Today’s investor is in a quandary. The conventional wisdom of salting money away in some form and forgetting about it, secure in the knowledge that it will grow year-on-year, has been shattered by seemingly everything of assumed value going through turmoil. The trusted maxim “You cannot lose buying property” has cost many house buyers dearly, and “The stock market always goes up over time, if you invest in sound companies” has been clearly demonstrated incorrect to many people, including retirees who may have been relying on their dividends for supplemental income. Savings accounts have such a low rate of return, there is no keeping up with inflation. So it is not surprising that many are considering a more physical form of value than paper money, stocks and shares, or even houses which can depend for their value on others’ whims. But are precious metals the answer, or will they too disappoint?

by Alan Tankenghoe via Flickr

First, it can be a mistake to lump all precious metals together in the discussion. There are distinct differences between the different metals in this category. Perhaps the most obvious one, gold, is the headline grabber, and at well above $1,500 (£1000) per ounce is a compact conveyor of wealth. Its characteristics and uses differ from many other metals. Most of the gold that has ever been mined is still in existence and accessible. Much is made into jewelry, and this use is predominant in India, which is currently the largest consumer of gold, although the Chinese have ramped up their investing and are set to overtake India as the largest buyers.

In contrast to this, other metals such as silver, platinum, palladium, and others are used in industrial processes, and consequently progressively used up. There have been many reports of manipulation of the silver prices, and at one point more silver was owed on futures contracts than was available in the world. If all production of silver ceased, one expert judges that there is only four month’s further supply available. Silver is used not just for photography, the traditional process, but as a good conductor for electrical contacts, for brazing, batteries, electroplating, and many other industrial processes.

Platinum and its related elements have found uses in catalytic convertors, as well as for jewellery. Demand currently would use up existing supplies in a year, if no further mining was done. It used to be much cheaper than gold, but is now on a par.

If you are interested in precious metal investing, there are several ways that you can tap into the market. The first is to buy the actual metal, and stockpile it somewhere, or hold it on your own property in a safe. There are risks and inconveniences to this, but after a number of offsite scams have come to light in gold investing, where the gold did not exist or was counted several times over for different customers, some people will only trust the physical presence. One obvious disadvantage to investing directly in precious metals is that there are no interest or dividend payouts, so anyone looking for an income investment must consider the need to make regular sales from their stockpile.

A similar idea is to buy gold, silver or platinum coins. If you are not an expert, then it is best to only deal with reputable dealers, and to buy the best quality that you can afford. Coins sell at a premium to the weight of the metal, so depend more on supply and demand for their prices, and can lose you money in the first place. There are many dealers in this market, so it is a case of “caveat emptor”; you need to be sure who you are dealing with.

Secondly, you can invest in funds that reflect the metal prices. Exchange traded funds such as Etfs Metals Securities Limited Gold (PHAU), or silver (PHAG), and others give you the facility to easily trade in and out of precious metals as your funds allow, and you do not have the problem of how to store the metal. These funds are backed by billions of dollars worth of the metal, but they charge an annual fee which will reduce your returns.

The third and most speculative way of investing in precious metals is to trade on the stock market, trading in mining and extraction company shares, such as GalantasGold Corp (GAL) or Randgold Resources (RRS).If you look at the prices of these, you will see that they are highly volatile, and more in the nature of calculated risks based on track record. You can spread this risk by buying into a fund such as the ETFX DAXglobal Gold Mining Fund which holds shares in several companies.

Unlike shares, it seems that precious metals will continue to hold their value, although that is subject to fluctuation, and will increase over time as more people become disillusioned with other investments. Even though prices have risen significantly, there is no reason that they cannot continue to go up. Silver looks a particularly good buy for the next few years. It has traditionally been around one-sixteenth of the price of gold, but is currently trading at one-fiftieth, and a “correction” in the price would triple its value, even if gold did not increase in price. Given the need for a continuing supply of silver for industrial purposes, it is likely that there will be a real physical shortage in the foreseeable future, and then supply and demand will push the price higher still, at least until alternatives are found. While gold may have been the story of the last decade, this decade may belong to silver.

Investment firms are bullish on palladium, too. It is being used as an alternative to platinum in catalytic convertors, and a UBS analyst believes it could climb to $1000 per ounce during 2012. Credit Suisse reports that growing demand could see the price reach $1200 per ounce in 2013, and Deutsche Bank analysts think that it could achieve $1450 per ounce by the end of 2012. At the time of writing, it is trading at just under $700 per ounce (about £440), down from a high of $885 a year ago.

Alan Northcott is an investment expert, authoring numerous critically acclaimed books in the field. His musings and financial commentaries can be found at Buy where he is a regular guest poster.

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