How to Save Money When Buying Pure Metal

Gold and silver have been recognized as valuable metals and were highly coveted by ancient civilizations. Precious metals still have their place in a savvy investor's portfolio in modern times. But which precious metal is best for investment purposes? And more importantly, why are they so volatile?

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There are many ways to buy precious metals like gold, silver, platinum, and a host of good reasons why you should give in to the treasure hunt. So if you're just getting started out in precious metals, read on to learn more about how they work and how you can invest in them.

Key Takeaways

• Precious metals are one way to diversify an investor's portfolio and can act as a hedge against inflation.
• Although gold is the most common investment in the precious metals sector, it isn't the only one out there for investors.
• Silver, platinum, and palladium are all commodities that can be added to your precious metals portfolio, and each has its own unique risks and opportunities.
• There are a number of factors that make these investments so volatile, including supply, demand, and geopolitical issues.
• In addition to owning physical metal, investors can gain access through the derivatives market, metal ETFs and mutual funds, and mining company stocks.

Gold

We'll start with the granddaddy of them all. Gold is unique for its durability (it doesn't rust or corrode), malleability, and ability to conduct both heat and electricity. It has some industrial applications in dentistry and electronics, but we know it principally as a base for jewelry and as a form of currency.

Its value is determined by the market 24 hours a day, seven days a week. Gold trades predominantly as a function of sentiment&#;its price is less affected by the laws of supply and demand. This is because the new mine supply is vastly outweighed by the sheer size of above-ground, hoarded gold. To put it simply, when hoarders feel like selling, the price drops. When they want to buy, a new supply is quickly absorbed and gold prices are driven higher.

Several factors account for an increased desire to hoard the shiny yellow metal:

• Systemic financial concerns. When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought out as a safe store of value. 
• Inflation. When real rates of return (RoR) in the equity, bond, or real estate markets are negative, people regularly flock to gold as an asset that will maintain its value. 
• War or political crises. Conflict and political upheaval have always sent people into a gold-hoarding mode. An entire lifetime's worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter, or safe passage to a less dangerous destination. 

The United States has the world's largest reserves of gold, amounting to 8,133.5 tons as of August .

Silver

Unlike gold, the price of silver swings between its perceived role as a store of value and its role as an industrial metal. For this reason, price fluctuations in this market are more volatile than in the market for gold.

While silver roughly trades in line with gold as an item to be hoarded, the industrial supply/demand equation for the metal exerts an equally strong influence on its price. That equation has always fluctuated with new innovations, including:

• Silver's once predominant role in the photography industry (silver-based photographic film) has been eclipsed by the advent of the digital camera.
• The rise of a vast middle class in the emerging market economies of the East created an explosive demand for electrical appliances, medical products, and other industrial items that require silver inputs. From bearings to electrical connections, silver's properties made it a desired commodity.
• The use of silver in batteries, superconductor applications, and microcircuit markets.

It's unclear whether, or to what extent, these developments will affect overall non-investment demand for silver. One fact remains: Silver's price is affected by its applications and is not just used in the fashion world or as a store of value.

Platinum

Like gold and silver, platinum trades around the clock on global commodities markets. It often tends to fetch a higher price (per troy ounce) than gold during routine periods of market and political stability simply because it's much rarer. Far less of the metal is actually pulled from the ground annually.

There are also other factors that determine platinum's price:

• Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalysts, which are used to reduce the harmfulness of emissions. After this, jewelry accounts for the majority of demand. Petroleum and chemical refining catalysts and the computer industry use up the rest.
• Platinum prices are influenced heavily by the geopolitical conditions in the countries where mining takes place, as well as the supply and demand equation. In this respect, prices have been determined, in large part, by auto sales and production numbers. For example, the drop in vehicle production and curtailed demand for autocatalysts (which accounts for a third of platinum demand) during the COVID-19 pandemic pushed prices down.
  Supplies dropped by 5% and demand increased by 21% during the first quarter of (primarily driven by the automotive industry), which likely contributed to an upward tick in the metal's price.
  With more car manufacturers substituting palladium for platinum in autocatalysts, demand may continue to put upward pressure on platinum prices, although this depends on continuing demand for low and no-emission vehicles.

• Platinum mines are heavily concentrated in only two countries: South Africa and Russia.
  This creates greater potential for cartel-like action that would support or even artificially raise platinum prices.

Investors should consider that all of these factors serve to make platinum the most volatile of all precious metals.

Palladium

Lesser known than the three metals mentioned above is palladium, which has more industrial uses. Palladium is a shiny, silvery metal used in many types of manufacturing processes, particularly for electronics and industrial products. It can also be used in dentistry, medicine, chemical applications, jewelry, and groundwater treatment.

The majority of the world's supply of this rare metal, which has the atomic number 46 on the periodic table of elements, comes from mines located in the United States, Russia, South Africa, Zimbabwe, Canada, Australia, and Finland.

Jewelers first incorporated palladium into jewelry in . When mixed with yellow gold, the alloy forms a metal stronger than white gold. In , the government of Tonga issued circulating palladium coins touting the coronation of King Taufa'ahau Tupou IV. This is the first recorded instance of palladium used in coinage.

Metalworkers can create thin sheets of palladium down to one-two hundred fifty thousandths of an inch. Pure palladium is malleable, but it becomes stronger and harder once someone works with the metal at room temperature. The sheets are then used in applications like solar energy and fuel cells.

The largest industrial use for palladium is in catalytic converters because the metal serves as a great catalyst that speeds up chemical reactions and scrubs hydrocarbons like carbon dioxide and carbon monoxide. About 80% of global palladium supplies are used in catalytic converters.

In , South Africa was the world's largest producer of platinum and the second-largest producer of palladium (Russia was the first).

Filling Up Your Treasure Chest

Let's take a look at the options available to those who want to invest in precious metals.

• Commodity Exchange-Traded Funds (ETFs): Exchange-traded funds are a convenient and liquid means of purchasing and selling gold, silver, palladium, or platinum. Investing in ETFs, though, doesn't give you access to the physical commodity, so you don't have a claim on the metal in the fund. You will not get the actual delivery of a gold bar or silver coin.
• Common Stocks and Mutual Funds: Shares of precious metals miners are leveraged to price movements in the precious metals. Unless you're aware of how mining stocks are valued, it may be wiser to stick to funds with managers with solid performance records. 
• Futures and Options: The futures and options markets offer liquidity and leverage to investors who want to make big bets on metals. The greatest potential profits and losses can be had with derivative products. 
• Bullion: Coins and bars are strictly for those who have a place to put them like a safe deposit box or safe. Certainly, for those who are expecting the worst, bullion is the only option, but for investors with a time horizon, bullion is illiquid and downright bothersome to hold.
• Certificates: Certificates offer investors all the benefits of physical gold ownership without the hassle of transportation and storage. That said, if you're looking for insurance in a real disaster, certificates are just paper. Don't expect anyone to take them in exchange for anything of value.

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Are Precious Metals a Good Investment for You?

Precious metals offer unique inflationary protection. They have intrinsic value, carry no credit risk, and cannot be inflated. That means you can't print more of them. They also offer genuine upheaval insurance against financial or political/military upheavals.

From an investment theory standpoint, precious metals also provide a low or negative correlation to other asset classes like stocks and bonds. This means even a small percentage of precious metals in a portfolio will reduce both volatility and risk.

Precious Metals Risks

Every investment comes with its own set of risks. Although they may come with a certain degree of security, there is always some risk that comes with investing in precious metals. Prices for metals can drop due to technical imbalances (more sellers than buyers), changes in supply and demand, geopolitical issues, and other related factors. That said, during times of economic uncertainty, sellers benefit, as prices tend to shoot up.

What Are the Benefits of Investing in Precious Metals Over Stocks?

Investing in precious metals like gold and palladium comes with some benefits over investing in stocks, such as being a hedge against inflation, having intrinsic value, no credit risk, a high level of liquidity, bringing diversity to a portfolio, and ease of purchasing.

What Are the Best Ways to Invest in Precious Metals?

The best way to invest in precious metals is either to buy the metal outright and hold the physical form or to purchase ETFs that have significant exposure to precious metals or companies involved in the precious metals business.

What Is a Disadvantage of Investing in Precious Metals?

Precious metals have no cash flow so an individual will receive no income. If an individual holds the outright metal, there is also a storage cost associated with the investment.

The Bottom Line

Precious metals provide a useful and effective means of diversifying a portfolio. The trick to achieving success with them is to know your goals and risk profile before jumping in. The volatility of precious metals can be harnessed to accumulate wealth. Left unchecked, it can also lead to ruin. 

Precious metals such as silver have long been an alternative to traditional investments such as stocks and bonds. When times get tough or the economy faces severe inflation, some investors turn to silver to hedge their bets or to invest more defensively. Silver prices spiked in March following the collapse of Silicon Valley Bank, as concerns were raised about the stability of the financial system.

Investors like silver for many reasons. Many see it as a store of value in uncertain times, while others see silver and other precious metals such as gold as protection against inflation. For this latter group, investing in silver is a way to be sure that they have a currency that can&#;t be inflated away by money printing or potentially destructive Federal Reserve policy.

Curious about how to buy silver? There are several ways to invest in the metal, from owning it outright to owning shares in companies that produce it. Here are five of the best ways to invest in silver.

How to invest in silver: 5 popular ways

Each of the ways to invest in silver comes with its own risks and rewards.

1. Coins or bullion

Owning physical silver, either as coins or bullion, is a psychologically and emotionally satisfying way to invest in silver. You have possession of it and can use it, if necessary. And in some cases, it&#;s actually relatively easy to access. For example, U.S. coins made before contain about 90 percent silver, and you can purchase them at the value of their silver content.

If the price of silver rises, you can make a profit on silver coins and bullion, but that&#;s the only way you&#;ll make money here, since the physical commodity does not produce cash flow, unlike a quality business.

You can purchase silver through local dealers and pawn shops or online dealers such as APMEX or JM Bullion. More specialized dealers allow you to purchase whole bars rather than just coins.

Risks: It can be easy to overpay for physical silver, so be sure to note the spot price to ensure that you&#;re getting a fair price. Similarly, if you need cash in a hurry, you may not be able to get the full value for your physical silver, especially if you need to go through a dealer.

Watch out if you&#;re buying collectible coins, since you&#;ll likely pay extra for the collectibility of the coin, meaning that you&#;re overpaying for the actual silver content. Finally, like all physical assets, silver is subject to theft, so you&#;ll have to safeguard it and maybe even insure it.

2. Silver futures

Silver futures are an easy way to wager on the rising or falling price of silver without any of the hassles of owning physical silver. You could even take physical delivery of the silver, though that&#;s not the typical motivation of those speculating in the futures markets.

Silver futures are an attractive way to play the silver market because of the high amount of leverage available in futures contracts. In other words, you have to put up relatively little capital to own a relatively large position in the metal. If silver futures move in the right direction, you&#;ll make a lot of money very quickly, though you can lose it just as quickly if you&#;re wrong.

Risks: The leverage in futures contracts works both ways, meaning it magnifies your gains and your losses. If the market moves against you, you&#;ll have to put up more money to hold the position. And if you can&#;t, the broker will close out the position and you&#;ll be stuck with a loss.

Futures are risky, and they&#;re more suitable for advanced sophisticated traders. You&#;ll usually need a large account balance to get started, too. Finally, only some online brokers offer futures trading.

3. ETFs that own silver

If you don&#;t want to own physical silver directly but also want a lower-risk method than futures, you can buy an exchange-traded fund (ETF) that owns physical silver. You&#;ll have the potential reward for owning silver if the price rises, but fewer risks such as theft. An ETF that owns physical silver will deliver the return of silver prices minus the ETF&#;s expense ratio.

ETFs offer another advantage, too. You&#;ll be able to sell your silver at the market price, and the funds are highly liquid. So you&#;ll be able to sell your funds at what&#;s likely the best price, and you can do so on any day the stock market is open.

The two main ETFs owning physical silver are iShares Silver Trust (SLV) and Aberdeen Standard Physical Silver Shares ETF (SIVR). Traders can also wager on the silver market via an ETF that owns futures contracts through ProShares Ultra Silver (AGQ), though it&#;s better as a short-term bet than a long-term hold, because of how the fund is structured.

Risks: Like gold and other commodities, silver can be volatile, especially over short periods. But with an ETF you&#;ll be able to dodge some of the bigger risks of owning physical silver yourself, namely the risk of theft, the illiquidity and the poor pricing when it&#;s time to trade.

4. Silver mining stocks

You can also take advantage of a rising silver market by owning the stocks of companies that mine the metal.

By owning a miner you can benefit in two ways. First, if the price of silver rises, the company&#;s earnings should rise along with it. In fact, silver miners&#; profits will rise faster than the price of silver, all else equal. Second, the miner can raise production over time, also increasing its profits. That&#;s an extra way to win with silver, over and above just betting on the price itself.

Risks: Any time you invest in an individual company, it&#;s important to do extensive analysis on it to be sure that you&#;re buying a high-quality company that can succeed. Many miners are risky outfits, and some have yet to dig a hole in the ground, let alone mine silver from it. Plus, because their profits depend on the volatile price of silver, mining stocks can be volatile, too.

5. ETFs that own silver miners

If you&#;re not looking to do a lot of analysis on silver miners but still want the advantages of owning a mining company, you can turn to an ETF that owns silver miners. You&#;ll get diversified exposure to miners and lower risk than owning one or two individual mining stocks.

Three ETFs are classified as silver miners, according to ETF Database: Global X Silver Miners ETF (SIL), iShares MSCI Global Silver Miners ETF (SLVP) and Amplify Junior Silver Miners ETF (SILJ).

Risks: A sector ETF reduces the costs of any single miner doing poorly, but anything that hits the whole industry, such as a falling price of silver, will likely ding the fund significantly. And pay close attention to what&#;s in those funds, since they&#;re not all created equal. Some may offer more exposure to higher-quality companies, while others focus more on riskier junior miners.

Is silver a good investment?

Investors like silver for many of the same reasons that they like gold and precious metals more generally. Here are some of the most important reasons:

• Returns: Over certain periods of time silver has outperformed highly regarded asset classes such as stocks.
• A store of value: Silver can hold its value and even gain over time, providing a way for investors to generate profits.
• Liquidity: Silver is generally a liquid market, and if you&#;re buying certain kinds of silver assets, they&#;re highly liquid.
• Less correlated to asset markets: Part of silver&#;s appeal is that it&#;s less correlated to other markets such as stocks, meaning it can act as a hedge against those markets.
• Diversification: Because the metal is less correlated, silver can act as a way to diversify a portfolio, reducing risks and potentially increasing returns.

Risks of investing in silver

Of course, silver is not without risks or drawbacks.

Silver itself does not produce cash flow, so it may not be clear when it&#;s a good time to buy. That&#;s in contrast to stocks, where the underlying company may be cheap based on its earnings or future prospects.

Second, because silver doesn&#;t produce cash flow like a business, investors looking to profit must rely exclusively on someone else paying more for the precious metal than they did. In contrast, owners of a business &#; through either individual stocks or ETFs &#; can profit through the rising price of the commodity or the increased earnings of the business. So those who have a stake in these types of businesses have multiple ways to win with silver.

Is now a good time to invest in silver?

Investors can consider investing in silver in a variety of scenarios:

• Supply and demand are out of touch: If the supply of silver is not keeping up with demand, it may cause the price of silver to rise.
• An attractively priced company becomes available: If you find a company that&#;s ramping up production or is able to take advantage of rising silver prices, it could be a good time to buy.
• You need a hedge against inflation: Some investors turn to commodities such as silver as a way to hedge against inflation
• You want to hedge your portfolio: If you have significant exposure to rising silver prices in your portfolio (for example, silver is a major input for your businesses), you could buy silver and help offset that exposure.
• You want to add commodities to your portfolio: Silver can be part of an allocation to commodities in your portfolio, helping to diversify your holdings and lower your risk.

While adding silver to your portfolio can be a useful strategy for more advanced investors, beginners may be better served by building a well-rounded portfolio made up of the best investments.

Bottom line

Investing in silver is not a good fit for everyone, and some investors prefer to focus on cash-flowing businesses rather than invest in the metal itself. Investors in businesses have multiple ways to win, and it&#;s why super-investors such as Warren Buffett prefer businesses over commodities.

It&#;s easier and less costly to own stocks or ETFs than physical silver, even as they&#;re more liquid than the actual shiny stuff. Still, owning bullion means you have no counterparty risk (with an exchange or a company, for instance), though the investment relies only on you for safekeeping.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.

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