The recent volatility in precious metals and their spot market pricing has definitely given investors reason to be skittish, especially new players who have been paying attention to the news in recent weeks and are suddenly worried about losing their investments. However, many of the fundamental principles of investing still apply to precious metals. All that has changed is the immediate value of the metals in the short-term.
Develop a Market Awareness
Like any investment market, new investors need to remember that to protect their interests and money, the best defense is to have a good understanding and awareness of the given market. Each slice of the market behaves differently, whether it be agricultural commodities, technology, natural resources, commerce, manufacturing, transportation or others. They all have drivers, big and small players, regulatory factors, and risks inherent to the given industry or market slice.
Precious metals as markets are also affected by two distinct dynamics:
- manufacturing supply and demand, and
- government interference.
In terms of manufacturing, precious metals are probably a quintessential example of a raw material harvested and refined into a secondary resource. Metals are mined from the ground, smelted into their purer form, cast into units for future manufacturing and then either kept as bullion or used for end-purpose retail products, i.e. jewelry or automotive parts. This level of supply rises and falls with a bit of a time lag to demand for the given metal. However, as modernized as manufacturing may be, it can still be subject to labor work stoppages, equipment failures, local unrest in resource areas, and competition. These outside issues can all independently and in concert affect supply and demand of precious metals and their prices.
The impact of South African mines due to work strikes is a perfect example where the given metal market can be impacted by a manufacturing shortage. Miners in the country have been striking repeatedly, causing significant shortages in the world supply of palladium. Not only is the metal used for investing, it also serves as a critical supply in automotive assembly for catalytic converters. As a result, the price has risen significantly due to a non-metal mining company issue affecting market supply and demand.
In terms of government interference, every investment market has some level of government presence. At a minimum there are investment regulations and agencies dictating how investing may occur and how it can be offered. These rules are intended to protect investors and competition fairly, preventing unscrupulous entities from stealing people’s investment money with fraud. Tax agencies also have a say, looking to make sure governments obtain their tax revenue from investors’ profits. However, the most influential government presence in precious metals tend to be central banks, who purchase and sell bullion to hedge government economies and currencies with a separate, unconnected asset to that country’s economy. Because these entities can buy and sell large amounts, they also have the ability to swing pricing considerably as well.
Given the two factors discussed above, an investor watching the behavior of these two elements can learn a lot about where precious metal markets may be going in the near future as well as the longer term. For example, while gold fell considerably in mid-April 2013, reaching a pricing low not seen since late 2010, central banks are not unloading their positions. This means that the price deflation is generally related to exchange-traded funds and individual gold investors panicking and lowering immediate demand. However, the fundamental support for gold to stay relatively expensive still exists. Only when the central banks pull out will gold then drop dramatically. Instead, the current decline probably presents a good opportunity for the banks to snap up additional positions in precious metals, increasing their hedge.
Plan Ahead for How to Invest
Any investor, new or experienced, should have a general investment plan to follow. It doesn’t matter that the assets involved a precious metals or stock in a corporation, a plan provides a long-term direction versus just floundering around in a market hoping to win the lottery.
An investment plan provides a method to the madness that an investor can stick to. The details of particular assets and buys and sells may change a lot, but the overall approach stays the same when following a plan. The plan will address the risk type an investor is comfortable with, how involved he wants to be, the overall goal and expectation, and the tools used to reach those goals. Further, an investor doesn’t need to have just one plan. He can have a plan for general investing, one for a retirement plan, and one for family members such as managing children investments or even a charitable trust.
For example, if a person is looking for a long-term position in precious metal bullion but is limiting investment to just the popular two of silver and gold, then it makes no sense spending money on trade commissions. Instead, just outright buying the metal in the form of government-issued coins and bars is the best approach. Some might suggest using a paper method, such as an exchange-traded fund, but that paper is only as good as the institution that backs it up. With a metal coin, an investor actually has the metal in hand and knows the value stamped on the coin by weight and quality per the mint that issued it.
On the other hand, if an investor is focusing on a retirement fund, actual bullion coins won’t work. Instead, the investor has to seek an administrator who will buy the metal and then keep it in a retirement holding that can keep it within tax rules for retirement savings eligibility. This is important, otherwise taxes apply to any gains in value.
On the other hand, those interested in also earning dividends and growth in their investments won’t be satisfied with just spot market pricing of metals. Precious metals themselves don’t produce quarterly dividends or earnings; only companies and bank instruments do that. So, an investment plan for capital growth may instead use mining companies of precious metals as vehicle for investment. The metal mining companies are still tied to their metal markets, but investor gains are improved by the respective companies’ performance versus just the inherent value of the given precious metal itself.
Finally, an investor could have a hybrid plan that covers multiple interests, so retirement, capital appreciation and gain can all be mixed in. This is a bit more of a complicated approach and requires some stratification of investment activities. However, with enough planning and research, a multiple level portfolio can be established in precious metals to cover all the bases.
Precious metals investing is not an impossible affair for a new investor, but success does require education and awareness development of how the metal markets work. Some of these issues can be addressed by answering the following questions:
• Why invest in precious metals? What does a new investor want from the market? Answering this question can help with developing an investment plan.
• Is the investment interest for quick profit or for long-term value? This can make a difference between paper holdings and actual bullion coin holdings.
• Are all the costs in precious metal investing clear and understood? Lots of profit can be eliminated through commissions, fees and taxes without proper planning to anticipate these costs.
• How do precious metals fit in an investor’s overall investment plan? Planning the details avoids making rookies guesses that can cost serious money.
With the online resources and information available from Monex, an investor can gain quite a bit of data and understanding of precious metals markets all at the reach of a computer and mouse click. Monex carries articles, education pieces, investment resources and more, all providing valuable assistance for new and experienced investors in the precious metals markets.