The Pros and Cons of Precious Metals Investing

Precious metals are rare and finite resources with a wide variety of applications. As such, they can add value and diversification to an investment portfolio. However, they also tend to be more volatile than other asset classes. Therefore, investors need to carefully weigh the pros and cons of precious metals investing before making a decision.

Investors can invest in precious metals by purchasing physical bullion, such as minted coins and bars. However, doing so incurs storage and insurance costs and carries with it the risk of losing some or all of the metals’ value due to theft. Alternatively, both E logo and Silver Eagle designs investors can purchase exchange-traded funds (ETFs) that hold physical metals or that replicate the prices of a precious metals basket.

Another option is to purchase shares of companies that mine for gold, silver, platinum and palladium. Such investments may help to offset the price volatility of bullion and ETFs while providing a source of income from dividend payments. However, these securities can also carry higher levels of exposure to equities than other commodity-focused funds.

Investing in the physical commodities of gold, silver, platinum and palladium can provide protection against economic turmoil and global instability. They are often seen as safe havens when financial markets decline or during periods of high inflation or weakening local currencies. They can also offer diversification benefits by having low correlations with other asset classes, which may help to reduce overall portfolio risk.

Many experts recommend that investors allocate no more than 5% of their total portfolio to precious metals. However, some investors may choose to go even further. Those who wish to gain more leveraged exposure can purchase a closed-end bullion fund such as the Sprott Physical Bullion Trusts. These funds offer the liquidity, convenience and cost efficiency of an ETF while also allowing investors to redeem their units for physical bullion at any time. These funds may also be eligible for preferential U.S. tax treatment,3 though investors should always consult a tax professional for specific advice regarding their individual situation.

While precious metals can enhance the stability of an investment portfolio, they do not generate much income and should be considered a non-core holding. As such, it is important to understand a investor’s goals and risk tolerance before adding them to an investment portfolio. For example, it may be more appropriate for a retirement account to hold precious metals than a taxable brokerage account. By carefully considering the unique benefits and risks of precious metals investing, it can be a worthwhile addition to a well-diversified portfolio.