In the words of the late American journalist Henry Hazlitt, ‘If precious metals had been abundant, they would not have been precious.’ Such is the allure of precious metals, which has existed for centuries and is certainly going to continue.
Precious metals are somewhat of a different beast, although not very difficult to understand once we appreciate their purposes. Analysts sometimes group metals under commodities (such as oil, cotton, corn, sugar, etc.).
Technically, metals are also commodities; although, in this article, we are explicitly referring broadly to the four precious metals (gold, silver, platinum, and palladium). Furthermore, we will cover the purpose of the precious metals market, what drives the prices, other investing methods, and the pros & cons.
The purpose of metals?
Scientists trace the existence of metals such as gold and silver several thousand BC. The purpose of these elements hasn’t changed much, making them increasingly valuable at every century turn.
The practical, everyday use of metals is seemingly endless, ranging from coins, electrotechnical products (the automotive industry, batteries, computers, phones, etc.), construction, and jewelry, to name a few.
Despite the numerous physical applications of metals, their other purpose is storing value or wealth. 1834 ushered in a period of money known as the gold standard in the United States, a monetary system where the country fixed their currency according to a particular amount of gold.
While there were various modifications of this standard, President Richard Nixon officially ended the system in 1971. Ever since, investors have noted several cases of inflation and recessions throughout the decades, leading to the term ‘safe-haven’ in reference to owning or investing in gold and other precious metals during an economic crisis.
What drives the prices of metals?
As is typical of any financial instrument, we have mainly technical and fundamental analysis factors. Also, there can never be one overwhelming element with a significant effect on the price.
All of these approaches attempt to analyze the supply and demand of the asset. With ‘technicals,’ market participants use a collection of chart patterns and market structure dynamics.
Metals are volatile, incredibly liquid, and dynamic, with most of their existence spent in strong bull markets. Fundamentally, it gets even more interesting. One of the consistent factors analysts look at is the value of the greenback (US dollar) since the most critical metal prices are dollar-based.
Other considerations include the global production & demand, reserves of central banks, ‘safe-haven’ investors (as covered previously), among many other things.
Methods of investing in metals
A beautiful feature of metals is the numerous investing methods they offer, making them suit anyone, from the ‘quick money’ scalper to the ‘buy and hold’ investor.
- Derivatives markets: By derivatives, this refers to metals as an online traded instrument, which is more pertinent in this article. Various brokers and other financial firms offer metals in spot, futures, options, mutual funds, and ETF (exchange-traded funds) markets, which clients can actively trade or invest in.
Another option investors may consider is owning mining company stocks, whose value would considerably be affected by the fluctuating value of these metals.
- Owning the physical asset: Lastly, buying good old bullion (or the actual physical asset) of metals is still a tried-and-tested method of investing, according to experts.
List of popular metals
The precious metals market is more or less the niche, consisting of only a handful of securities. Generally, most investors and traders aren’t as keenly interested in base metals (although traded markets exist for this).
Several brokers will use other currencies (aside from the US dollar) like the euro, British pound, and Japanese yen as the quote.
- XAU/USD – the price in US dollars (USD) to purchase one troy ounce of gold (Au). The gold market is easily the most popular metal instrument (with an astounding market capitalization greater than some currencies).
- XAG/USD – the price in US dollars (USD) to buy one troy ounce of silver (Ag). We can consider silver as gold’s ‘younger brother.’ Despite being the second most popular metal, silver is still a keenly speculated instrument since it very often mimics the movements of gold.
- XPT/USD – the price in US dollars (USD) to purchase one troy ounce of platinum (Pt). Although platinum is at least 30 times rarer than gold (according to experts), it is not as heavily traded. Nonetheless, it still enjoys extraordinary levels of liquidity and market participants similar to the previous two.
- XPD/USD – the price in US dollars (USD) to buy one troy ounce of palladium (Pd).
Pros and cons of metals trading
This financial market is often a natural extension for many forex traders because of the close relationship between currencies and metals. The latter has reasonably stable movements like the former, further making it a favorite for many forex participants. Aside from the familiarity, metals do also have distinct features, which could be a detriment to some.
- Like forex, metals trading occurs around-the-clock (24/5), making it a highly liquid market.
- Metals are a recession-proof market because they are inherently scarce and perform exceptionally well in these circumstances. Investors have long used them to diversify their portfolios as a hedge or to protect themselves from inflation.
- We could consider metals as a niche instrument since there is little choice in many markets. Hence, traders seldomly trade metals purely on their own, preferring to add them to an existing forex or cryptocurrency watchlist.
- Some brokers offer low leverage for metals. In these cases, traders would require larger trading capital.
Overall, metals are a unique market and should be a viable option for those looking to expand any of their portfolios for diversification or exploring more profit opportunities.
When thinking of any market to trade or invest in, we should understand its history and whether we can profit when it’s in good and bad times (recession-proof). Fortunately, metals have existed since almost the beginning of recorded history and have shown no signs of slowing down.