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Investing in Precious Metals

Jun 30

For many investors, precious metals provide a sense of security and a potential for significant return. But as with any investment, it’s important to understand the risks and costs before investing.

Investors can gain exposure to the metals through physical bullion, futures contracts, exchange-traded funds (ETFs), mutual or exchange-traded funds that hold the metals, unique history from 1985 mining company stocks and even leveraged metal ETFs. Regardless of how they’re obtained, investing in precious metals can add diversification to a portfolio and may benefit from lower long-term capital gains taxes.

Many investors choose to buy physical precious metals, such as minted coins or bars, for their tangible nature and ability to be stored in a safe deposit box or home safe. This method of investing can reduce counterparty risk, but it carries the costs of storage charges and higher investment commissions. It’s also illiquid and can be difficult to sell.

Precious metals are a form of money and can act as a hedge against inflation. They can also provide protection in a financial crisis when the value of other investments decline. However, precious metals are not the only way to achieve a substantial economic return, and most people would be better served by investing in other assets that will increase in value over time, such as real estate or mutual funds.

If you decide to invest in physical precious metals, you’ll want to make sure you’re dealing with a reputable dealer and calculating the true cost of your investment before sending any money. Commissions and storage fees can add up quickly, and it’s a good idea to get a full accounting of all the expenses associated with your investment before you send any money. In addition, it’s a good idea to check out a gold dealer’s background by using Money Metals or the U.S. Mint’s searchable database of coin sellers.

ETFs, mutual funds and mining company stocks offer a convenient and liquid means of gaining exposure to the metals without having to store physical bullion. But they don’t offer a direct ownership stake in the metals, and their price movements are likely to be more volatile than those of physical bullion.

Money metals ETFs allow investors to gain exposure to the price of gold, silver, platinum and palladium by borrowing money to purchase a basket of futures contracts that track those same prices. These funds are often more volatile than the spot prices of the precious metals they’re tracking, and they typically have higher management fees than traditional ETFs. In addition, some leveraged metals ETFs are taxed as collectibles and may not qualify for lower long-term capital gains rates. For these reasons, they’re best suited for investors with a short-term horizon.