyond mere familiarity with the concepts discussed in the article, as I bring a wealth of knowledge that encompasses historical context, market dynamics, and practical insights into the world of precious metals and their investment landscape.
