Investing in Precious Metals
Picking the right investment for your portfolio isn’t always easy. You want to keep diversification alive by selecting stocks from different economic sectors. And while most investors cycle through various sectors as the economy ebbs and wanes, there’s one sector that seems to make it into almost any portfolio – gold.
Gold, along with silver and platinum, are popular investment choices for investors. Their use as a safe haven asset means that precious metals stocks can be part of a defensive portfolio while mining companies can often make for solid dividend-paying stocks.
Precious metals can play a number of roles in your portfolio. Understanding how they provide value is the key to maintaining healthy profits.
Key metrics for precious metals
While ratios like price-to-earnings or price-to-sales are important for most stock sectors, they don’t mean much when it comes to precious metals. Instead, inflation, interest rates, and the US dollar become the primary considerations.
One of the biggest misconceptions about gold is what economic factors actually make it relevant as an inflation hedge. As a safe haven asset, gold is used as a default investment to protect investors against virtually all types of risks ranging from geopolitical to economic. But gold is most often quoted as being the go-to inflation investment.
However, gold isn’t an appreciable investment like a stock. Gold doesn’t produce earnings or yield dividends – it simply holds value in a way that’s separate from currency. Precious metals are best used as wealth-protectors that aren’t correlated with the economy or market performances.
As far as being an inflation hedge, most investors pick gold and silver without giving it a second thought. But precious metals are only good as inflation plays when inflation is higher than interest rates. As long as interest rates are higher than inflation, investors are better off investing in assets that actually appreciate in value. But if interest rates can’t keep pace with inflation, then precious metals like gold are the better option since wealth preservation takes precedence over price appreciation.
One of the most overlooked aspects of investing in precious metals is the difference between mining companies and junior mining companies. It’s a critical difference that can mean boom or bust in your investment portfolio. A mining stock derives income from their operations, whereas a junior mining stock is an exploration company that seeks out new locations for ore. The latter is far more risky since there’s a lot of money that goes into the process considering that a potential mine site could turn out to be worthless.
Mining stocks aren’t the only way to play precious metals though. ETFs and mutual funds are also viable options. They might invest in an index of mining stocks to help you stay diversified, or they might invest in futures contracts. Regardless of the path you take, adding precious metals into your portfolio can be a good risk mitigation strategy that will help your portfolio stay afloat in difficult economic times.