3 Tips For Understanding The Precious Metals Market


December 30, 2020 | AtoZ Markets – Precious metals are known as hedges against inflation, as their value moves against the value of stocks, bonds, and mutual funds. However, the market is volatile and investors have to be careful before they decide to invest in certain precious metals assets or companies. 

Here are some essential tips to help you understand the precious metals market:

1. Know The Ways To Invest In Precious Metals

Would you rather own gold physically or would you be satisfied with dividends?  Here are the following ways to invest in precious metals:

  • Physical Ownership

If you’d rather see what your investment looks like, you can choose to buy physical bullion bars and coins in your gold IRA. You can own an existing IRA and fund your gold IRA through a gold IRA rollover. It’s a method where you can transfer a fraction of your standard IRA cash to purchase bullion gold. Investors are using this method as a way to diversify and prepare for their retirement. 

  • Mining Companies

Investors receive dividends from these companies as investment returns. 

  • Exchange Traded Funds (ETFs)

These ETFs also invest in physical and futures-based exposure. Gold and silver can be bought as ETFs from brokerage accounts and is the easiest way to invest in precious metals. ETFs are pricey but are easy to liquidate.

2. Understand The Forces That Influence Value

Spot prices of precious metals are influenced by the following:

  • The US Dollar

The precious metals market is said to move on the opposite side of the US dollar. If the dollar is weak, gold rises.  The currency itself has many factors influencing its value such as stages of debt, unemployment rates, global strength., interest rates, and oil prices among others. Global markets place value on precious metals in US dollars, and the two have an inverse historic relationship.

As previous reports have shown, the value of precious metals rise as the value of the dollar goes down, and vice versa. That discourages investors to buy precious metals when the US dollar is high, save for the times when both the currency value and the demand for precious metals are both on the rise. 

  • Central Banks

Central banks as the overseer of national currencies may use precious metals like gold, silver, and platinum as a part of low-risk portfolio of reserves. That also includes bonds and foreign currencies. Not only do private investors uses precious metals as protection against inflation, so do central banks. They, too, acknowledge that precious metals are useful during the times of economic unrest as they’re easy to liquidate. 

  • Quantitative Easing

Also known as QE, quantitative easing is when central banks begin to purchase various stable assets to encourage an economical boost. New money is given as credit to motivated investors to sell government bonds to central banks. The move risks inflation, and influences the rise in gold prices especially when the economic times are edging towards recession.

3. Consider The Costs

Be prepared for the costs associated with investing in precious metal, be they paper or physical asset. Here are some of these costs:

  • Storage Costs

If you’re buying physical gold or silver, you need to find somewhere secure to store them. There are various storage providers that can do for you at a cost. You can also get a safety deposit box at a bank.

  • Taxes

In some places, gains from owning physical gold get taxed at a higher rate.

  • Mark-up to Spot Prices

Generally, the mark-up is between 2-8% over the current spot prices when you purchase coins, bars, or bullions. ETFs are typically sold at near-spot prices. However, your manager would probably charge annual fees to cover their costs and profit.

In Conclusion

Investing in precious metals is a way of diversifying assets. They’re tangible and proven hedges against inflation. However, it’s important to do some exploring in the precious metals market to see if it’s right for you as an investor. Choosing between physical, ETFs, and dividends also gives you pros and cons to consider. To know how you can benefit from precious metals, it’s best to do due diligence and gather as much information as you can before dabbling right through. 

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