What are precious metals?
Precious metals are scarce, glossy elements able to resist corrosion. They also have significant commercial importance. Precious metals are inert and rarely react with other compounds. This allows them to resist corrosion and preserve their value. Precious metals are used in jewelry, financial instruments, and many commercial uses.
Precious metals investing means buying physical metals or futures, funds, and ETFs with precious metals. This is a way to hedge against inflation and diversify an investment portfolio.
A precious metals dealer is an entity trading precious metals in different forms such as bullion bars or coins.
A precious metal fund is an investment fund composed of different precious metal assets. The fund can have a mix of mining stocks, futures contracts, precious metal ETFs, and physical bullion.
A precious metals ETF is a type of commodity ETF designed to track the price of one or a basket of precious metals. An investor can buy a gold ETF, silver ETF, or a combined precious metals ETF.
A precious metal IRA is a retirement saving account with tax advantages that can hold physical precious metals. The metals must follow IRS standards and be stored in an IRA-approved depository. It is classified as a self-directed IRA and can be a traditional IRA or a Roth IRA.
Semi-precious metals are more abundant metals that have commercial value. Because they are not rare or corrosion-resistant, they are less valuable. There is no standard list for semi-precious metals. This category was copied from gemstone rankings.
Types of Precious Metals
The Gold Group of Precious Metals
Gold is the most prominent of all precious metals. It’s well-known for its unique, shiny, slightly reddish-yellow tinge. It is soft, dense, malleable, and ductile. Gold is used in jewelry, coinage, investments, and some industrial applications.Silver is a soft, shiny, and white metal. It also has the highest reflectivity and electrical and thermal conductivity among metals. These properties make it useful in jewelry, investment purposes, electronics, optics, medicine, and more. It is a popular precious metal.
The Platinum Group of Precious Metals
Platinum is the most precious metal in jewelry. It's dense, silvery-white, and it's rarer, and more durable than gold. This makes platinum jewelry more expensive than gold jewelry. Platinum is rare because it has a low concentration on the crust and extracting it is difficult. To get 1 ton of platinum, about 200,000 tons of rock need to be mined. It has many uses in jewelry, laboratory equipment, and industrial processes.
Palladium is a white metal and looks like platinum. It is rarer than platinum which often leads it to a higher price. It has various uses in electronics, jewelry, dentistry, and catalytic converters in automobiles.
Rhodium is the rarest precious metal. It is a white and highly reflective metal. While it has the highest price among precious metals, it is not widely traded because of its low volume. The IRS does not include it in the list of IRA-approved precious metals. It's used in electro-plating, catalytic converters, mirrors, searchlights, and electronics. It is one of the metals used to make white gold.
Ruthenium is a silvery-white metal and one of the rarest precious metals. It is found in ores that contain other platinum metals. Pure ruthenium is hard and brittle. It is combined with other metals as an alloy to lend its toughness and durability. It is mainly used in electronics and as a catalyst in chemical production.
Iridium is a hard, brittle, silvery-white metal. It also is the 2nd most dense precious metal. It is difficult to use pure iridium because it is brittle at room temperature. However, when it is alloyed with other metals like pure gold, it lends its toughness and durability. Iridium is used in electronics, catalysis, and medicine. It is extracted from a mineral that contains other platinum group metals.
Osmium is the only bluish-white platinum group metal and the densest metal on earth. It is also a hard and brittle metal that is difficult to use in pure form. But it forms extremely hard materials when alloyed with other metals. It has a very high melting point, making it ideal in high-temperature processes.
How investing in precious metals works
- The most direct way to own precious metals is to buy physical bullion (bar, coin, ingot). The four major precious metals commonly traded are gold, silver, platinum, and palladium. The other platinum group metals have very niche markets. They do not have enough volume to warrant trading. The physical metal can be stored in a safe place, such as a home safe, a rented safety deposit box, or a depository. For tax advantages, an investor can consider using a gold IRA to hold the metals.
- Precious metal ETFs allow investing in precious metals without having to store them. These funds buy and store the metal, and you can buy shares in the fund. Each share represents a certain amount of metal. For example, with a gold ETF, each share might represent 1/10th of an ounce of gold. But you generally cannot convert your ETF shares into physical bullion.
- Investors can invest in mining company stocks and funds instead of buying the metal. The price of these stocks is related to the price of the metal. It is also influenced by factors specific to the company and the whole stock market. There are also mutual funds and ETFs that invest in a basket of mining stocks.
- Futures contracts are agreements to buy or sell an amount of metal at a future date and at a specified price. Futures are a way to speculate on the future price of the metal, but they can be risky because of their leverage. You can also lose your entire investment if the price moves against you.
- Some banks and gold depositories offer precious metal certificates. These certificates are a promise to deliver metal if the certificate is redeemed. This is a way to invest without having to store the metal. But you are relying on the bank or depositories’ ability to fulfill the promise.
- Some platforms in India offer the ability to buy digital gold or silver. Each unit represents physical gold stored in a vault. This is the same as an ETF or a gold certificate, but transactions are done online.
Investing in precious metals: the pros and cons
Pros of investing in precious metals
- Precious metals keep their value over time and serve as a hedge against inflation. When the value of money falls, their purchasing power remains stable or increases.
- Precious metals provide portfolio diversification. Their price movements have a low correlation with stocks and bonds.
- Precious metals, especially gold, are seen as a "safe haven" asset class. It can hold or increase its value during uncertain times. These can include economic uncertainty, geopolitical uncertainty, or stock market volatility.
- Precious metals are finite resources with supply constraints. This can drive up value if demand increases.
Cons of investing in precious metals
- Precious metals do not produce income through dividends or interest. The only return you get is the change in value from when you bought and sold it.
- If you invest in physical precious metals, you may incur storage and insurance costs. Even with some ETFs, you might pay these costs indirectly through management fees.
- While they can be a safe haven in turbulent times, they can experience huge price swings. Global factors, speculative trading, and changes in supply and demand can affect prices.
- While gold and silver markets are liquid, other precious metals are less so. Depending on the form you own these metals converting them into cash quickly may not always be easy.
Uses of precious metals
Different precious metals are used in jewelry, coinage, investments, and various industries.
Precious metals in electronics
Gold, silver, platinum, and palladium are good conductors of electricity. They have natural corrosion resistance that prevents tarnish. These make them useful in high-quality electronics and computers.
Rhodium, ruthenium, and iridium have applications in spark plugs and electrical contacts. Even at very high temperatures, these three metals are unaffected.
Precious metals in dentistry & medicine
Gold, silver, and palladium's are chemically stable and resistant to corrosion. It makes them suitable for fillings, crowns, and bridges.
Silver has antibacterial properties and is used in wound dressings. Gold and iridium are used in nuclear medicine and for the treatment of certain forms of cancer.
Precious metals in industrial & chemical applications
The platinum group of metals is used as a catalyst in a variety of chemical reactions. Platinum, palladium, and rhodium are used in catalytic converters for automobiles. This reduces harmful emissions from vehicles. Ruthenium and iridium catalyze the production of acetic acid. Osmium is used to catalyze the production of ammonia.
Rhodium, ruthenium, iridium, and osmium are added to other metals to make them hard and durable. They are usable even at high temperatures because they don’t corrode or melt easily.
The metals which may be considered semi-precious are:
* stainless steel
Some of these metals are in the same group in the periodic table as precious metals but are not precious. They don’t satisfy the requirement of rarity or resistance to corrosion.
Copper is not a precious metal. It is in the same group as gold and silver but copper is abundant and widely available. It does not meet the rarity requirement. It is also called a base metal.
Iron, nickel, and steel (an alloy of iron) are not precious metals. These metals have extensive industrial and economic value. But they are not considered precious because they are widely available.
The category of semi-precious metals is subjective, as there are no clear guidelines to define it. It is a category copied from grading gemstones. A metal may be considered semi-precious if it is used in jewelry and has a higher value than ordinary metals.
When investing in precious metals
Precious metals are a solid investment option for investors that want to diversify and protect against various risks. But they are not risk-proof. Understanding the risks and rewards of precious metals investing is important to maximize returns and protect against massive losses. Learn more about them from Augusta Precious Metals, one of the best gold IRA companies.