Precious metals have been used as a store of value from time immemorial. Today, the average retail investor is able to trade in a wide range of precious metals through exchange traded funds with a simple click of the mouse.
Precious metals are valuable because of their scarcity. They also have crossover appeal since metals don’t just serve a single purpose. Precious metals are used in a wide range of applications, including coinage, jewelry, medical devices and electronics.
When we think of precious metals, gold immediately pops up. But a precious metals investor may move beyond gold assets and look into other metals when determining the best exposure for one’s investment portfolio.
Nevertheless, we shouldn’t completely ignore gold. Gold, besides being a good store of value, is a critical component in the electronics industry, especially in high-end technological equipment. The metal is in high demand because it is corrosion-resistant, highly conductive, chemically stable and serves as a heat shield.
More commonly, gold is used in jewelry and serves as a store of wealth or a substitute for currencies. The precious metal is also used as a good portfolio diversifier since it shows a low correlation to other classes, and it will generally move in the opposite direction of the U.S. dollar – gold is priced in U.S. dollars. [Tom Lydon Talks Gold on CNBC.]
Gold prices are less affected by the supply from gold miners because the huge above-ground stores of gold outweigh the supply of any new mine discoveries. It is this very reason that global central banks provide a very heavy hand on price fluctuations.
Growth and inflation in the emerging markets have boosted demand for gold. Emerging market central banks have more than doubled their purchases in gold bullion in the first half 2011 compared to the whole of 2010, which goes to show that central banks are betting that gold prices are here to stay. Central bank year-to-date net purchases are 203.5 tons, or a 168% surge from 76 tons for all of 2010.
In the recent market volatility, investors adhered to the age-old tradition of the flight to quality as economic red flags crop up. Any perceived threat to the stability of the financial sector, foreign exchange market or the government will push investors to gold as the go-to safe store of value.
Additionally, the record low interest rates and loose monetary policies enacted by global governments have helped stoke the flames of inflation, more notably in the emerging markets. As inflation eats away at the purchasing strength of individuals, investors will flock to gold for maintaining value.
Silver, like gold, has been used as a store of value – it is often referred to as the “poor man’s gold” – and a staple in fine jewelry, but this precious metal has a greater role in the industrial sector. As such, silver prices may be more volatile and more closely linked to industrial growth.
Silver is a main ingredient for several industrial applications, over half of silver is used for such purposes. It is the best electrical and thermal conductor — the metal is perfect for high-performance electronics or high-voltage circuits. The metal is even a natural biocide, which is handy in sterilization and treating wounds. Silver’s high reflectivity also makes it a must for fine-precision optics, and photosensitive silver compounds are the engine behind photographic film, or at least the demand used to be there before digital cameras took over. The growing middle class, more notably in the emerging markets, have also created a surge in demand for electrical devices, medical products and other items that require silver components.
Furthermore, demand for silver is expected to jump as the metal is used more in green technologies. For instance, photovoltaic cells in solar energy, water purification plants and silver-zinc batteries are heavily dependent on silver. [Why Silver ETFs Have Lagged Gold Prices.]
Platinum has recently touched upon parity with gold prices, hovering around $1,750 an ounce, and the closely related palladium has dropped to close to $740. Historically, platinum has fetched a higher price because it is much rarer and the sources are much lower compared to gold. [Gold ETFs Add 3% as Metal Touches $1,800 an Ounce.]