Metals of any type are considered precious because nations are running out of their natural resources. This can make investing in precious metals very lucrative. For this article, we concentrate on Gold, Silver, and Platinum, though some of what is given here can also be applied to Copper, Nickel, and Alloys. Investing is not just about buying precious metals it also involves knowing when to sell them. To know when to sell you will need to know the premium price of the metal which will show you how much the metal is marked up. Naturally you would want to buy any investment item at the lowest mark up. A standard for gold is 1-4%.
[{quoted price – spot price} / spot price] X 100 = Premium
Example:
If you are buying 1 troy ounce of gold at $2000 per ounce and the spot price of gold is $1850, than the premium is 8.1%
$2000-1850 = $150/$1859 = 0.081 X 100 = 8.1%
Why is this important? This is an investment so before you can make any money on your investment the price of gold (in this case) must rise 8.1% just for you to break even. The same ounce of gold purchased from a Mint will at most have a mark up of only 4%. So which is the better deal? 8.1% or 4%?
The following are the five basic ways to invest in precious metals:
- 2/15/2013 Price of Gold Bullion $1609.30
- 2/15/2013 Current Price of Silver Bullion $29.76
- 2/15/2013 Current Price of Platinum Bullion $1671.30
Buy and Hold Physical Metals:
Buying and Holding Physical Metals are one of the popular ways to invest in precious metals. The reason being that even if the price falls you still have possession of the actual metal. TIP: Avoid buying antique coins and jewelry as the physical form of precious metals like gold or silver. Antique coins have a value that is not based on weight and jewelry is marked up because of the craftsmanship needed to produce the jewelry.
Investing Precious Metal through a bank or lending institution
This option is not a common as buying physical metal. In fact, not all banks will offer this type of account. A gold or silver investment account pays you interest based on the price movement of the precious metal listed on the account.
Exchange Trade Fund (ETF)
The key word here is fund. This is a conglomerate type investment that is paid a dividend based on the price of the fund. So if, the price of the precious metal rises so does the value of the fund. Unlike a mutual fund, the Exchange Trade Fund can be sold at any time.
Buying Precious Metal Shares:
There are a few things to be aware of when buying precious metal shares. This is the same as buying stock in a company. If the price of the precious metal drops you risk losing your investment. The value of metal shares is based on the value of metal that is still in the ground. In part, the amount of metal in the ground is an estimate. There are also outside factors that impact the cost of mining precious metal. Those include the location of the mine, governmental unrest, natural disasters, and even labor issues. If you choose to buy metal shares, research the mining company and look closely for issues that my crop up.
Investing in Futures through an Index
Futures are also somewhat risky because it is a contract that is paid for now, whereas the product will be delivered at some predetermined point in the future. Precious metals are not the only market that deals with futures. These are often associated with corn, wheat, etc.