Precious Metals Investing 101

Precious metals have been used as a store of wealth for generations and can offer a strong long-term return, backed by U.S. currency as well as hedge against inflation and falling equities. They are also highly liquid, making them an attractive addition to a portfolio of investment vehicles, such as equities, bonds and real estate.

Investors can choose from a range of ways to gain exposure to precious metals, including physical bullion, exchange-traded funds (ETFs) and closed-end funds. ETFs aggregate sums of money from investors to be managed on their behalf, either actively-managed (where the fund manager seeks to beat a benchmark by stock-picking) or passively-managed (where the fund track an index without human intervention). In contrast, closed-end funds hold physical bullion that can be redeemed at will. Both options come with the advantages of liquidity, lower storage costs and potentially more favorable tax treatment for U.S. residents (though tax considerations should always be taken into account).

When investing in precious metals, it’s important to understand the risks and returns of each. Precious metals are volatile, and their prices can rise and fall significantly on a daily basis. While some investors may be drawn to this volatility as a potential source of income, the truth is that it’s more likely to lead to investment losses than gains.

It’s also important to consider the total cost of ownership when evaluating precious metal investments. In addition to the purchase price of the metal, there are a number of other fees that can add up. These can include account opening fees, trading commissions, leveraged margin interest, storage fees and ongoing management fees. It’s crucial for any investor to understand these fees and what level of return they would need to break even after all of these costs are taken into account.

Aside from fees, another downside of investing in physical precious metals is that they don’t provide an income stream. This means that an individual will spend more time agonizing over the price of their metal investment than they would if they invested in a home or rental property, or had a growing 401(k).

As such, it’s important to consider the totality of costs when evaluating precious metals investments. Ideally, an investor should determine their goals and risk profile and determine how best to incorporate them into their overall portfolio diversification plan. If they are relying on precious metals as an inflation hedge, it’s also important to know how much a dollar can buy and how long it will take for the value of those dollars to decrease. This way, an investor can avoid spending unnecessary money on speculative assets and focus on building long-term wealth. This will help them spend less time worrying and more time enjoying the fruits of their labor.