How and When Should You Enter the Precious Metal Market?
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Precious metals have been used as an investment medium for hundreds of years. Gold, silver, platinum, palladium and copper are the most popular ones have a few things in common. They’re all limited in supply, have various industrial and financial functions and act as protection against uncertain economic and geopolitical conditions. These reasons have made precious metals a critical part of the top mutual funds in the world.
How to Invest?
For someone looking to invest in this thriving market, the options can be overwhelming. Here are a few of the several ways you can go about your investment plan.
Physical Bullions and Coins
The simplest and most common way to invest in precious metals is to purchase the actual metals. Each precious metal is available in different sizes and forms. Gold is available in bars ranging in sizes from 200 ounces to one gram. Another measure used is the level of fineness (karat). It represents the weight of the fine metal in a coin or bar. The sizes vary for platinum, palladium and silver.
Minted coins and bullions can be purchased either online or from physical stores. It’s important to locate a reputable source and compare prices between different dealers, since prices fluctuate daily.
Storing precious metals can be risky. You have to arrange for secure vault storage in a bank or your house. During times of economic crises, governments have put a limit on ATM cash withdrawals. At such times, having access to precious metals can meet your immediate liquidity needs.
Derivatives include futures and options. Futures are a type of contract that makes it obligatory for the parties to complete the transaction at the predetermined price and date. The legally binding contract puts both the parties at risk, as fluctuations in price can lead to a profit or loss for either party.
Options are financial instruments that allow the buyer and seller to proceed with the transaction within a specified time period. Unlike futures, buyers have the right—but not an obligation—to complete the transaction. Stocks of precious metal companies are usually the underlying asset in options.
Derivates are primarily traded through online brokerage houses.
Exchange Traded Funds (ETFs) are financial instruments that represent a collection of other instruments such as stocks, bonds, and commodities. Commodity ETFs may contain one or more types of precious metals. As ETFs are traded, the prices fluctuate according to the demand and supply.
The advantage of investing in ETFs is that you’re not in possession of the physical asset, reducing your overall risk. Online trading makes it a convenient investment medium. The advantage of ETFs over purchasing individual stocks or commodities is that ETFs charge lower expenses and broker commissions.
When to Invest?
Investing in precious metals is dependent upon several factors. The investment time frame, your liquidity requirements, the total return you want and also your capital.
If you’re investing in gold, consider the economic and geopolitical conditions. If conditions are expected to worsen over the coming months then investing in gold is recommended.
While the global demand for palladium, platinum and copper influences their prices, consider individual industries and their prospective growth before making a decision.