Disclosure: Our content isn't financial advice. Do your due diligence and speak to your financial advisor before making any investment decision. We may earn money from products reviewed. (Learn more)
Disclosure: Our content isn't financial advice. Do your due diligence and speak to your financial advisor before making any investment decision. We may earn money from products reviewed. (Learn more)
Precious metals investing is an increasingly popular form of wealth-building and risk management for American investors. In 2020, 16% of U.S. investors owned some form of precious metals investments and U.S. imports of precious metals reached a 19-year high.
In years past, the average American investor was limited to stocks, bonds, and mutual funds by brokerage firms. Fortunately, these days the rise of self-directed IRAs and 401(k)s have broadened investors’ selection of asset types. These include physical precious metals such as gold, silver, and platinum-group metals like rhodium or palladium.
Curious about adding precious metals to your investment account? In this comprehensive guide, we’ll discuss the fundamentals of precious metals investing, its various risk management benefits, and how you can get started investing in this asset class.
Table of Contents
Precious Metals Investing 101: The Fundamentals
Broadly defined, precious metals investing refers to any allocation of capital in rare, physical metal commodities that hold economic value. Like any investment, they are bought and sold on open markets by investors looking to sell them at a profit at a later date.
Gold is the most popular investment-grade precious metal for retail investors. In fact, gold as an investment dates back millennia, with the earliest known gold bullion artifacts being sourced from burial grounds in Ancient Thrace (modern-day Bulgaria) in 4,000 BC.
Their unique chemical properties make precious metals like gold and silver extremely useful in manufacturing, medicine, electronics, dentistry, and jewelry making. Given their myriad industrial use cases, precious metals have always held value throughout their existence. Small wonder, then, why investors flock to precious metals as a stable store of wealth.
Over the previous 50 years, precious metals have performed exceptionally well. Below, we’ve listed the inflation-adjusted performance of the top three precious metals’ spot prices relative to the U.S. stock market benchmark, the S&P 500, since October 1970:
The data doesn’t lie. Throughout the past half-century, precious metals have grown at a pace that matches the U.S. stock market. More importantly, their volatility shares only a weak correlation with that of stocks, as well as low in-group correlation, thereby making them an effective hedge against routine instabilities in the equities market.
How to Invest in Precious Metals
For many investors, entering the precious metals market is facilitated through a self-directed IRA (SDIRA). Both traditional and Roth IRAs offer a host of tax advantages that allow precious metals investments to accrue value without owing taxes on the capital gains. As such, they’re the best resources we have for investing in precious metals.
Large brokerage firms such as Charles Schwab or Fidelity Investments don’t offer self-directed IRAs to their clients. Their brokerage IRAs are highly restricted in the types of asset classes they can invest in, and, in most cases, outright prohibit physical precious metal purchases.
Therefore, aspiring precious metals investors have to apply for an SDIRA through a third-party custodian. If you’re interested in building a precious metals IRA, consider browsing our list of the top SDIRA companies on the market.
Investing in Gold
Gold is the king of commodities investing. Currently, the United States federal government holds 8,133 tonnes of physical gold in reserve. Central banks, such as the U.S. Federal Reserve, maintain gold reserves for largely the same reasons that individuals do—to counterweight a decline in the value of the dollar, and to hedge against hyperinflation.
According to the chart below (Fig. 1.), the spot price of gold has roughly risen in step with the Consumer Price Index (CPI) since the mid-1970s when gold futures were first traded. More specifically, gold has outpaced the growth of the CPI—the measure of the average change in prices paid by consumers—by about 155%.
Fig. 1. Source: Seeking Alpha
As demonstrated, gold can help investors hang on to more of their wealth when the dollar is in decline. However, investors should treat gold as only one of several elements that comprise a strong diversification strategy.
In truth, gold is merely one of many assets that counter the effects of inflation. Other asset types, such as REIT indexes, stock market indexes, and investment-grade corporate bonds do as good a job or better at outpacing inflation. However, that doesn’t mean that gold doesn’t also serve an important function as a supplementary hedge in one’s portfolio.
Benefits of Gold Investing
Gold has a host of benefits that can assist with the development of one’s retirement investing strategy, or simply to build one’s savings. For example, gold poses the following unique benefits in an investor’s portfolio:
- No Counterparty Risk: Unlike stocks, physical gold bullion cannot default on debt or declare bankruptcy; therefore, it doesn’t carry the same counterparty risks as more conventional asset types.
- Leverage Can Be Applied: When buying gold futures contracts, investors can leverage their purchasing power by trading on margin.
- Low Liquidity Risk: As an industrial material, gold is perpetually in demand; therefore, gold investors can sell or pawn their gold with relative ease if they need to convert their assets to cash quickly.
- Low Maintenance Costs: Unlike other alternative assets, like real estate, gold bullion doesn’t generate recurring tax liabilities (when held in an IRA) and doesn’t require ongoing upkeep or repairs as a house would.
- Low Crash Risk: In its multi-millennia history as a financial instrument, gold bullion has never gone to zero—gold holds its value remarkably well over time.
Finally, gold is what some consider to be a disaster hedge. For example, during the coronavirus crash between February and March 2020, the S&P 500 plummetted 34%. In that same period of time, the spot price of gold only fell by about 3.5%.
In other words, you would have lost nearly 10 times more if you had been all-in on the stock market rather than all-in on gold during the crash of 2020. The same can be said of other periods of geopolitical or financial instability, such as the global financial crisis, when gold prices rose +78% between late 2007 and early 2010.
It’s no surprise that gold is often thought of as portfolio insurance. Although you would be hard-pressed to find a successful fund manager who would recommend going all-in on the yellow metal, many of the world’s top billionaires—including Ray Dalio and Warren Buffet— hold a portion of their managed assets in gold to offset the risk of global disaster.
Best Gold Companies for IRA/401(k) Investors
Before you get started investing in gold bullion, you’re going to need to do your due diligence by thoroughly researching a gold IRA or 401(k) provider. Unless you’re interested in investing in paper gold (e.g., gold stocks or gold ETFs), which do not offer the same benefits as real gold, you must invest via a self-directed IRA provider.
As previously mentioned, legacy brokerages such as Vanguard, Fidelity, and Charles Schwab won’t be able to provide you with a self-directed IRA. For that, you’re going to have to look for other trusted investment companies. To make your life easier, we’ve put together a list of the world’s top precious metals IRA providers that offer competitive fee structures and have the highest customer satisfaction rates.
Investing in Silver
Investment-grade silver is bought and sold to the tune of 200 million ounces in volume every year by global investors. Although multinational banks such as JP Morgan and HSBC hold vast reserves of silver in their vaults, about 11.6% of ordinary American investors also own some amount of silver in their portfolios.
Silver was once a global currency standard and, until 1935, much of the world utilized silver coinage as legal tender. Since the end of the silver standard, most silver metal is now consumed in the industrial manufacturing process. In particular, the burgeoning demand for silver alloys in the production of solar energy and electric vehicles (EVs).
Fig. 2. Source: The Silver Institute World Silver Survey 2019
As demonstrated above (Fig. 2), the projected global demand for silver within the automotive industry is rising rapidly over the next couple of decades. In 2019, an estimated 1,611 tonnes of silver were used in the automotive industry, up 4% from the previous year.
Pure silver is the world’s best conductor of electricity, and as the automotive industry continues to undergo electrification, we should see a steady rise in industrial demand for the alloy. However, that’s not the only reason why investors should have the white metal on their radar.
Benefits of Silver Investing
Investors interested in precious metals may want to consider supplementing their portfolio with silver. Among the most compelling reasons to invest in silver is the fact that silver and the U.S. stock market share no meaningful correlation. As depicted below (Fig. 3), the S&P 500 and silver ratio up to 250 days maintains a weak correlation (-.25 to +.33).
Fig. 3. Source: SunshineProfits
Therefore, investors can purchase silver with confidence knowing that fluctuations in the stock market likely won’t have an adverse effect on the value of their silver investment. As a hedge, silver holds exceptional value especially in view of the fact that industrial demand is expected to rise in the years ahead.
Beyond that, there are several other benefits of silver investing that investors should account for, including the following:
- Lower Entry Point: Investors can purchase more silver bullion at a lower price point than gold, as the gold-silver ratio currently hovers around 70. That means that the per-ounce price of gold is about 70 times higher than silver.
- Safe and Secure: Like all precious metals, silver bullion is vaulted by trusted third-party custodians who fully insure each deposit. Insurance costs are bundled in the annual storage fees and represent about 0.1 to 0.5% of the investment’s value.
- Capitalize on Renewable Energy: Silver is an essential conductor metal that is used widely in the production of not only EV cars but also photovoltaic solar panels. Therefore, silver has considerable long-term upside potential as the world transitions to a low-carbon economy.
- Historically Under-Valued: Silver is one of the few assets currently trading at a spot price lower than it was in 1980. If following the same growth trajectory as other precious metals, silver would be traded at several times its current value.
Best Silver Companies for IRA/401(k) Investors
Investing in physical silver requires a self-directed IRA or 401(k) with full checkbook control. A basic brokerage account places restrictions on the kinds of assets one can add to their portfolio, including silver, which necessitates the use of a self-directed account.
If you want to get started with silver investing or to initiate a silver IRA rollover, consider browsing our exclusive list of the most trusted silver IRA companies. All of the companies listed therein have been in the business for many years and boast stellar customer reviews, competitive storage rates, and offer full administrative freedom for account holders.
Investing in Platinum
The lesser-known third precious metal is platinum, which, in fact, refers to several related metals known as platinum-group metals (PGM). Often considered the best-value precious metals on the market, PGMs share unique chemical properties that make them extremely desirable for industrial usage, including:
- Malleability: Platinum is a soft metal that is very easy to shape, with a density of about 12.4 ounces per cubic inch; it’s also highly ductile, making it apt for stretching into wire.
- Heavy Weight: Platinum is an extremely heavy substance, with one six-inch cube weighing as much as an adult human being.
- Catalyst: A highly catalytic material, platinum improves fuel cell efficiency and is used widely in the production of silicone, nitric acid, and benzene.
- Toxicity: Platinum is a non-toxic substance
- Melt Resistance: Platinum has an extremely high melting point of 1,768 degrees Celcius, making it one of the world’s most heat-resistant substances, even among noble metals.
Platinum is an extremely scarce resource, with only five million troy ounces mined every year—most of which emanating from South Africa or Russia. This pales in comparison to gold and silver, which are extracted to the tune of 82 million ounces and 885 million ounces, respectively, each year.
Its rarity makes platinum a very interesting investment asset. In 2020, platinum investments netted a return of about +20.8%. In the years ahead, mining industry analysts forecast a chronic supply deficit of about 1.2 million ounces for platinum. Therefore, we should expect to see continued positive price movement in platinum in the years ahead.
Benefits of Platinum Investing
Once known as “white gold”, platinum is currently regarded as one of the most undervalued rare commodities on the market. Used widely in both jewelry-making and industrial manufacturing, the metal has enormous demand-side price pressure that’s punctuated by a chronic supply shortage. In other words, it’s a relatively safe bet that platinum will continue to appreciate in value, at least in the near term.
The primary benefit of investing in platinum is that PGMs have a long growth runway. Given its unique market balance, in which demand has outpaced supply every year since 2012, platinum is deeply entrenched in a deficit. Precious metals investors can invest in platinum with confidence knowing that they have a blue-chip diversifier that can strengthen their commodities position via high growth potential.
Best Platinum Companies for IRA/401(k) Investors
Prospective platinum investors should be aware that not every precious metals IRA company offers PGMs. Make sure you thoroughly research every SDIRA custodian and inquire about whether they permit platinum bullion in an IRA.
To get started, check out our list of the top precious metals IRA companies. These providers offer the most diverse selections of metal bullions on the market, though not everyone is guaranteed to carry platinum or other noble metals.
Investing in Palladium
Palladium is a platinum-group metal that’s used primarily in the construction of catalytic converters in motor vehicles. As of 2021, approximately 85% of the world’s palladium supply, a metal sourced exclusively from emerging markets, was used in the auto sector.
In terms of price appreciation, palladium has outperformed platinum, gold, and silver. The chart below (Fig. 4) demonstrates the considerable growth that palladium has seen in recent years due to supply tightness and new environmental regulations for automakers.
Fig. 4. Source: Reuters
The benefits of investing in palladium largely match those of platinum. Palladium is an extremely rare noble metal on which many environmental technologies depend. As such, it stands to reason that we’ll continue to see palladium hold value as an investment asset for years to come.
Those interested in investing in palladium should first inquire with a precious metals IRA provider. Due to growing demand from retail investors, many of the world’s largest precious metals vendors are now restocking palladium bullion and coinage, including 1 oz. Canadian Maple Leaf coins and .995 pure palladium bars.
Investing in Diamonds
Although not technically a precious metal, diamonds are nonetheless some of the world’s rarest and most sought-after commodities. In fact, even 1-carat diamonds can hold value comparable to a kilogram of gold bullion.
Unfortunately, diamond investing is a tricky business. Unlike proper precious metals, which are evaluated by weight and purity, diamonds and other gems are appraised according to qualitative criteria. That every diamond is unique renders its investment potential dubious.
Diamonds should be certified and scrutinized closely by a professional before purchase. It’s imperative that diamond investors do not proceed uncritically during a diamond purchase. However, if you do choose to invest in diamonds, make sure that you do so with a licensed self-directed IRA, so you can minimize your tax liability on the capital gains.
3 Types of Precious Metals Investing
There are several ways that investors can gain exposure to the precious metals market. Each method poses its own set of unique benefits and drawbacks that every aspiring precious metals investor should carefully consider.
Below, we’ve listed the three most popular types of precious metals investing that are suitable for casual investors and retirement investors alike.
Physical Metal Bullion
Many investors of all stripes opt to invest in physical precious metals bullion because they pose a wide array of benefits for any portfolio. Since the physical metals market has low liquidity (i.e., buying and selling metals is a relatively time-consuming process), physical metal prices tend not to suffer from the same volatility levels as paper-based investments.
Although they have to be vaulted by an approved third-party custodian per IRS regulations, physical metals allow investors to take possession of hard assets that are secure from digital theft or compromise.
Furthermore, physical metal bullion investments are free from counterparty risk, as well as inflationary risks. Unlike gold stocks, physical metals cannot declare bankruptcy or fail to live up to their contractual obligations—for this reason, there’s no risk associated with a counterparty. Likewise, real assets provide confidentiality and anonymity that digitized assets do not, while also providing a haven when equity market returns slump.
Individual gold stocks are another popular form of exposure to the gold market. Some investors choose to invest in gold stocks, such as Barrick Gold Corp (NYSE: GOLD) or Franco-Nevada (TSE: FNV), for their relatively high liquidity and ease of access.
Since most self-directed investors already pick and choose their own stock portfolio, the simplicity of adding gold stocks makes this option attractive. These companies are involved in gold or silver mining or precious metals exploration projects of another sort. Therefore, the value of the stock is indirectly tied to the spot price of gold, silver, or whatever metal the company’s associated with.
Finally, some investors choose to hedge their bets with gold exchange-traded funds (ETFs). This investment type might be suitable for a passive investor who wants to spread risk across multiple stocks within the mining sector. Like stocks, gold ETFs are securities that are sold on public exchanges. However, unlike individual stocks, they consist of several companies bundled within the same investment vehicle.
The downside to gold ETF investing is that they often carry costly expense ratios, as well as high fluctuation risks compared to physical metals. Nonetheless, they boast greater liquidity, greater affordability, and the transaction process is sometimes more convenient for casual investors.
Precious Metals IRAs: Restrictions and Conditions
Many precious metals investors invest in precious metals through IRAs or, occasionally, self-directed 401(k) accounts. This is because there are many tax advantages to IRA investing that can save investors thousands of dollars over the lifetime of their investment.
However, if you decide to invest in precious metals via an IRA, there are several important rules and restrictions that you must be aware of. Below, we’ve provided a brief and non-exhaustive summary of the IRS’ rules on precious metals investing in an IRA:
- Silver metals must be 99.9% purity
- Gold and platinum-group metals must be 99.5% pure
- All physical metals must be held by an approved custodian and vaulted by non-bank trustees (i.e., assets cannot be held at one’s own home)
- Collectible numismatic coins cannot be included in an IRA nor 401(k)
- Penalty-free distributions may only be made after the account holder reaches 59.5 years of age
- Mandatory minimum distributions must be taken after the account holder reaches 72 years of age
If the above conditions aren’t met, your investments will not be eligible for inclusion in an IRA. Therefore, any assets failing these criteria will inadvertently trigger a tax event or potentially other costly penalties.
Should You Invest In Precious Metals?
Investors of all stripes and levels of experience should consider adding precious metals to their IRA. For the majority of investors, real physical precious metals will offer more protection and wealth-building benefits than paper-based assets. Getting started is simple. If precious metals are disallowed in their brokerage account or employer-sponsored 401(k), precious metal IRA rollovers are available to transfer funds into a new IRA without incurring tax penalties.
For many, precious metals are an essential aspect of one’s investment diversification strategy. For others, they’re a targeted growth asset similar to stocks and mutual funds. In any case, precious metals are a relatively low-risk asset class that have a rightful place in any investor’s portfolio.
Ready to get started? To start investing in precious metals, contact a trusted precious metals IRA custodian and inquire about opening an account or initiating an IRA or 401(k) rollover today. This way, you can join the growing ranks of wealthy Americans who understand the value of hedging with safe haven assets amid an increasingly unstable market.
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