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Investing in Precious Metals: A Golden Opportunity?

In times of market instability, savvy investors often look to certain types of investments that can lend stability to their portfolio. Increasingly, that investment is in gold and other precious metals. Because the value of precious metals does not directly correspond to the values of other kinds of investments, precious metals can help balance investment risk. While gold is the first precious metal people think of, you can invest in other metals, too – like platinum, silver and palladium.

Many fans of precious metals, and especially gold, point to the fact that these kinds of metals have the potential to hold more of their value as compared to other investments. Consider, for example, the stock of a failed company versus a precious metal index fund when supply is too high. Precious metals are valued not only as a commodity for investment purposes alone, but also for industrial reasons. They are used in the making of electronics, medical, and automotive equipment and other applications. Because of this reason, precious metals have been in demand even more on a global scale.

That being said, there are a variety of advantages and disadvantages to investments made in precious metals.

Advantages:

  • Portfolio diversification – The prices of precious metals are related to supply and demand and are independent of investments like stocks and bonds. In this way, investments in precious metals can balance the performance of other kinds of investments.
  • Protection against inflation – Some people believe that precious metals help counteract inflation within a portfolio because when the dollar weakens, gold prices typically rise. When fears about inflation strike, people invest in more metals and drive their value up further.

Disadvantages:

  • Volatility – Despite their ability to provide balance and diversification for your portfolio, the prices of precious metals are often subject to dramatic swings, both up and down. This is partly because supply and demand are continually changing due to mining and trading activities.
  • Vulnerability to geopolitical risks – Investments in precious metals are, to an extent, an investment in the economic and political conditions of the area from which they are mined, along with any instability that region faces.
  • Investment specialization – Even an experienced stock market investor does not necessarily know all there is to know about investing in precious metals. There is always a learning curve in investing in precious metals – or in any commodity or alternative investment choice.
  • Higher taxes – When you sell precious metals, your capital gains is sometimes taxed at a higher rate as a collectible.
  • Storage – If you chose to invest in bullion rather than in index securities, you’ll have to take steps to properly store and care for your physical investment.

Just as there are varieties of advantages and disadvantages to investing in precious metals, there is also a variety of ways to make your investment.

  • Securities – Like most investors, you can invest in securities that are based on precious metal prices.
  • Mutual Funds – As with mutual funds based on stocks and bonds, these funds can invest in a variety of related securities such as mining company stocks and index securities, as well as bullion.
  • Exchange-traded Funds (EFTs) – These investments (Gold SPDR (GLD), Platinum (PPLT), Palladium (PALL), and Silver (SLV)), tend to reflect the price of precious metals very closely and can be invested in bullion.
  • Mining Company Stocks – With this choice, which is riskier than investing in precious metal securities, you essentially are investing in both the precious metal itself and the individual company that mines it – for good or bad.
  • Options, Futures and Derivatives – More experienced investors with more time to devote to managing their investments may choose these. Options, futures and derivatives essentially provide precious metals at a predetermined price at a predetermined time.
  • Bullion – You can purchase physical assets such as coins or bars, which should be certified for clarity and weight, and have a dealer store them for you or you can store them yourself.

Whatever investment you choose, be sure to carefully research the associated risks and keep a long-term perspective in mind.

 

IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein. Contributing Sources: http://www.forbes.com/2010/06/22/investing-precious-metals-personal-finance-gold.html

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