Buying gold, silver, platinum, or palladium for the first time can sometimes seem intimidating. But in reality, knowing a few basics is all it takes to start adding physical precious metals to your investment portfolio or collection with confidence. GOLD AVENUE offers to help you better understand and prepare your precious metal purchase.
Key Takeaways
Their reputation as a "safe haven" and a "store of value" plays an important role in the stability appeal of precious metal prices.
Precious metals can be coveted assets by investors to diversify an investment portfolio.
Commercial and industrial demand supports the general demand for precious metals and therefore contributes to maintaining their price stability.
Table of contents
An introduction to precious metals
Precious metals have long captivated and fascinated mankind. Since their discovery, they have been synonymous with wealth and power and are used today for various purposes: industry, high technology, medicine, investment, jewelry, etc. Their unique characteristics and properties have made them play an important role in our history, from the past’s religious traditions to their more modern uses.
Should you buy precious metals?
Physical precious metals are a special category of investment. They are both rare and globalized: each metal’s unique price simplifies their worldwide exchange, and their rarity has turned them into highly coveted products. But physical precious metals, unlike other forms of investment, also have an intrinsic value.
In other words, their status over the centuries, their ever-renewed usefulness, and their durability have made them physical products of great value. Therefore, it is not surprising that they are still appreciated by most investors as a historical store of value, both for the transmission of wealth (inheritance, savings, etc.) and its preservation. Their physical and tangible characteristics offer reassuring guarantees for precious metal owners.
Precious metals can thus be a coveted asset to diversify any investment portfolio. In particular, they can be used to offer protection against the volatility sometimes encountered by other forms of assets. For example, they tend to have a very low correlation with equities and capital. While the price of such assets can rise and fall according to short-term economic trends, historically precious metal prices tend to remain more stable.
The price of gold compared to the stock market (dow Jones) over the last 20 years.
More generally, precious metals tend to move independently from other asset classes, be it shares, bonds, certificates of deposit, real estate, options, or commodities. Precious metals such as gold, silver, platinum, or palladium are often seen as a good option by investors wishing to preserve their assets over a long time.
Are precious metals stable over the long term?
Their reputation as a "safe haven" and a "store of value" plays an important role in the stability appeal of precious metal prices. But gold, silver, platinum, and palladium are not only investment products or stores of value; they are also raw materials and consumer goods.
Indeed, beyond their commercial use in jewelry, there is a large and growing need for precious metals across many industries, from electronics and high technology to medicine, the automotive industry, and even space exploration. These commercial and industrial needs support the demand and supply of precious metals and therefore contribute to maintaining their price stability.
Thus, the purchase of precious metals tends to be a historically stable investment, due in particular to their numerous properties allowing for a variety of uses. Although their prices often move more slowly than other types of investments, they tend to increase over the medium and long term.
The evolution of the price of gold since the 1960s.
And although they can lose value in the short term, like any investment, they seem to remain protected from most sharp price variations that other asset classes can experience. They have also shown an ability to increase their value, at times, during periods of economic turmoil.
How does the price of precious metals work?
The prices of precious metals are the same throughout the world. They are most commonly expressed in U.S. dollars but can also be seen in other currencies (Euro, Swiss Franc, Pound Sterling, etc.). The price of physical precious metals is called spot price, this is the price as it appears on the market, its most common unit of measurement is the troy ounce, which is a historical unit of 31.1 grams of precious metals.
Precious metals have a global but centralized market, their true price is determined by the LBMA (London Bullion Market Association) and the LPPM (London Platinum and Palladium Market) in London.
Precious metals true price is determined by the LBMA (London Bullion Market Association) and the LPPM (London Platinum and Palladium Market).
The setting of precious metals prices is also known as pricefixing. Historically, price fixing has been used as a way for players to settle contracts on the precious metals markets. Today, these fixings are used as the worldwide reference and informal basis for deciding each metal’s spot price. The spot price will then be used to buy and sell investment precious metals products such as bullion or coins. Unless stated otherwise, the spot price will always be used to indicate the price of precious metals.
How often are precious metals prices set?
The LBMA gold price is determined twice a day on business days at 10:30 AM and 3:00 PM (London time) in US dollars.
The LBMA silver price is determined once a day on business days at 12:00 PM (London time) in US dollars.
The LBMA platinum and the LBMA palladium prices are fixed by the LPPM (London Platinum and Palladium Market) and the LME (London Metal Exchange), they are determined twice a day on business days at 9:45 AM and 2:00 PM (London time) in US dollars.
Breaking down the price of a precious metal product
The price of a precious metal product is actually made up of three elements:
The price of the metal: This is another name for the spot price, which is the price on the market at that moment.
The premium: This includes the product’s operating and production costs (production, storage, craftsmanship, etc.), as well as the reseller’s margin.
The VAT: Switzerland as well as most European countries do not apply VAT on gold. Other precious metals usually are not exempt of VAT. The VAT rate will depend on each country. Metals sur as silver, platinum and palladium are charged a 7.7% VAT rate in Switzerland (the lowest VAT rate in Europe).
GOOD TO KNOW!
Why do precious metal bars of the same weight sometimes have different prices?
You might have noticed that the price per ounce of two products of the same weight can sometimes differ. This price difference is actually due to each product's production costs.
Minted ingots, such as Lady Fortuna products will require more craftsmanship, precise finishing work, and will therefore have higher production costs.
On the other hand, cast bars are made of raw metal and simply marked with legal inscriptions (weight, purity, logo, etc.). They will therefore require lower production costs and will tend to have a price lower.
Gold: the leading precious metal for investment
Gold is the most famous precious metal by far as well as one of the most appreciated. For manufacturing, gold is available in as many forms as there are industrial needs.
For investment, gold generally only exists under three main categories: ingots, bullion, and coins. But each of these major categories is composed of many products of different sizes, shapes, and qualities. This means that every investor can find what they are looking for, provided they know where to start.
Investment gold comes in many shapes and sizes, from coins to cast and minted bars.
Should you buy gold?
While purchasing gold for the first time may sometimes seem complex, most gold purchases are based on simple arguments often shared by many investors.
Here are the main arguments put forward by those who invest in gold:
Gold is a safe haven in times of economic turmoil or inflation.
Gold is a source of liquidity with no default risk.
Gold is a store of value with an upward trend in the long term.
Gold is a diversification tool increasingly appreciated by investors to counterbalance risk in their portfolios.
What is physical gold?
To fully understand your gold purchase, it can be useful to look at gold’s history, its uses in manufacturing, jewelry, and as an investment, and to understand the actors involved. Do you know why central banks buy gold? Do you know who the actors in the gold sector are? Do you know what makes up the price of a coin or bullion?
Purchasing physical gold is nowadays often considered a form of investment. But gold remains a distinct type of investment, particularly because of its specific advantages. Before investing, it can be useful to understand gold’s particularities compared to other investments such as stocks, traditional savings products, or cryptocurrencies. Because if, unlike stocks, gold does not pay dividends, it can be seen as an asset for a well-diversified portfolio.
Taxes, storage, prices: what you need to know about gold
Buying gold also presents its share of more technical questions: taxes, storage, resale, price composition, gold price, etc. These points can sometimes seem complex and might need some clarification.
For example, taxes and duties on gold may vary from country to country. Whether you are in Switzerland, France, Germany, United Kingdom, Italy, or any other country in Europe or the world, it is important to keep it in mind when purchasing or delivering your gold products. Because while physical gold is exempt from VAT in most countries, certain taxes, sometimes difficult to calculate, may increase your purchase’s final cost.
Upon your first gold purchase, you will soon face the questions of storage and resale. Two important points that should not be overlooked as they can turn out to be costly and risky later on if they are not anticipated correctly.
What are the real risks and costs of storing at home or in a bank? What are the best storage solutions for your physical gold? How to resell your gold at the best price? Where to buy and resell your physical gold?
After gold, silver is probably the best known and most widely used precious metal in the world. With a very liquid commodity market, physical silver is also one of the easiest precious metals to sell. Its many industrial uses, particularly for the manufacture of mirrors, in electronics, engineering, hygiene, medical devices, or energy, make it a potentially valuable commodity in the future for many investors.
Is silver a good investment?
Many investors see silver as a good first step in buying precious metals. With its very affordable prices, physical silver offers great flexibility for both purchase and resale.
Indeed, its much lower price compared to gold, platinum, or palladium, makes silver a truly affordable metal for all investors. With the same budget, silver gives investors the possibility to buy a greater variety of products than gold. This is what gives investment silver its unparalleled flexibility: in the same way that a 10$ bill can be exchanged much more easily than a 100$ bill, it will always be easier and more flexible to resell several small silver ingots than to try to divide a single large gold ingot.
The current low price of silver also makes it a generally underestimated metal. But a low price does not necessarily mean a low return, and the sharp rise in the price of silver in recent years has clearly demonstrated the metal’s investment potential. In fact, some analysts believe that the historical levels reached by the price of gold in 2020 will itself contribute to a renewed interest in more affordable metals such as silver. And with an ever-increasing industrial demand for silver, the metal’s price has strong drivers in place to keep rising in the future.
Platinum: a new and sought-after metal
When it comes to precious metals, platinum is a much more recent investment opportunity than gold or silver. Widely used in the automotive, chemical, and textile industries, as well as in the aerospace and medical sectors, its numerous industrial applications make it a high-demand metal on the raw materials market. It is produced in only a handful of countries throughout the world and is, therefore, more heavily dependent on supply and demand than, for example, gold or silver.
Platinum is widely used in the automotive industry.
Its rather scarce supply and heavy reliance on industrial demand can create strong variations in the price of platinum. But being a rather volatile metal can be seen as an asset for investors looking to add a little risk to their precious metals portfolio. However, with a strong and increasing industrial demand, platinum often ends up being more resistant than gold to shifts in the precious metal markets.
Palladium: a rare metal to follow
Palladium is one of the rarest metals in the world. It is part of the PGM, the Platinum Group Metals, which comprises rare metals with unusual and common properties (PGMs are platinum, palladium, rhodium, ruthénium, osmium, and iridium). Used in the automotive, electronics, or chemical industries, its demand among investors and manufacturers has been steadily increasing over the last two decades.
Almost as important as silver or copper for manufacturing, thanks to its rare chemical properties, palladium is often overshadowed by these better-known precious metals. The price of palladium, like that of other precious metals, particularly those with industrial uses, tends to remain relatively stable over the long term. It is therefore used as a store of value and a protection against inflation. In the short term however, the price of palladium tends to be more volatile and attracts investors willing to add a degree of risk to their precious metals portfolio.
The palladium price is more volatile than that of gold or silver in times of crisis, and it has recently peaked at unprecedented heights before going back down, creating some interests for investors unafraid of adding a little risk to their portfolio.
Palladium's volatility comes from two main factors:
demand in the automotive industry, where palladium is often seen as a successor to platinum.
The output levels from palladium-producing countries.
A rise in these factors would therefore help increase the price of palladium. Thus, many precious metals experts estimate that the recent increase in industrial demand and the weakening global reserves may very well continue to push the metal to new heights.
Other precious metals
Only gold, silver, platinum, and palladium have their own price set on the commodity market. However, other types of precious metals, especially those used in industry or jewelry, are also traded on these markets. They can be divided into two categories: other precious metals and base metals.
What are the other precious metals?
The other precious metals are PGMs (rhodium, ruthenium, osmium, iridium), rhenium, indium, and certain alloys of one or more precious metals such as electrum, which is a natural alloy of gold and silver.
Rhodium is perhaps the best known of the other precious metals. Sometimes referred to as "the most precious of the precious metals" after having experienced sharp price increases in recent years, it is also widely used in the automotive industry and electronics. However, its relatively small market subjects rhodium to greater price fluctuations than the four major precious metals.
Rhodium is perhaps the best known of the other precious metals.
While its demand in the automotive industry for catalytic converters will most likely continue to increase, rhodium remains an extremely rare metal with a total production equivalent to 1% of gold. Two factors that make this small and expensive metal one to follow.
What is a base metal?
Base metals are the more common and less expensive cousins of precious metals. We often come across these metals every day: aluminum, copper, iron, zinc, lead, nickel, steel, or tin.
But while these metals are easier to find and can be traded at relatively lower costs than precious metals, their properties make them widely used in modern manufacturing. Therefore, many of them are also actively traded in the commodities markets, and some investors even choose to add small quantities of base metals to their precious metals portfolios to further improve their diversification.
