The 2022-2023 financial year is drawing to a close. That means investors in the UK will be using up this year’s tax allowances and making plans for next year.
With inflation as it is, some will surely be wondering if 2023 is the year to invest in precious metals.
If so, Wall Street Metal IRA share their expertise on what you need to know.
Understanding precious metals
As their name suggests, precious metals are metals with a particularly high economic value. This is generally due to a combination of rarity and desirability. Gold is almost certainly the best-known precious metal. Other precious metals include silver, platinum, palladium, rhodium and iridium.
Precious metals may not be particularly strong. Gold, for example, is known to be very soft. They are, however, typically very resistant to tarnishing and often hypoallergenic. This makes them desirable for art, particularly jewellery. They also have many industrial uses.
Gold and silver are particularly important to modern industry as they are highly conductive. This means that they are often needed in the manufacture of electronic equipment. The IT, telecoms, aerospace, medical and dental industries all depend on them. Meanwhile, platinum, palladium and rhodium are needed for catalytic converters.
Why invest in precious metals?
Precious metals are often seen as safe-haven assets. They tend to store their value over the long term. This means that they can be useful hedges against both inflation and currency volatility.
For many investors, precious metals are also a means to diversify a portfolio. This in itself is a strategy to manage risk. Last but definitely not least, precious metals offer the potential for capital appreciation.
The risks of investing in precious metals
Although precious metals tend to keep their value over time, their markets are notorious for their short-term volatility. This means that investors could find themselves facing significant losses if they are forced to sell during a downturn. To compound this problem, the market for precious metal investments is not always particularly liquid.
The value of precious metals can also be heavily influenced by politics. This is not always bad. In fact, precious metals’ resilience to political turmoil is part of the reason for their popularity. Sometimes, however, political forces can negatively impact the value of precious metals.
In the modern world, the two main ways this happens tend to be interest rates and regulation. If interest rates increase, inflation tends to go down. This means that there is less need to hedge against it, hence the value of precious metals drops. Given how low interest rates are at the moment, this has to be a concern.
With regulation, the main issue is regular investors, particularly small ones, getting trapped by rules intended to thwart malicious actors. Governments tend to be particularly wary of physical gold holdings for much the same reasons as they are wary of cash and crypto. As with cash and crypto, holding physical precious metal is unlikely to be banned. It may, however, become subject to more stringent reporting requirements.
How to invest in precious metals
There are four main ways to invest in precious metals. These are physical metal, exchange-traded funds, mining stocks and futures and options contracts.
Buying the physical metal
Buying physical precious metals is arguably the most challenging way of investing in precious metals. It is, however, also the only way to have the security of knowing that you actually have the asset literally in your keeping.
Choosing the right strategy for buying physical precious metals
Many people who appreciate jewellery like to buy fine jewellery because they see it as an investment. Fine jewellery typically does keep its value better than costume jewellery. It can therefore be viewed as an investment if you wanted the jewellery anyway.
If, however, you are purely interested in the value of precious metals, then fine jewellery is very unlikely to be the best option for you. Firstly, a lot of fine jewellery combines materials. This makes it look more attractive but means that the materials have to be separated if you want to use them individually.
Secondly, you will be paying for the labour involved to create the jewellery. Thirdly, in some cases, you will be paying for a brand name. Furthermore, if you buy new, you will often pay a high premium for being the first person to own an item.
Overall, therefore, if you simply want precious metals for their investment value, it’s better to go for non-collectibles. This could mean bullion or coins that are purely valued for their metal content rather than their collectability.
Practical considerations regarding buying physical precious metals
When buying precious metals, your first consideration is to make sure you’re actually getting what you’re paying for. There are ways to check if a metal is what it claims to be. The safest option of all, however, is just to stick to reputable dealers.
Your second consideration is to make sure that any purchase is properly recorded. As a corollary to this, you need to make sure that your copy of the record is stored securely. Ideally, therefore, you’ll have at least one paper copy of it and at least one electronic copy of it.
On a similar note, your final consideration is security. It can be advisable to hold your metal in a third-party storage facility such as a safe deposit box. This would, however, mean that you only had access to it when you had access to the facility.
Exchange-traded funds (ETFs)
As their name suggests, EFTs are essentially mutual funds that can be traded on stock exchanges. Regular mutual funds can follow many different investment strategies. ETFs, however, almost always track a given index or asset class.
There are many ETFs that track the performance of precious metals. These all work on a similar basis but also have their differences. It’s therefore important to do your research carefully before investing.
Mining stocks give indirect access to precious metals in the same way as housing stocks give indirect access to the housing market. They can be a convenient option for investors as most investors will be very familiar with trading stocks.
Futures and options contracts
Futures and options contracts are both agreements to buy or sell a specific asset on specific terms. Futures mandate the buyer to buy the asset. Options give the buyer the right, but not the obligation to buy the asset. Even so, options are very far from being risk-free.
If you choose not to buy the item, you lose the money (premium) you paid for the option.