How to Invest in Precious Metals?

Posted by The Popular News Today on Sunday, January 15, 2012

By Alan Dupont


Investing in precious metals can take several different forms ranging from equities to hard metal to much more sophisticated derivate products like precious metals futures and options. In general, however, the investment activity in the precious metals market is driven by broader market and economic conditions or the macro level indicators. Below we outline some of the ways investors can get exposure to the precious metals market.

Precious metals can be purchased in raw hard metal form from vendors that specialize in precious metals sales or from banks. Banks not only sell hard metals but they also offer storage and delivery services. Investors tend to choose banks over dealers for security purposes. Hard precious metals can be purchased in two basic forms: bullion or bars, and coins. Both bullion and coins come in different denominations such as 1oz coin, 1 Kg bullion, and so on. Specialized dealers generally sell gold and silver bullion and coin but on occasion they will sell platinum and palladium bullion and coin as well. From an investment standpoint, gold and silver a lot more popular than platinum and palladium.

Precious metals mutual funds like other funds are based on specific objectives. Generally mutual funds are classified as growth, income, balanced, or some form of combination. BMO Precious Metals, for example, provides long-term growth. Precious metals funds can invest in companies in the exploration, mining or distribution space. They are also open to investing in financial instruments like certificates or futures or straight metals in the form of coins or bullion. It all depends on the fund objective. A few popular precious mutual funds:

The precious metals supply chain starts with exploration companies that study geology in various fields around the world to identify the next mining destination. Mining companies essentially dig ditches to bring the precious metal to the surface. Production companies focus on extracting gold and by products. Many times mining companies are also precious metals producers and end up selling the metal to distributors or mints. Investors can be part of the precious metals supply chain activity by investing in companies that make up the supply chain. Mining companies are classified as junior or senior mining companies. Juniors, as the name suggests, are small miners with limited resources including capital.

Futures are a form of derivatives product. Precious metals futures provide a hedging mechanism for those who are engaged in the exploration, production, or the distribution of precious metals. Investors in the precious metals futures market speculate on the future price of the precious metals. It gives investors the ability to manage their price risk depending on the future price levels. A gold mining company, for example, may be active in the gold futures market in order to protect themselves from unfavourable price movement in the gold market. Last thing they want to see happen is prices turn unfavourably when they have just spent millions of dollars mining the metal.




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