Investing in Precious Metals

Anyone watching the slump in metal prices might wonder if they should now be investing in precious metals

Here are a few statistics that show how much the three best known precious metal prices have dropped from their all time highs.


Metal Highest Price (USD) Current Price (USD)
Gold 1889.7 1134.9
Platinum 2253.0 985.5
Silver 45.58 15.42

So why would anyone want to be investing in precious metals? In fact How come they are worth anything at all? And how would one go about investing?

Why invest into precious metals?

A short answer might be: Why not? Historically, metals have always held value of some kind, and it would be reasonable to think of them as assets much like any other investment, whether shares, real estate, diamonds, or an original Van Gogh. Historically they have been shown to be a good way of hedging inflation, especially the hyper-inflation associated with the collapse of an economic system. In that sense, they can be thought of as defensive investments. In other words, they don’t grow in value like shares might with their increasing dividends, or real estate might with its rental value. And unlike real estate, which can be expropriated by a regime so disposed, precious metals can be carried on the person or hidden away without anyone knowing they are there at all. Financial advisors often state that a 5% holding in gold (or silver or platinum) is optimum, although I have yet to see any justification for this number.

With the advent of ETFs, trading metals has never been easier. Rights to a metal trade just like shares in a company. The metal never physically moves so there is no need to find a gold dealer to offer a price for your gold.

How to buy precious metals

Other than the jewellery and other luxury items we might own, there are many other ways of boosting investment exposure to precious metals. Here are a few.

Coins

Coins are minted of gold, silver and even platinum around the world. Well-known examples of gold coins are the Krugerrand from South Africa, the sovereign from the UK and the American Eagle from the USA. Gold coins trade at prices above their weight value, typically of the order of a few percent. Why is this? A simple answer is that demand is higher for coins than for the equivalent weight in bullion. This is partly because of their aesthetic attraction but also for the certainty about their weight and quality. We shouldn’t necessarily be concerned about paying 5% over the gold spot price for our American Eagles, because when we sell we are likely to get something similar to that from our buyer.

Silver coins are obviously much cheaper, and they are minted in (or for) countries you don’t really expect, like the Somali Silver Elephant and the Armenian Silver Coin.

Platinum coins are available as the Canadian Platinum Maple Leaf and the American Platinum Eagle. The Canadian coins are a little cheaper than their colleagues from the USA. Palladium coins are also available, mostly from Russia.

Gold, Silver and Platinum Bars

Unlike coins, bars don’t take the form of money and are not minted by national mints. Nevertheless there are a number of well-known suppliers of bars whose quality can be assured. Bars are cheaper than their equivalent weight in coins and taxation might be different, as coins are, well, money. The cheapest bars are the “generic” bars that don’t have the name of a respected brand stamped on them.

Palladium and Rhodium are two “platinum group metals” which are relatively rare and have commanded very high prices in the past. Palladium bars are available from a number of merchants, and Baird&Co also offer Rhodium bars.

Precious metals held in vaults

Although one attraction of holding precious metals is that nobody else can get their grubby fingers on them, security starts to become an issue and theft is a real concern. An alternative is to hold gold or other metals in a vault. Obviously there is a cost to holding vaulted gold – BullionVault.com quotes 0.12% per annum on its website, for example, but many might consider that to be a price worth paying. The same company offers vaults in five different countries, and you never need to “visit” your gold or silver. You just buy or sell your share of the gold or silver the company has stored away. Further, it is stored for “good delivery”, so the buyer knows its provenance is good. They even quote you the two-way prices on their main page.

Precious metal ETFs

The next logical development in the “food chain” of precious metal trading is the ETF (Exchange Traded Fund). Like the vaulted metals, metals held by the ETF are kept securely in safes and through holding the ETF, you have a beneficial interest in some portion of that metal. Although in theory you can exchange your ETF certificates for physical gold, you probably wouldn’t want to do that. There will be a cost of breaking the ETF and the gold you receive will cease to have the “good delivery” status that it maintains in the vault. Hence ETFs are used for trading metals rather than accumulating them.

You would think that all ETFs for the same metal would be the same. But there are differences. The annual management fee is the first thing to consider. If the ETF charges 0.5% per annum then this is taken from your gold and after one year your ETFs will be backed by only 99.5% of the gold they started with. These costs are higher than the cost of vaulted gold, but trading ETFs is much simpler and quicker. The location of the gold (or other metal) backing the ETF will vary – could be in London or Zurich, for example – and the size of the ETF might affect its liquidity. Not a problem if you are trading a few hundred dollars worth but much more a problem if you have millions of dollars of a retirement fund to liquidate.

There are ETFs which are structured to be more clever than simply holding the metal. Some have prices which move at double the rate of the underlying, while others increase when the underlying decreases. If you have a particular view of the market, one of these might be preferable.

Some, mostly gold traders, point to the risk of government intervention in holding ETFs. If a government wanted to expropriate your gold, they could get their hands on the gold backing an ETF far more easily than gold held offshore somewhere.

Platinum, Palladium and Rhodium ETFs also exist.

Shares in mining companies

An alternative to holding the metals or products backed by metals is to hold shares in mining companies. This can be a risky strategy, especially when prices fall and mines become uneconomical. Recently, heavily indebted companies like Glencore have seen their share prices tumble as solvency worries have increased. On the other hand, heavily indebted companies or those with less economical mines would likely see their share prices rise more quickly than their peers when metal prices increase. The Euromoney Global Mining Index currently stands at about 30% of its all time high, having fallen by much more than the minerals the companies making up the index are extracting. On the other hand the bull market leading to the 2005 peak saw a return of 1000% in ten years.

And what about tax?

I would love to give a complete answer here, but every country has its own rules. In the USA, coins can be held in IRA schemes. And in the UK, SIPPs can hold gold bullion which is 99.99% pure free of CGT. Silver is more complicated, as it incurs VAT in the EU (in the UK this means 20%), being classified as an industrial metal rather than a precious metal. However if it is held in an accredited vault, there is no VAT until you take delivery of it (so don’t). An interesting tax dodge in the EU is to buy silver in Estonia, an EU country that doesn’t charge VAT. Singapore is another country where gold and silver can be traded tax-free, and for dealers is often the recommended country of choice.

So is investing in precious metals worth it?

In terms of whether it’s an outperforming investment or not, who can tell? But as an insurance policy against global economic meltdown, most certainly yes. And if that’s your worry, get as close to the physical stuff as you can. For short-term inflation hedging, ETFs or even mining shares would do the job.

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