It is a trend that whenever the stock market becomes volatile, investors shift their investment to comparatively less volatile asset classes. Among these, precious metals top the list. Similarly, as the current market condition has become uncertain, following worldwide COVID-19 pandemic, investors are shifting their portfolio to mitigate risk by lowering exposure and opting for secured return alternatives. Demand for precious metals sees a steep rise in India as growth indices remain muted.
Precious metal as an alternative investment
Value of precious metal comes from its rarity. Metals like gold, silver, and platinum are rare to find and produced in small quantity under strict regulations. As a result, these are highly valued and act as a good alternative to other popular investment classes. Even today, investment in precious metals spike whenever other investment instruments falter. Unlike equities, ETFs, fixed deposits, or mutual funds, returns on precious metals are less impacted by investors’ sentiment. But at the same time, precious metals are highly liquid. If this has got you wonder how to invest in precious metals, this article will answer your questions.
A few things to remember while investing in precious metal
- Gold, perhaps the most popular precious metal, is a good portfolio diversifier and offer a hedge against market risk
- Apart from gold, investors can also invest in other precious metals like silver, platinum, and palladium
- Buying physical metal isn’t the only option. Investors can also invest in precious metals through bonds, derivatives, metal ETFs, mutual funds, and mining company stocks.
Precious metals are valued differently from other asset classes and traded in a separate market. Let’s take a careful look at the precious metal investment options.
An introduction to shiny metals
Gold: Value of gold depends a lot on investor’s sentiment, and it is less impacted by global demand and supply rules. Indians are one of the largest consumers of gold, but in India, demand for gold is mostly seasonal. In the global market price of gold is determined by a 24-hour market.
In the global market, rise and fall in demand from gold hoarders determine its price, who can get swayed by the factors listed below.
- Systematic financial concerns
- War or other political crisis
Silver: Much of silver’s value in the market comes from its extensive use in the industries. Like gold, supply and demand of silver depend on total reserve; if the reserve increase, the price of silver goes down in the global market.
Platinum and Palladium: Both are known for their industrial uses. Platinum is considered more precious because of its extreme rarity. On the other hand, palladium finds its application in a wide range of industries and jewellery sector. It is valued for its durability. Palladium is more durable than platinum and creates stronger alloy when mixed with gold.
How to make your portfolio shine with precious metals
We have already said that precious metals are excellent for investments. But, do you have to buy and hoard them for that reason? Thankfully not. While buying and hoarding is an option, it is not safe and requires high-level security arrangement. Alternatively, there are many other options available that will let you invest in precious metals without buying the physical asset.
Commodity ETFs: You can invest in commodity ETFs in all the three metals. However, investing in ETFs doesn’t entitle you to receive the metal in physical form.
Equity and Mutual Funds: You can invest in company stocks of precious metal miners. These can be leveraged to price movements and traded in exchange. Unless you are aware of how mining stocks behave, avoid direct investment. Instead, you can invest in funds that contain mining company stocks.
Futures and Options: You can leverage price and hedge against future price movements by trading in futures and options. These allow you to bet against possible trend reversals and earn profit.
Certificates: Certificates allow you to purchase precious metals without really holding it physically. These are often of fixed tenure and give an assured return on your investment.
Bullions: You can hoard metals in forms of coins or bars if you want. These work as assurance when the market condition is worst and give you liquidity. But it involves risks associated with safety and storage.
Risk-reward equation in precious metal
Investing in precious metal also involves risk, mainly in the form of price fluctuation. When the market condition is good, prices of metals drop, and the opposite happens when economic factors are slow. Several factors can contribute to the price fluctuation of precious metals. Apart from economic factors, supply scarcity can cause the price to rise. And, when the price increases, it puts a damper in demand and number of buyers in market depletes.
The bottom line
Why should you invest in precious metals? Because they let you hedge against unpredictable market movements. There is historical evidence that precious metals have withstood worst market conditions and offered sanctuary to investors while other options failed. Investing in precious metals ensures steady returns. Every investor should have a share of precious metals in their portfolio. It is a great way to diversify risk. But it will take some practice and understanding how the valuable metal market works and which instruments are worth investing.