Last Updated on April 7, 2023 by George
For American investors, investing in precious metals is an increasingly popular wealth creation and risk control method. In 2020, 16% of U.S. investors owned precious metals investments, while U.S. imports hit their highest level in 19 years.
In the past, brokerage firms restricted the average American investor to stocks, bonds, and mutual funds. Thankfully, the development of self-directed IRAs and 401(k)s have widened investors’ choice of asset classes. These include Gold, Silver, and platinum-group metals rhodium and palladium.
Are you interested in adding precious metals to your investment portfolio? This article will cover the principles of investing in precious metals, its numerous risk management benefits, and how to start investing in this asset class.
Investing in precious metals encompasses allocating cash to rare, tangible metal commodities with economic worth. As with any other investment, they are bought and sold on open markets by investors who intend to sell them for a profit in the future.
For ordinary investors, Gold is the most popular investment-grade precious metal. In truth, Gold has been used as an investment for millennia, with the earliest documented gold bullion objects being discovered in 4,000 BC in Ancient Thrace (modern-day Bulgaria).
Precious metals like Gold and Silver are precious in manufacturing, medicine, electronics, dentistry, and jewelry production due to their unique chemical qualities. Due to their extensive industrial applications, precious metals have long been highly valued. Therefore, it is unsurprising that investors rush to precious metals as a stable form of asset storage.
Precious metals have performed extraordinarily well during the past half-century. Since October 1970, we’ve provided the inflation-adjusted performance of the spot prices of the primary three precious metals relative to the U.S. stock market benchmark, the S&P 500:
- Gold: +715.87%
- Silver: +209.52%
- Platinum: +929.23%
- S&P 500: +644.38%
The statistics do not lie. In the past fifty years, precious metals have increased at the same rate as the U.S. stock market. In addition, their volatility has only a modest association with that of stocks and a low intra-group correlation, making them a good buffer against average equity market volatility.
How to Invest in Precious Metals
A self-directed IRA facilitates the entry of numerous investors into the precious metals market. (SDIRA). Both standard and Roth IRAs offer a variety of tax advantages that allow investments in precious metals to appreciate without incurring capital gains taxes. Consequently, they are the best available resources for investing in precious metals.
Clients of large brokerage firms such as Charles Schwab or Fidelity Investments need help accessing self-directed IRAs. Their brokerage IRAs impose severe restrictions on the asset groups in which they can invest and, in most cases, expressly prohibit the acquisition of tangible precious metals.
Therefore, prospective investors in precious metals must apply for an SDIRA through a third-party custodian. If you want to establish a precious metals IRA, try perusing our list of the market’s leading SDIRA providers.
Investing in Gold
Gold reigns supreme in commodity investing. The federal government of the United States currently has 8,133 tonnes of actual Gold in reserve. Central banks, such as the U.S. Federal Reserve, hold gold reserves for the same reasons individuals do: to offset a drop in the dollar’s value and protect against hyperinflation.
Since the mid-1970s, when gold futures were first traded, the spot price of Gold has increased roughly in tandem with the Consumer Price Index (CPI), as seen in Fig. 1. Specifically, Gold has grown 155% faster than the CPI, which measures the average change in prices paid by consumers.
As demonstrated, Gold can help investors retain more of their money during a dollar downturn. However, investors should consider Gold to be simply one component of a robust diversification plan.
In reality, Gold is just one of many assets that mitigate inflation’s consequences. Other asset classes, including REIT indexes, stock market indexes, and investment-grade corporate bonds, perform as well as or better than inflation-beating bonds. However, this does not imply that Gold is unnecessary as a supplementary portfolio hedge.
Benefits of Gold Investing
Gold has a variety of advantages that aid in the formulation of a retirement investing strategy or simply in the accumulation of money. Gold, for instance, offers the following benefits to an investor’s portfolio:
- No Counterparty Risk: Physical gold bullion, unlike stocks, cannot default on obligations or declare bankruptcy; hence, it does not entail the same counterparty risk as other conventional asset classes.
- Leverage Can Be Applied: By trading on margin, and investors can increase their purchasing power when purchasing gold futures contracts.
- Low Liquidity Risk: As an industrial substance, Gold is always in demand; consequently, gold investors can sell or pawn their Gold with reasonable ease if they need to turn their assets into cash swiftly.
- Low Maintenance Costs: Gold bullion, unlike other assets such as real estate, does not produce recurring tax liabilities (when stored in an IRA) and does not necessitate continuing maintenance or repairs.
- Low Crash Risk: Gold bullion’s value has never been zero in its millennia-long existence as a financial instrument; Gold retains its value amazingly well throughout time.
Lastly, Gold is considered by some to be a disaster hedge. For instance, the S&P 500 fell 34% during the coronavirus crisis in February and March 2020. During the same period, the spot price of Gold declined by only roughly 3.5%.
During the 2020 stock market crisis, you would have lost approximately 10 times more if you had invested exclusively in stocks instead of Gold. The same is true during other geopolitical or financial instability instances, such as the global financial crisis, during which the price of Gold increased by 78% between late 2007 and early 2010.
It’s not surprising that Gold is frequently considered portfolio insurance. Many of the world’s wealthiest individuals, like Ray Dalio and Warren Buffet, retain a portion of their controlled assets in Gold as a hedge against the danger of global catastrophe.
Best Gold Companies for IRA/401(k) Investors
Before you begin investing in gold bullion, you must perform your due diligence by conducting extensive research on a Gold IRA or 401(k) provider. You must invest through a self-directed IRA provider unless you wish to invest in paper gold (such as gold equities or gold ETFs), which offers different benefits than physical Gold.
As previously stated, legacy brokerages such as Vanguard, Fidelity, and Charles Schwab will not offer self-directed IRAs. You will have to seek out other reputable investing firms for this. For your convenience, we’ve compiled a list of the world’s best precious metals IRA providers offering low-charge structures with the most excellent customer satisfaction ratings.
Investing in Silver
Global investors purchase and sell approximately 200 million ounces of investment-grade Silver annually. Despite the fact that international banks such as JP Morgan and HSBC keep enormous silver holdings in their vaults, around 11.6% of average American investors also hold
Silver in their portfolios.
Until 1935, most of the globe used silver coins as legal money, and Silver was formerly a global currency standard. Since the demise of the silver standard, the majority of Silver is now utilized in industrial manufacture. Specifically, the a rising need for Silver alloys in manufacturing solar energy and electric vehicles (EVs).
As depicted in the preceding figure (Fig. 2), the global demand for Silver in the automobile industry is predicted to increase significantly over the next few decades. In 2019, an expected 1,611 tonnes of Silver will be utilized in the automotive sector, a 4% increase over 2018.
As the automobile sector continues to electrify, we expect to see a continuous increase in industrial demand for the alloy, as pure Silver is the world’s best conductor of electricity. Nonetheless, this is not the only reason investors should keep the white metal in mind.
Benefits of Silver Investing
Investors interested in precious metals may explore adding Silver to their portfolio. Silver and the U.S. stock market have no meaningful association, one of the most persuasive arguments for investing in Silver. As shown in Fig. 3, the association between the S&P 500 and silver ratio up to 250 days remains minimal (-.25 to +.33).
Consequently, investors can purchase Silver with confidence, knowing that fluctuations in the stock market are unlikely to have a negative impact on the investment’s value. Silver has outstanding potential as a hedge, especially considering that industrial demand will likely expand in the following years.
In addition to this benefit, investors should also consider the following advantages of investing in Silver:
Lower Entry Point: Investors can get more silver bullion at a lesser cost than Gold, as the gold-silver ratio stands around 70. This indicates that the price of Gold per ounce is approximately seventy times that of Silver.
Safe and Secure: Similar to other precious metals, reputable third parties store silver bullion in vaults that fully insure each deposit. Insurance charges are included in the annual storage fees and range between 0.1% and 0.5% of the value of the investment.
Capitalize on Renewable Energy: Silver is an essential conductor metal frequently employed in manufacturing electric vehicles and photovoltaic solar panels. As a result, Silver has substantial long-term upside potential as the global economy shifts to a low-carbon model.
Historically Under-Valued: Silver is one of the rare assets whose spot price is currently lower than in 1980. If Silver followed the same growth track as other precious metals, its value would be multiplied by multiple.
Best Silver Companies for IRA/401(k) Investors
Physical silver investments require a self-directed IRA or 401(k) with checkbook management. A basic brokerage account restricts the types of assets that can be added to a portfolio, including Silver, so a self-directed account is required.
If you wish to start investing in Silver or conduct a Silver IRA rollover, consider perusing our list of the most reputable Silver IRA providers. All of the firms featured have been in business for many years, have received outstanding client feedback, offer competitive storage prices, and provide account holders with complete administrative freedom.
Investing in Platinum
The third valuable metal is Platinum, which refers to a group of metals known as platinum-group metals. (PGM). PGMs are frequently regarded as the most valuable precious metals on the market due to their unique chemical properties, which make them very attractive for industrial
applications.
Malleability: Platinum is a soft, easily-formed metal with a density of around 12.4 ounces per cubic inch; it is also very ductile, making it suitable for wiring.
Heavy Weight: Platinum is a weighty metal, and A cube of a platinum measuring six inches weighs as much as an adult.
Catalyst: Platinum, a highly catalytic substance, increases the efficiency of fuel cells and is commonly utilized in synthesizing silicone, nitric acid, and benzene.
Toxicity: Platinum is an inert material.
Melt Resistance: Platinum’s melting point of 1,768 degrees Celsius makes it one of the most heat-resistant substances in the world, even among noble metals.
Platinum is an exceedingly scarce resource, with about five million troy ounces extracted annually, mainly from South Africa or Russia. This pales compared to Gold and Silver, of which 82 million ounces and 885 million ounces are mined annually, respectively.
Platinum’s rarity makes it an attractive investment asset. In 2020, investments in Platinum yielded a return of approximately +20.8%. In the coming years, specialists in the mining industry anticipate a chronic shortage of approximately 1.2 million ounces of Platinum. Therefore, we should anticipate continuing price appreciation for Platinum in the coming years.
Benefits of Platinum Investing
Platinum is currently regarded as one of the most undervalued rare commodities available on the market. Utilized extensively in jewelry production and industrial manufacturing, the metal is subject to intense demand-side pricing pressure and chronic supply scarcity. In other words, it is a safe bet that Platinum’s value will continue to rise in the foreseeable future.
PGMs have a long growth runway, which is the primary benefit of investing in Platinum. Platinum is deeply entrenched in a deficit due to its peculiar market equilibrium, in which demand has surpassed supply annually since 2012. Platinum can be invested in with confidence by investors in precious metals with a blue-chip diversifier with excellent growth potential to bolster their commodity position.
Best Platinum Companies for IRA/401(k) Investors
Platinum investors must know that not all precious metals IRA providers offer PGMs. Ensure you investigate each SDIRA custodian extensively and enquire whether they permit platinum bullion in IRAs.
Check out our list of the best precious metals IRA firms to start. These sellers offer the widest variety of bullion metals on the market, albeit only some carry Platinum and other precious metals.
Investing in Palladium
Palladium is a platinum group metal that is utilized mainly in the production of automobile catalytic converters. Approximately 85% of the world’s palladium supply, obtained entirely from emerging economies, was utilized in the automotive industry in 2021.
Palladium has performed better in price appreciation than Platinum, Gold, and Silver. The graph below (Figure 4) illustrates the significant growth palladium has experienced in recent years due to supply constraints and new environmental restrictions for automobile manufacturers.
The benefits of investing in palladium are comparable to investing in Platinum. Palladium is a scarce noble metal upon which numerous environmental technology relies. Therefore, it stands to reason that palladium will continue to be a valuable financial asset for many years.
Those interested in investing in palladium must first contact a distributor of precious metals IRAs. Many of the world’s leading precious metals dealers are replenishing palladium bullion and coinage, including 1 oz Canadian Maple Leaf coins and.995 pure palladium bars, in response to rising demand from retail buyers.
Investing in Diamonds
Although not strictly a precious metal, diamonds are among the world’s rarest and most coveted commodities. Even 1-carat diamonds are similar in value to one kilogram of gold bullion.
Unfortunately, diamond investment is a challenging endeavor. In contrast to precious metals, which are appraised based on their weight and purity, diamonds and other gems are rated based on qualitative criteria. The fact that each diamond is unique diminishes its financial potential.
Before purchasing, an expert should certify and thoroughly examine diamonds. During a diamond purchase, investors must proceed with caution. Nonetheless, if you choose to invest in diamonds, you should do so through a licensed self-directed IRA to minimize your capital gains tax burden.
3 Types of Precious Metals Investing
There are numerous entry points for investors into the precious metals market. Each approach has advantages and disadvantages, which every ambitious investor in precious metals should carefully evaluate.
Below, we’ve outlined the three most common precious metals investment strategies ideal for casual and retiree investors.
Physical Metal Bullion
Numerous investors of all types choose to invest in genuine precious metals bullion due to the benefits they bring to any portfolio. Due to the low liquidity of the physical metals market (i.e., the time-intensive nature of buying and selling metals), physical metal prices tend to be less volatile than paper-based assets.
According to IRS requirements, physical metals must be vaulted by an approved third-party custodian before investors can take control of hard assets that are safe from digital theft or compromise.
Moreover, investments in metal bullion are free of counterparty and inflationary risks. In contrast to gold stocks, physical metals cannot declare bankruptcy or fail to meet contractual obligations; hence, there is no counterparty risk. Similarly, tangible assets offer privacy and anonymity that digital assets do not and are a haven when equities market returns decline.
Gold Stocks
Individual gold stocks are another popular kind of gold market exposure. Some investors pick gold equities, such as Barrick Gold Corp (NYSE: GOLD) and Franco-Nevada (TSE: FNV), due to their comparatively high liquidity and accessibility.
Since the majority of self-directed investors already select their stock portfolio, the ease of adding gold equities makes this a desirable alternative. These businesses engage in mining gold, Silver, or other precious metals exploration initiatives. Consequently, the value of the stock is indirectly correlated with the spot price of Gold, Silver, or whatever metal the company is affiliated with.
Gold ETFs
Finally, some investors utilize gold exchange-traded funds to hedge their chances. (ETFs). This form of investment may be suited for a passive investor who wishes to diversify risk across various mining stocks. Similar to stocks, gold ETFs are traded on public markets as securities. In contrast to individual stocks, however, they comprise multiple companies bundled into a single investment vehicle.
The disadvantage of investing in gold ETFs is that they frequently entail high expense ratios and more volatility risks than real metals. Nonetheless, they offer higher liquidity, greater affordability, and sometimes a more straightforward transaction process for casual investors.
Precious Metals IRAs: Restrictions and Conditions
Many precious metals investors use IRAs or, on occasion, self-directed 401(k) accounts to purchase precious metals. This is due to the numerous tax advantages of IRA investing, which can save investors thousands of dollars over the investment’s lifetime.
If you invest in precious metals via an IRA, you must know several essential requirements and limits. Below is a quick, non-exhaustive description of the IRS’ guidelines on investing in precious metals in an IRA:
- Silver metals must have a purity of 99.9%
- Gold and metals in the platinum group must be 99.5% pure.
- All physical metals must be held by an approved custodian and vaulted by non-bank trustees (i.e., they cannot be stored at a private residence).
- Numismatic collectible coins cannot be put in an IRA or 401(k).(k)
- Only distributions made once the account holder reaches 59.5 years of age are tax-free.
- After the account holder reaches the age of 72, mandatory minimum distributions must be taken.
With the abovementioned qualifications, your investments will qualify for inclusion in an IRA. Consequently, any assets that do not meet these requirements will inadvertently cause a tax event or other potentially costly penalties.
Should You Invest in Precious Metals?
All types and levels of investors should consider including precious metals in their IRA. Physical precious metals will provide more protection and wealth-building benefits to most investors than paper-based assets. Starting is simple. If precious metals are prohibited in a brokerage account or employer-sponsored 401(k), precious metal IRA rollovers are available to transfer monies into a new IRA tax-free.
For many, precious metals are vital to a diversified investment portfolio. Others view them as growth-oriented assets comparable to equities and mutual funds. Precious metals are a very low-risk asset class that has a place in any investor’s portfolio.
Are you prepared to start? Contact a reputable precious metals IRA custodian immediately to enquire about opening an account or initiating an IRA or 401(k) rollover. In this manner, you can join the growing number of wealthy Americans who see the importance of hedging with safe-haven assets in an increasingly volatile market.
Final Thought- Precious Metals 401k
Precious metals 401k plans offer a secure way to invest in Gold and Silver while also taking advantage of tax advantages. With the potential for long-term growth, investing in precious metals can be wise for those looking to diversify their investments.
