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5 Top Precious Metals You Can Invest In: All You Need to Know About Investing in Precious Metals

Editor, TRANSFIN.
Jun 8, 2020 4:33 AM 10 min read
Editorial

The lure of investing in precious metals is obvious – adding some metallic shine to your portfolio can not only make it more alluring but also lead to diversification and downside protection during economic downturns – after all, these are “tangible” assets, right?

Like most things worthwhile, it is not that simple. Investing in precious metals isn’t as straightforward a process as say investing in the stock market or mutual funds, easily achievable by enlisting the help of discount brokers and robo advisors. So in this article, we will demystify the process of investing in precious metals for your understanding. Let’s dive right in!

 

 

Why Should You Invest in Precious Metals?

First off, there are many reasons to invest in precious metals:

  1. Certain precious metals can diversify your investment portfolio and help reduce the risk and volatility you’re dealing with. Though not always...read on.
  2. Many precious metals tend to be relatively stable and safe bets – especially in times of financial instability owing to their tangible nature i.e. They are hard assets with intrinsic value.
  3. They are a solid hedge against inflation. Inflation is a concern for many investors vis-a-vis paper currency, property value, bonds and equity. “Real assets” like physical precious metals are viewed as a safe hedge against inflation in that they tend to maintain or increase their value over time even as the purchasing power of a currency declines (the value of $1 or ₹1 decreases over time due to inflation).
  4. For precious metals, demand is reliably high. You can be quite certain that people’s demand for precious metals like gold, silver, platinum, palladium etc. isn’t going to fizzle out anytime soon. Besides their traditional uses in ornaments and jewellery, arts and coinage, precious metals also have a myriad of vital industrial applications.

 

What are Some High-Value Commodity Trading Metals?

If you’re not familiar with investing in precious metals, you might assume it’s all to do with gold and silver. However, there are numerous precious metals that are traded every day + some “base” metals that are important to know about too.

Let’s dissect them one by one.

 

Investing in Gold


Biggest producer: China
Biggest consumer: China and India
Current price: ₹46,220 ($615) (as of June 8th 2020, for 24 Carat Gold in New Delhi, India)


The yellow metal is one of the best- and oldest-known commodities out there. Gold has captivated human beings for generations (click here to read a brief history of gold). We all are familiar with gold’s usage in jewellery, but it is also significant in industry, where its inertness, ductility, durability and malleability are highly coveted.

For a long time, gold was the commodity on which the value of paper currency around the world was based on (the Gold Standard). Even today, central banks around the world store gold as part of their foreign exchange reserves. Gold also finds industrial applications in many areas like electronics, dentistry, computers, aerospace, GSP systems, glassmaking etc.

5 Top Precious Metals You Can Invest In: All You Need to Know About Investing in Precious Metals
Gold is probably the most well-known precious metal, having found application for many centuries in many ways, from jewellery to monetary policy.

 

Investing in Silver


Biggest producer: Mexico
Biggest consumer: India
Current price: ₹47.42 ($0.63) (as of June 8th 2020, for 1g of silver in India)


While gold’s industrial usage drives only 10-15% of its demand, for silver that number is more than 50%. Silver is renowned for its strength, ductility and malleability and is used in many fields from pharmaceuticals and purifying water to nuclear reactors and battery manufacturing.

 

Investing in Platinum


Biggest producer: South Africa
Biggest consumer: China
Current price: ₹1,989 ($26.45) (as of June 8th 2020, for 1g of platinum in India)


The greatest demand for platinum comes from the auto industry, where automotive catalysts are used to reduce the harmfulness of emissions (as the push for clean energy accelerates, demand for these catalysts is gathering steam). Other industrial applications of platinum are in petroleum and chemical refining, dentistry, laboratory equipment and the computer industry.

5 Top Precious Metals You Can Invest In: All You Need to Know About Investing in Precious Metals
This here is an ore of platinum and palladium, two precious metals mainly found in South Africa and sought for their various industrial applications.

 

Investing in Palladium


Biggest producer: Russia and South Africa
Biggest consumer: North America
Current price: ₹4,811 ($64) (as of June 8th 2020, for 1g of palladium in India)


Palladium’s industrial usage is found in electronics and industrial products, medicine and groundwater treatment.

 

Investing in Rhodium


Biggest producer: South Africa
Biggest consumer: China
Current price: $228.27 (as of June 8th 2020, for 1g of rhodium)


Rhodium has been hailed as the “world’s most precious metal” because of its steep increase in value in recent months. In 2019, its prices soared 151%. And in the last four years, rhodium's price has risen by 12x. Just like platinum, rhodium’s industrial application is predominantly in the auto industry.

5 Top Precious Metals You Can Invest In: All You Need to Know About Investing in Precious Metals
Rhodium's value has sky-rocked in recent months as countries tighten emission standards for the auto industry: rhodium is used in auto-catalyst manufacturing.

 

Investing in Other Precious Metals

The precious metals with active commodities markets include gold, silver, platinum and palladium. Besides them, there are other precious metals that are used in industry and/or jewellery like ruthenium, osmium, iridium, rhenium and indium. Some alloys also exist that are mixtures of two or more precious metals. An example is electrum, a naturally occurring alloy of gold and silver.

 

What are Base Metals?

Base metals are the common and inexpensive brethren of precious metals. They are found easily and are relatively cheaper. But they too have a wide array of industrial uses, and many of them are actively traded in commodities markets. Alongwith precious metals, you can add some base metals to your investment portfolio to diversify it further. 

Some examples of base metals are aluminum, copper, iron, zinc, lead, nickel, steel and tin.

 

How to Invest in Precious Metals?

You can invest in precious metals in two ways:

  1. By buying the actual metal i.e. in its physical form.
  2. Via financial products like exchange-traded funds (ETFs), mutual funds, bonds, futures contracts or stocks of mining companies.

 

Direct/Physical Investment in Precious Metals


This investment window is strictly for those willing to invest in storage alongwith purchasing the precious metal in question. In India, physical quantities of precious metals like gold and silver can be bought from jewellers, banks, non-banking finance companies and even e-commerce websites.

PS - Physical gold and silver of high purity that is often kept in the form of bars, ingots (blocks) or coins are referred to as “Bullion”.

  1. Bars: If you’ve ever watched a movie about a bank heist, you might have noticed gold being stored as huge, bulky bars. These are Bullion Bars: gold or silver that is officially recognised as being at least 99.5% pure and is in the form of bars (or ingots). Bullion bars are often kept as a reserve asset by Governments and central banks. Bars tend to be cheaper per ounce but they are illiquid options since they are big, bulky and expensive to store. Therefore, only seasoned and long-term investors tend to deal with bars.
  2. Coins: These are more popular forms of physical metal investments since they are more portable, tradable and easy to store.
  3. Jewellery: No explanation needed here. Purchasing and storing precious metals as jewellery is an ageless obsession, especially in a country like India!

 

Investing in Precious Metals Indirectly via Financial Products


If you don’t have a private safe or bank vault to store bars and coins in (which is usually the case), you might be interested in hedging your money on precious metals via more convenient and indirect ways i.e. Via financial products. These methods don’t imply actual ownership of the metal so no physical delivery is involved.

  1. ETFs: Commodity ETFs are a popular way of investing in precious metals. Some ETFs represent ownership of actual metals while other ETFs represent precious metal interests like ownership of mines and refineries. (Reminder: ETFs are investment funds whose assets can include stocks, commodities and bonds. They trade on stock exchanges and can track a certain stock or bond index.) Some examples of precious metal ETFs in India are Canara Robeco Gold ETF, Reliance Gold Exchange Traded Fund, Birla Sun Life Gold ETF and CPSE ETF. As of November 2020, there were no silver ETFs in India, but ICICI AMC and Nippon India Mutual Fund are planning to launch some soon. 
  2. Stocks and mutual funds: Many precious metal and base metal mining companies trade on stock exchanges. Examples include those engaged in metal manufacturing and trade like Shirpur Gold, JSW Steel, Gravita India, SAIL, Vedanta, Hindustan Zinc etc. As well as those engaged in mining activities like Ashapura Minechem, MOIL and Rajdarshan Industries. Metals can also be included in a basket of securities in mutual funds like DSP Natural Resources and New Energy Fund Direct Plan, HSBC Mutual Fund and Tata Mutual Fund and gold funds like Nippon India Gold Savings Fund, HDFC Gold Fund, Axis Gold Fund and SBI Gold Fund. These companies’ value is impacted by metals’ actual value, albeit in an indirect manner.
  3. Precious metals futures contracts: This is a legally binding agreement for delivery of gold or silver at an agreed-upon price in the future (more on futures contracts here). Investors can take a long position (an obligation to accept delivery of the physical metal sometime in the future) or a short position (an obligation to make delivery of the physical metal). The great majority of futures contracts are offset before the delivery date, however. Meaning: an investor with a long position initiates a short position in the same contract.
  4. Certificates: A precious metal certificate is essentially a document that states that an investor owns a specific quantity of precious metal that is stored by a bank on the investor’s behalf. Generally, there are three types of precious metals certificates: allocated accounts (where the investor holds specified amounts of bullion bars/coins in the bank), pool allocated accounts (investor’s metals are pooled with those of other investors’ and held by the bank), and pool unallocated accounts (similar to pool allocated “accounts but here the bank is allowed to use the metal for its own needs). The Government has introduced schemes through which you can invest in some precious metals too. For example, the Gold Monetisation Scheme and the Sovereign Gold Bond Scheme.
  5. Precious metals as Digital Commodities: This is where cryptocurrency meets precious metals. In 2016, the UK’s Royal Mint and CME Group announced a partnership wherein investors could purchase “tokens” online that represented actual gold held in the bank and trade them.The ownership of gold is a matter of digital record and aims to be “cryptographically secure alternative” to trading spot gold. In India, several fintech players like Amazon, PhonePe, Kuvera, Mobikwik and Paytm and the Stock Holding Corporation of India (via the “GoldRush” scheme) are entering the digital gold market as well.

 

Trends in Investing in Precious Metals

Demand vs Supply

The demand for precious metals is something we can count on to remain relatively high - people will never stop wanting to possess jewellery and engineers will continue to use these metals in various applications. But while demand continues to surge, the supply of these metals is limited. They are, after all, nonrenewable resources. As the world’s remaining reserves of precious metals are mined, there could come a day when all existing channels are depleted. This drives investment into finding untapped sources of these metals and alternative ways of producing them.

 

Environmental implications

The mining industry’s track record of environmental abuse and human rights violations in developing countries across Asia, Africa and Latin America is well-documented. Calls to more tightly regulate their activities will impact the companies’ operations and therefore the metals’ prices. On the other hand, several precious metals are vital for green and clean energy infrastructure, especially in emission-reducing equipment in the auto industry and the renewable energy sector. As the world moves towards unconventional sources of energy like solar, hydro and nuclear, demand for these metals can be expected to rise.

 

5 Top Precious Metals You Can Invest In: All You Need to Know About Investing in Precious Metals
While many precious metals benefit from market volatility, others' fortunes are directly linked to economic activity. One example is silver, whose value tends to rise and fall with the general economy due to its various industrial uses.

 

Market fluctuations

Precious metals’ relationship with the larger market varies individually. For example, gold can have an inverse relation i.e. Its price can rise when other market indices are in turmoil due to its status as a safe haven asset. But other metals are more susceptible to demand pressures and hence market volatility. For example, silver is more intricately linked to economic activity due to its widespread industrial uses. And rhodium’s recent price durge can be linked to new emission controls and rising demand for autocatalysts.

 

The COVID-19 effect

The impact of the coronavirus pandemic on the precious metals market is complicated. You would expect that a rise in economic instability would see investors rushing to these safe haven assets but there’s more to it than that. For starters, you can’t mine or refine precious metals while social distancing! In recent weeks, silver and platinum prices have plummeted while gold, palladium and rhodium have surged (this difference in reaction can be explained by these metals’ relationship with larger market trends i.e. The point above). For base metals, the impact has been overwhelmingly negative since their value is intricately linked to industrial activity. Nonetheless, precious metals are expected to overcome the pandemic’s negative effects and in fact benefit from the financial uncertainty - the World Bank in its Commodity Markets Outlook (Page 3, Table 1) has revised upward the forecast of precious metal prices for this year and the next.

 

5 Top Precious Metals You Can Invest In: All You Need to Know About Investing in Precious Metals
The outlook for investing in precious metals remains positive despite the COVID-19 pandemic.

 

FIN.

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