Indian investors have a variety of options for online investment in gold with exchange-traded funds (ETFs) and sovereign gold bonds (SGBs). But, is there a way to invest in other precious metals such as silver or platinum? The answer is yes – through commodity exchanges in India, thematic mutual funds in India, or ETFs in the US, one can invest in metals. However, these precious metals are highly volatile, and therefore, investors need to be careful and well aware of the risks. Only investors with a high-risk appetite should ideally consider them.
This article delves into the opportunities in investing in metals and things to remember when trading in precious metals.
This article covers:
- What are the different types of metals?
- What are precious metals?
- What are base metals?
- What are the different precious metals to trade?
- How to invest in precious metals?
- What affects the price of precious metals?
- Are precious metals a good investment?
- A few things to remember while investing in precious metals
What are the different types of metals?
There are several kinds of metals that investors can invest in, usually categorized as ‘precious’ or ‘base.’ The most popular precious metals are gold, silver, platinum, and palladium. The most well-known base metals include copper, lead, nickel, and zinc.
What are precious metals?
Precious metals are rare, organically occurring metallic elementals that have an inherent value. They do not usually oxidise or corrode, and are anti-tarnish naturally.
The main precious metals are gold, silver, palladium, and platinum – which are all used in jewellery and have a range of different applications.
Precious metals have been used for currency and jewellery throughout human history. It would surprise many that metals like gold are used in devices including iPhones and computer hardware. Precious metals are often considered as safe-havens, especially during market uncertainty.
What are base metals?
Base metals are common metals that naturally oxidise, corrode or tarnish. This includes copper, lead, nickel, and zinc. These metals are used to make products such as copper pipes or to make alloys such as nichrome, an alloy of nickel and chromium. Copper is also a popular sculpture material, with icons including the Statue of Liberty getting its green hue from oxidized copper.
What are the different precious metals to trade?
There are generally four primary precious metals that are commonly traded: Gold, Silver, Platinum, and Palladium. These all have a range of applications, not just as a historical store of money or for their use in jewellery, but also in industry, electronics, medicines, and alloys.
Gold has been used in the production of expensive goods for a millennia. Even today, gold is the most preferred asset of choice for many investors during times of market uncertainty.
Silver has a range of applications, including in batteries, dentistry, and water purification. Silver is also dear in Indian households as utensils or articles for worship, apart from jewellery.
Platinum in its pure form is used in jewellery and dental work. However, it is also popular as an alloy – for example, the alloy of platinum and cobalt is used to make magnets.
Palladium is a congener with platinum – meaning the two metals share a common structure, origin, or function. Palladium is majorly used in converting toxic gases like nitrogen dioxide and others into substances of lesser harm. It is also used in catalytic converters for many cars.
How to invest in precious metals?
As a savvy investor looking to capitalize on long-term capital gains, investing in a metal-based ETF may be considered. You can choose from several funds that are focussed on a single metal like gold or silver, as well as opt for a combination fund that tracks the basic commodity as well as the commodity futures.
Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds are digital investments in gold that the Central government issues through the RBI. They are essentially government bonds with a fixed holding period of 8 years. The USP of investing in gold as a commodity through SGBs is the premise of earning a fixed yield, that is, you can earn an annual interest to the tune of 2.5% annually on the value of gold.
Commodity exchanges like the Multi-Commodity Exchange (MCX) and Indian Commodity Exchange (ICEX) facilitate trade of a whole host of commodities, including but not limited to precious metals. If you’re interested in taking a position on the commodity and/or hedging the same with commodity futures, these exchanges are the preferred path to tread.
What affects the price of precious metals?
Supply and demand
As with any product or service, a shortage of precious metals – or an increased need for them – makes them more valuable. For example, if a strike at a major silver mine interrupts production, silver prices could increase over the short term.
An improvement in mining equipment, on the other hand,could have the opposite effect, speeding up production and saturating the market, thus driving prices down (assuming demand remains constant )
In times of economic and political instability, precious metals are traditionally viewed as safe havens due to their lasting value. One can recall this theory in action in 2016 when Donald Trump’s election to the US presidency caused gold to rally as nervous investors flocked towards precious metals, fearing uncertainty.
Precious metals have a massive range of industrial uses, including in the manufacture of automotive parts, medical devices, electronics, and jewellery. As demand for these goods grows, so does the demand for precious metals, and therefore the prices.
Strength of the dollar
Given that precious metals are dollar-denominated, they are particularly susceptible to fluctuations in the greenback value. When the dollar falls, precious metals are an excellent place to store USD – meaning it is likely to push the price of precious metals higher.
Precious metals offer a desirable alternative for fixed-income investors, whose investments offer a lower yield when rates are slashed. As such, government decision-making may guide investors towards these safe-haven opportunities.
Nevertheless, the Fed’s impact on precious metals should not be overstated. What remains of more importance is how rate announcements in the US affect the dollar, which may trigger a series of price changes.
Precious metals generally perform better in a rising inflation environment. This is because quantitative easing – or money-printing – dilutes the currency’s value in circulation and makes it more expensive to buy assets that are viewed as a reliable store of value.
Are precious metals a good investment?
Many investors regard precious metals as a good investment – particularly gold, as they store value, are anti inflationary and provide great capital protection and appreciation in turbulent times. Precious/non-precious metals are the backbone of many industries and related production, directly impacting the direction of the economy.
A few things to remember while investing in precious metals
- Gold, perhaps the most popular precious metal, is a good portfolio diversifier and offers 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.
The Indian subcontinent has been a pioneer for more than a century when it comes to trading in precious metals. With online trading made extremely simple and renewed investment options like ETFs, mutual funds, derivatives, investors have excellent opportunities to diversify and hedge themselves.
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