Precious Metals investing are an increasingly popular way to diversify a portfolio. Yet many investors remain unfamiliar with the various methods to purchase and sell physical metals.
Gold and silver both provide inflation protection, market protection, low correlation to other investments and low correlation among themselves. Unfortunately, however, they don’t generate cash flows like profitable businesses or interest-paying bonds would.
Diversification
Rare commodities, like gold and silver, have historically proved resilient during periods of economic turmoil, making them ideal investments for those looking to diversify their portfolios. Gold and silver serve as safe havens against traditional asset volatility while keeping their value comparatively well through recessions, crises, or other periods of economic unpredictability.
Gold, silver, platinum and palladium form an asset class with low correlations to stocks and the economy as a whole. Their pro-cyclical demand (jewelry, consumer goods and industrial applications) increases with economic expansion while countercyclical investment demand often picks up during times of economic contraction or market fluctuations. Their dynamic correlation provides unique benefits by adding precious metals as diversifiers into an equity portfolio and helping mitigate its associated risks.
Futures contracts and options provide liquidity, leverage and access to markets while offering greater potential profit or loss than physical bullion purchases such as coins or bars.
Utilizing the Maximal Overlap Discrete Wavelet Transform
It is possible to decompose precious metal and stock return series into their high-frequency components, and create time-frequency domain filtered series that can then be used to calculate conditional quantile correlations.
If you’re curious about precious metals investing, consulting with a certified financial professional is highly recommended. SmartAsset’s free tool connects users with pre-screened advisors in their area that you can meet without cost – giving them an opportunity to interview the advisor and determine whether or not it meets their needs.
Inflation Resistance
Investors seeking protection from inflationary times tend to favor assets that help preserve purchasing power – precious metals are therefore an attractive asset class for these purposes. Stocks, bonds and real estate also provide some inflation resistance; however they do not provide quite the same degree of safety. Therefore it is wise for investors to add gold and silver investments as part of their portfolio strategy.
Gold and silver prices tend to fluctuate more slowly than paper currencies like the dollar, due to being independent from currency-backed assets and earning their value through other channels. Their prices are free from credit risk so may help in times of financial crises when paper assets such as stocks, bonds or savings accounts can collapse.
Precious metals provide investors with a way to safeguard their wealth against economic crises, foreign currency devaluations and civil unrest without depending on any one government or asset class. Their global buying power gives investors’ confidence in this form of asset diversification.
Gold and silver may offer some protection against inflation, but their returns often do not match up to more secure investments. For example, during the inflation-plagued 1970s when inflation peaked, S&P 500 only provided an average annual return of 1.6% annually while gold generated an impressive average annual return of more than 30% during that same timeframe.
Leverage
As with other commodities, precious metals don’t generate income like businesses or bonds do; rather, investors hope their investment will appreciate over time and provide some protection in case of market fluctuations or economic slowdown.
Investment options in precious metals span from physical bullion bars, coins and jewelry, mining stocks and funds. Commodity trading with American Bullion on futures markets and commodity futures contracts to commodity trading on futures markets with higher risks associated with it than other methods. Buying precious metals on futures markets offers leverage but has an increased risk of loss than other forms of investing in this asset class.
An increasing number of investors prefer purchasing precious metals-related investment products, such as shares of precious metals mining, streaming, or royalty companies as well as ETFs or mutual funds that focus on these metals.
Physical bullion can be an attractive investment option for those who want physical precious metals but lack storage space for them. Unfortunately, however, its higher costs and illiquid nature mean you may take longer to see your money returned than with real estate or no-load mutual funds.
ETFs and funds that specialize in precious metals are increasingly popular due to their ease of purchase, with most transactions completed through one transaction and held in an individual broker account. Unfortunately, however, such ETFs tend to carry high expense ratios and are taxed as collectibles rather than capital gains rates for individual investors.
Precious metal-based investment products carry with them the risk of high-pressure sales tactics and fraud, so be wary of unsolicited calls urging you to act quickly. No reputable investment professional would use such pressure, which should serve as a red flag that fraud could be involved.
Taxes
Precious metals can make an excellent addition to any investment portfolio, yet can have unexpected tax ramifications. Understanding these taxes is paramount to optimizing your return and maximizing the profit from investing.
There are ways around this tax trap. Investors can take advantage of state sales tax exemptions in most states to lower their taxable income, and the IRS permits individuals to add specific costs associated with buying precious metals as cost basis; this could potentially reduce tax obligations when selling later.
Investors can gain exposure to precious metals by buying shares of mining companies that specialize in this asset class or fund managers who invest in gold and other precious metals. Such investments typically incur long-term capital gains tax rates of 20 percent or lower; short-term gains could incur the maximum federal tax rate of 39.6 percent.
Investors looking to sidestep capital gains taxes altogether often opt for other similar metals-focused private equity funds such with any wills or trusts as an easy way to gain exposure in this thriving sector without incurring taxes on long-term and short-term gains. This strategy becomes even more appealing for higher income taxpayers as PFICs do not incur taxes during their first year of ownership!