How to Invest in Precious Metals

When it comes to investing, diversification is the name of the game. By placing your money in various funds, your wealth isn’t tied to any one company or sector of the economy.

While many people understand the importance of diversifying stocks or mutual funds, they may overlook the need to diversify the types of assets they own. Investing in precious metals is one way to diversify your assets.

In this guide, we’ll discuss the different ways you can invest in precious metals, the ins and outs of each, and how to get started.

What to know about investing in precious metals

Investing in precious metals differs from buying a stock through a brokerage account or a CD at your local bank. That is especially true if you are buying physical metals. There are four types of commonly held metals:

1. Gold
2. Silver
3. Platinum
4. Palladium

Many people use these metals as a hedge against inflation, and they have traditionally held their value in times when the stock market has faltered. Some people also like the security of owning a tangible asset that isn’t tied to any country’s currency.

However, there are different costs and considerations involved in these purchases, and you should be sure you understand those before investing. Here’s what to know.

1. Precious metal investments can be a physical or paper asset

While many people purchase physical precious metals, that is not the only way to invest in these assets. You can also buy shares in funds that hold physical metals, or you could buy shares in companies that mine metals. 

These are ways to diversify with precious metals but without needing to store a physical item.   

2. Precious metals are best as a long-term investment

While the value of precious metals has historically increased in the long term, their value can be volatile in the short term. That means this isn’t the type of investment you purchase in the hopes of quick gains. 

Instead, you should buy precious metals with the thought that they provide a hedge against inflation and a safety net during economic and political unrest.

3. Precious metals are subject to capital gains tax

Like other investments, precious metals are subject to capital gains tax. However, you only pay this tax when you sell your precious metals, and it is only assessed on the gains—that is, the growth in value—of your investment. 

For instance, if you buy $10,000 worth of gold and sell it for $15,000, the gains would be $5,000.

However, if you use a precious metals IRA, you could reduce your taxes. A traditional IRA provides a deduction for contributions to the account while a Roth IRA offers tax-free withdrawals in retirement. Talk to a tax and retirement specialist for more details.

4. Precious metals shouldn’t be your entire portfolio

A diverse set of investments is key to weathering financial storms since each asset class may respond differently under various economic conditions. For this reason, most finance professionals advise against keeping all your money in any particular asset—stocks, bonds, real estate, or something else.

The same is true with precious metals. Opinions vary, but many in the industry advise holding no more than 20% of your assets in precious metals.

5. Precious metals have unique risks and costs compared to other investments

Since physical metals are tangible assets, they have special considerations. Chief among those is how to store the metals. You could keep them at home, but they could be at risk of theft, and you’ll likely need to add insurance coverage to protect them. 

You could also store your precious metals in a depository—-which is required of precious metals in an IRA—but annual expenses will apply.

There is also the question of ensuring you get good value when purchasing your precious metals. Unscrupulous dealers or scam artists may deliver inferior metals or charge exorbitant mark-ups.

Before investing in precious metals, be sure to research and understand current pricing and how to spot signs of a scam. Here are some resources to get you started:

• Bloomberg: Current precious metals spot prices.
• LBMA: Precious metals forecast for 2024.
• World Gold Council: Research and news on gold.
• The Silver Institute: Information on the silver industry and list of trusted dealers.
• World Platinum Investment Council: Information and research on platinum investments.

Options for precious metals investment

Investing in precious metals may bring visions of a home safe filled with gold and silver, but holding physical metals is only one option. You could do any of the following.

Option	Best for
Buy metals from a dealer	Owning physical precious metals
Open a precious metals IRA	Retirement savings and a tax break
Purchase precious metals ETFs	Those who don’t want to store physical metals
Purchase mining stocks	Benefiting from the metal industry as a whole
Invest in gold or silver futures	Those with high-risk tolerance

Buy metals from a dealer

Buying from a dealer is the most straightforward way of investing in precious metals. It’s best for those who want to have physical assets in their possession.

How it works

If you purchase precious metals as a personal investment, the process is very similar to any other retail transaction. Dealers often have their inventory listed online. You select and pay for the items you’d like, and they are shipped to you. 

However, most dealers don’t list prices online, and you should expect to speak to a representative on the phone to complete the transaction.

What to know

Precious metals pricing constantly changes, and each dealer will have their own markup and fee structure. For this reason, comparing prices from several dealers before making a purchase is good. Don’t forget to ask about shipping costs as well.

Remember that fees may be assessed based on the value of your purchase. For instance, Fidelity charges a 2.9% fee on purchases of less than $10,000, but that charge drops to 0.99% for purchases at or greater than $100,000. The investment firm also has a $2,500 minimum for precious metals orders.

Open a precious metals IRA

With a precious metals IRA, you won’t be able to store your metals at home, but you will get a tax break and boost your retirement savings.

How it works

Standing for individual retirement account, IRAs come in two forms: traditional and Roth. A traditional account offers a tax deduction for contributions, but withdrawals in retirement are subject to regular income tax. 

Contributions to a Roth account are not deductible, but you will get tax-free withdrawals in retirement. With both forms, you might pay a penalty if money is withdrawn from the account before age 59½.

What to know

Only self-directed IRAs can be used to hold precious metals, which must meet IRS purity standards. You’ll need a specialized custodian to administer the account, and precious metals must be stored in an IRS-approved depository.

Purchase precious metals ETFs

If storing physical metals sounds like a hassle, you could buy ETFs—exchange-traded funds— designed to track precious metals’ performance and value.

How it works

ETFs can be traded the same as stocks but may include a mix of assets rather than shares of a single company. Some ETFs hold physical gold or silver and offer a way for people to invest in precious metals without owning them directly.

GLD, GLDM, AAAU, and IAU are all ETFs that include exposure to physical gold. SIVR and SLV are funds that hold physical silver.

What to know

Although these funds hold physical precious metals and are intended to track their value, the actual costs of ETFs vary depending on the fund’s structure and fees. What’s more, even though you are investing in precious metals through a fund, you will not own the precious metals yourself.

Purchase mining stocks

Buying shares in a mining company is another way to diversify your portfolio with precious metals without physically holding them.

How it works

Precious metals have value not only as investments but also for industrial uses, and the mining industry finds and extracts metals from the ground to meet that demand. Many mining companies are publicly traded, meaning you can buy stock in the firm. If the company increases in value so too should your stock.

What to know

Unlike the ETFs above, mining stocks aren’t based on physical gold or silver value. Instead, their value depends on the strength of the company itself. If you buy stock in a company that finds a significant store of precious metals in the ground, the value of your shares will likely rise. If not, the value may stay the same or decline.

HMY, GATO and KGC are all stocks for companies involved in the exploration and mining of precious metals, but they are far from your only options.

Invest in gold or silver futures

Buying gold or silver futures is an option that may be best left for sophisticated investors who have a high-risk tolerance. Significant risks are involved in trading futures so tread cautiously if you pursue this option.

How it works

A future is an agreement to buy or sell a commodity or asset at a specific price. There is the potential for significant profit if the agreed-upon price is lower than the market price at the time of the sale. Still, there is also the possibility of a large loss if you are obligated to buy an asset for more than it is currently worth.

What to know

There are also gold and silver options, which are similar to futures but with less risk. These give you the right—but not the obligation—to purchase at a certain time.

Both futures and options are advanced investment strategies and should not be attempted alone. Seek an experienced and trusted investment advisor who can clearly explain the pros and cons and guide you through the purchase process, if deemed appropriate.

How to invest in precious metals

Investing in precious metals will vary depending on your selected option, but you can follow these steps to get started.

1. Determine how much to invest: Before purchasing any precious metals, ETFs, or stocks, you must know how much of your portfolio you plan to devote to this asset class. Diversification is essential, and you shouldn’t put all your money into any one investment.
2. Research your options: Whether you are planning to buy physical gold, a silver ETF, or a mining company’s stock, you must research. Check the prices from several precious metals dealers before purchasing and consider the long-term performance of ETFs and stocks before buying shares.
3. Create a funding schedule: Finally, decide how you plan to buy your investment. While investing all your money at once can be convenient and may result in reduced fees for physical metal purchases, there is also a case for dollar-cost averaging. This approach involves making regular yearly purchases to manage the risk of rising prices.

Does precious metals investing make sense for you?

Before you get started, understand why you want to invest in precious metals. Is it to have a tangible asset at home, boost your retirement savings, or diversify your stock portfolio? Knowing your goal will help you decide whether precious metals suit you.

Once you know why you want to invest in precious metals, you can select the best strategy to meet that goal.

For instance …

• If you want a hedge against inflation, buying metals from a dealer or a precious metals ETF might be the best option.
• If you want to boost retirement savings, go with an IRA.
• If diversification is the goal, gold mining stocks or futures might be worth considering.

And in some cases, you may find that investing in precious metals is not right for you. It might seem like too much of a risk or hassle to have gold or silver in your home, or perhaps you prefer the low fees of an index fund in a regular IRA to the cost of a precious metals IRA.  

Pros and cons of investing in precious metals

If you’re unsure, consider these pros and cons of precious metals investing.

Pros

• May offer a hedge against inflation

• Diversifies investment portfolios

• Precious metals typically hold their value over the long term

Cons

• Prices can be volatile in the short term

• There can be additional expenses, such as insurance, storage, and fees

• Physical metals are not as liquid as other investments, and a seller must be found to convert your investment to cash