PRECIOUS METALS

A Guide to Precious Metals

Gold and silver have been recognized as valuable metals and have been coveted for a long time. Even today, precious metals have their place in a savvy investor’s portfolio. But which precious metal is best for investment purposes? And why are they so volatile? There are many ways to buy precious metals like gold, silver, and platinum, and a host of good reasons why you should give in to the treasure hunt.

Gold

The value of gold is determined by the market 24 hours a day, seven days a week. Gold trades predominantly as a function of sentiment—its price is less affected by the laws of supply and demand. This is because the new mine supply is vastly outweighed by the sheer size of above-ground, hoarded gold. To put it simply, when hoarders feel like selling, the price drops. When they want to buy, a new supply is quickly absorbed and gold prices are driven higher.

Several factors account for an increased desire to hoard the shiny yellow metal:

• Systemic financial concerns: When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought out as a safe store of value.

• Inflation: When real rates of return in the equity, bond, or real estate markets are negative, people regularly flock to gold as an asset that will maintain its value.

• War or political crises: War and political upheaval have always sent people into a gold-hoarding mode. An entire lifetime’s worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter, or safe passage to a less dangerous destination.

Silver

Unlike gold, the price of silver swings between its perceived role as a store of value and its role as an industrial metal. For this reason, price fluctuations in the silver market are more volatile than gold.

So, while silver will trade roughly in line with gold as an item to be hoarded, the industrial supply/demand equation for the metal exerts an equally strong influence on its price. That equation has always fluctuated with new innovations, including:

• Silver’s once predominant role in the photography industry—silver-based photographic film—has been eclipsed by the advent of the digital camera.

• The rise of a vast middle class in the emerging market economies of the East created an explosive demand for electrical appliances, medical products, and other industrial items that require silver inputs. From bearings to electrical connections, silver’s properties made it a desired commodity.

• Silver’s use in batteries, superconductor applications, and microcircuit markets.

Platinum

Like gold and silver, platinum is traded around the clock on global commodities markets. It often tends to fetch a higher price (per troy ounce) than gold during routine periods of market and political stability simply because it’s much rarer. Far less of the metal is actually pulled from the ground annually.

There are also other factors that determine platinum’s price:

• Like silver, platinum is considered an industrial metal. The greatest demand for platinum comes from automotive catalysts, which are used to reduce the harmfulness of emissions. After this, jewelry accounts for the majority of demand. Petroleum and chemical refining catalysts and the computer industry use up the rest.

• Because of the auto industry’s heavy reliance on metal, platinum prices are determined in large part by auto sales and production numbers. “Clean air” legislation could require automakers to install more catalytic converters, raising demand. But in 2009, American and Japanese carmakers started turning to recycled auto catalysts or using more of platinum’s reliable—and usually less expensive—sister group metal, palladium.

• Platinum mines are heavily concentrated in only two countries—South Africa and Russia. This creates greater potential for cartel-like action that would support or even artificially raise platinum prices.