Navigating the Opportunities in Precious and Industial Metals

Precious metals have been used as a store of wealth for millennia, 61 or more in Uncirculated and they can be a valuable addition to an investment portfolio.1 However, the price of these assets can be volatile and the market is complex, which makes it important for investors to understand the risks and rewards before investing in precious metals. There are many ways to invest in precious metals, including purchasing physical bullion such as coins or bars, investing in futures contracts, buying shares of mining companies, or using exchange-traded funds and mutual funds.

Investors interested in owning physical precious metals often buy bullion, such as minted gold coins or silver bars, and store them at a secure storage facility. This approach to ownership can offer a high level of security but can also have significant costs, including storage fees, insurance and transaction charges.

When considering a purchase from a physical precious metals dealer, it's important to get a full accounting of all fees. These can include account opening fees, commissions that can exceed 15 percent of the value of a leveraged portion (where you invest with borrowed money), and the cost of storage and management fees. In some cases, these fees can make it difficult to break even on a precious metals investment.

Physical investments in precious metals are typically made by trading futures contracts, which can be highly risky. This type of investment is a strategy reserved for experienced or professional investors, and it can be volatile and potentially result in substantial losses. Unlike other commodities, futures contracts do not deliver ownership of the actual physical metals; instead, they represent a contractual obligation to purchase the metals at a specified price at a future date.

Precious metals tend to be uncorrelated with stocks and bonds, so they can offer a potential diversification benefit to an overall investment portfolio. Additionally, the limited supply and rising global demand for these metals may contribute to their long-term value appreciation.

Investors can also gain exposure to these metals through metals-backed exchange-traded funds, mutual funds and closed-end funds. These products can provide the liquidity, convenience and cost efficiency of traditional exchange-traded funds without the responsibility of storing physical precious metals. They can also offer a number of advantages, such as the ability to redeem for physical metal,2 favorable U.S. tax treatment for certain funds,3 and reduced counterparty risk by not storing the physical metal with a non-corporate U.S. bullion bank.

Investors should note that broad commodity indexes generally only have small allocations to precious metals, with weightings ranging from less than 1% to 19%. This type of low allocation can prevent investors from receiving the potential portfolio benefits that these assets can offer. Investors seeking exposure to precious metals through ETFs, mutual funds or closed-end funds should consider a basket of these metals instead of focusing on one particular metal. This can help to reduce volatility and maximize potential gains. In addition, investors should be aware that many of these investment vehicles are taxable as collectibles rather than ordinary capital gains.