Precious metals such as gold and silver have been coveted for a long time. Even today, they still form a part of an investor’s portfolio. But in times of inflation, are they still good investments?
Throughout history, precious metals such as gold and silver have been highly sought-after and people have considered them as valuable commodities.
Today, they remain coveted and many investors still include them in their investment portfolios. Precious metals also have many uses, especially in manufacturing and construction.
However, they’re also known to be extremely volatile and come with their own risks too. So are they worth investing your hard-earned money?
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Types of precious metals you can invest in
Gold is the most well-known and traded precious metal. While its metallic properties make it suitable for industrial uses in dentistry and electronics, it’s perhaps most well-known for jewellery and as a form of currency.
During times of political and economic uncertainty, investors will look to buy stable assets such as gold, which has historically retained in value. Gold also acts as a hedge against inflation and helps to diversify your portfolio.
On the flip side, gold has a poor historical return compared to other asset classes like stocks and bonds. According to this article, if you had invested US$10,000 for 200 years:
- Gold will give you a return of US$26,000
- Bonds will give you a return of US$8,000,000
- Stocks will give you a return of US$5,600,000,000
There are a few ways to invest in gold; you can buy physical gold such as jewellery, gold coins, and gold bars, or invest in ‘paper’ gold like gold stocks, gold ETFs, gold futures, and gold certificates.
If you invest in physical gold, you also need to invest in a safe deposit box or security system if you want to keep your gold safe at home. That said, some banks do offer safe deposit box services to safely store and keep hold of your gold.
On the other hand, you can also invest in paper gold. As the name suggests, paper gold isn't physical gold but rather gold-related assets that reflect the value of gold on paper.
For example, you can buy gold ETFs on the stock market and invest in the shares of a company in the gold industry. This gives you exposure to the industry without the need to buy physical gold. It’s also cheaper; instead of buying a gold bar for thousands of dollars, you can buy a gold ETF at a fraction of the cost.
According to a Straits Times article, an OCBC Bank initiative to allow investors to buy and sell gold and silver has seen around S$1 million traded in its first week of launch, suggesting that non-tangible precious metal investments are popular among investors.
However, the drawbacks of investing in paper gold include fees such as expense ratio and commissions when buying or selling. Since gold stocks are traded in the stock market, it’s also prone to price swings and market fluctuations.
Some of the popular gold stocks include Newmont Mining (NEM), Newcrest Mining (NCM), Franco-Nevada Corporation (FNV), SPDR Gold Shares ETF (GLD), iShares Gold Trust ETF (IAU), and SPDR Gold MiniShares Trust ETF (GLDM).
While silver doesn’t get as much obsession as its yellow-metal counterpart, it doesn’t mean that it can’t be part of your investment portfolio. In fact, between 2018 and 2021, prices of silver gained by 52%, which is 10% higher than gold.
The demand for silver is also rebounding as economies recover from the impact of COVID-19, and looks set to grow with decarbonisation trends such as green tech and EVs.
Like gold, silver is also used in jewellery. However, silver plays a larger role as an industrial metal and has numerous uses in the electronics, automotive, and photographic industries. For example, silver is used in batteries, mirrors, dental fillings, silverware, and computers.
However, the market for silver is much smaller than gold, so prices are more volatile due to speculation as well as supply and demand. This makes it harder to manage silver in your portfolio.
Like gold, you can buy physical silver like silver bars, silver coins, and silver jewellery. You can also invest in silver stocks, silver ETFs, and silver mutual funds.
Some of the popular silver ETFs are iShares Silver Trust ETF (which is the largest silver ETF with an AUM of nearly US$13 billion), Aberdeen Standard Physical Silver Shares ETF, and iShares MSCI Global Silver and Metals Miners ETF.
Meanwhile, you can also invest in silver stocks such as SSR Mining (SSRM), Wheaton Precious Metals (WPM), and Fortuna Silver Mines (FSM).
Although widely used in jewellery, platinum plays a larger role as an industrial metal and its uses are varied across the electronics, medical, chemical, and even aerospace industries. It's used to make anything from surgical equipment and computer hard disks to fertilisers and rocket engines.
However, the greatest demand for platinum is in the automotive industry, where it’s used for spark plugs and as catalytic converters to reduce harmful emissions from vehicles. As such, the automotive industry greatly relies on platinum and platinum prices are determined by car sales and production.
Palladium might be one of the lesser-known metals, but this silvery-white metal is more precious than gold, silver, and platinum due to its rarity and numerous uses.
In fact, prices of palladium have soared in recent years as demand exceeded supply. Global sanctions on Russia and supply chain concerns due to the Russia-Ukraine war have further spiked palladium prices.
Like most precious metals, palladium is used extensively for manufacturing purposes to create electronics, industrial, dentistry, medicine, chemical applications, jewellery, and groundwater treatment products.
However, palladium's largest use is creating catalytic converters for vehicles to reduce harmful emissions. Aside from that, it’s also present in hydrogen fuel cells, an emerging technology that powers hydrogen cars. Like electric cars, hydrogen cars will likely replace combustion vehicles in the future.
Should you invest in precious metals?
As mentioned, precious metals like gold and silver correlate negatively with other asset classes like stocks, so it’s good to have them in your portfolio to reduce risk.
During times of market instability, demand for precious metals such as gold will go up as investors look for psychologically safe and tangible assets. This usually pushes the prices of precious metals up.
For example, between 2007 and 2011, there were three major financial crises: the US mortgage debt crisis, the collapse of the Lehman Brothers Bank, and the Euro Area Debt Crisis.
During that time, investors flocked to gold as a safe-haven investment, which drove up gold prices from US$600 per ounce to US$1,900 per ounce.
Conversely, gold tends to perform poorly during a bull market. When the economy and corporations are doing well, investors will look at income-generating assets that bring in higher returns.
Precious metals may perform well in the short term, but they don’t perform as well as stocks and bonds over the long term. For example, from 1990 to 2020, the price of gold increased by around 360%. However, over the same 30-year period, the Dow Jones Industrial Average jumped by 991%.
And if we look at the chart above, we can see that the S&P 500 Index had also outperformed gold. In April 2012, the S&P Index was trading at US$1,386.43 versus US$1,650.10 for gold. However, by December 2021, the S&P 500 Index peaked at US$4,674.77 while gold was at US$1,786.70.
Since precious metals are considered commodities, they don’t provide cash flow like stocks or bonds. So it comes with the expectation that you’d need to sell them at a higher price in the future.
Then there’s also the storage cost involved. While you can invest in a stock or ETF, you’d still need to consider expense ratios and commission fees. You also need to do your due diligence to ensure you’re buying from reputable sources to avoid counterfeits, a problem exacerbated by the huge demand and limited supply of rare metals.
In summary, precious metals do offer diversification of your investment portfolio. However, they come with their own risks and are also known to be volatile. Before investing in precious metals, it’s important to understand the risks associated with the chosen precious metals and your investment timeline.
With Singapore’s inflation rate rising to a 10-year high, you should be investing in assets that are higher than the current inflation rate. Some of the popular investments to consider include real estate investment trusts (REITs) and the S&P 500 Index. Check out these investments that can help you beat inflation.
Ready to start investing? Compare the best brokerage accounts to kickstart your investment journey now.
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