How to Invest in Precious Metals in 2013

    Text size
Anyone thinking about how to invest in precious metals right now has been watching the plunging prices of gold and silver.

Both metals are firmly in bear market territory. By the end of last week, gold was down about 27% from its 52-week high of $1,803 and silver had cratered by a whopping 43%.

But the recent downward slide in the price of silver and gold has once again revealed to investors the most important fundamental fact about precious metals - they're incredibly volatile. Swings of 50% in value in a single year are not unheard of.

But the fact remains, there are a host of good reasons why you should know how to invest in precious metals and why they are important to a diversified portfolio.

Precious metals offer unique protection against inflation and insurance against financial or political disasters.

Because of their widespread industrial applications, they have intrinsic value.

What's more, precious metals have a low correlation to stocks and bonds -- a small percentage in a portfolio can reduce volatility and risk.

And unlike the greenback, you can't print more of them.

But in-the-know investors also realize that gold and silver aren't the only precious metals on the block. In fact, there are a number of other options.

Here's how to invest in precious metals and where you should be looking for treasure right now.

How to Invest in Metals: Physical versus Paper

You can invest in precious metals in a variety of ways ranging from safe and conservative to aggressive and speculative.

They can be vehicles for growth or income. Or they can be used as hedges against economic calamities.

But basically there are only two options for those who want to invest in precious metals -- physical versus paper.

You can either take physical possession of the metal itself or you can own a vehicle that represents a unit of value on paper.

Here's how to invest today:

Exchange Traded Funds (ETFs) -- ETFs are a convenient and liquid means of purchasing and selling precious metals. Two examples are the SPDR Gold Shares ETF (NYSEArca: GLD) and the iShares Silver Trust ETF (NYSEArca: SLV), both of which closely track the price of the metals. Some ETFs even allow you to magnify your exposure to price swings by two and three times, like the ProShares Ultra Gold (ETF)
(NYSEArca: UGL).

Mining Stocks and Mutual Funds: An indirect method of investing in precious metals that still provides exposure to metals. Shares of precious metals miners are leveraged to price movements in the precious metals but don't always follow the price movements of the metals themselves. Stick to funds with managers with solid performance records and low expenses like the Vanguard Precious Metals & Mining Investors Fund (MUTF: VGPMX).

Futures and Options: The futures and options markets offer liquidity and lots of leverage to investors who want to make big bets on metals. For instance, a gold contract on the New York Mercantile Exchange controlling 100 troy ounces of gold worth approximately $130,000 at today's prices can be had for $8,800. But be advised -futures markets are the riskiest method of investing and also provide the greatest potential for profits -- and losses.

Bullion: Coins and bars are available for investors who want to be able to hold the actual physical metal in their hands and have a secure place to store them. One of the largest bullion and coin dealers is Kitco Inc. This option is appealing to investors who are expecting disaster, but bullion is illiquid, cumbersome and exposes you to loss from theft.

Certificates: Certificates offer investors all the benefits of physical gold ownership minus the hassle of transportation and storage. The Perth Mint of Australia offers certificates for gold and silver bullion. Nevertheless, certificates are still only paper, with questionable value in times of disaster.

How to Invest in the Other Precious Metals

Owning precious metals is usually thought of as owning gold and silver.

But how about other metals?

You can buy the stocks of companies that mine uranium. Same goes for base metals like copper, nickel and zinc.

But owning physical quantities of these commodities is simply impractical.

So how to invest beyond the usual havens of gold and silver?

Their lesser-known cousins -- palladium and platinum -- may be just the ticket.

These metals are coveted for high-tech uses such as catalytic converters in cars and have soared in value the past few years.

They weren't even refined until the 1800s, making them the new kids on the block compared to ancient gold and silver, which have been hoarded since the beginning of civilization.

And while gold and silver are locked in the teeth of a grinding bear market, platinum's spot price is only 20% off its 52 week high. Palladium is down a mere 10%.

Meanwhile, increased use of platinum and palladium in automobiles is expected to help drive consumption up 7% - 8% this year.

In fact, palladium use in autos rose by 9.5% to a record high of 6.01 million ounces in 2012, while supplies decreased by 32,000 ounces, according to Thomson Reuters Platinum & Palladium Survey for 2013.

In fact, while global demand is surging, continued labor unrest in South Africa is beginning to put a crimp into supplies.

This shortage promises to boost the value of both platinum and palladium.

In fact, the price of platinum will rise to $1,850/ounce in 2013, according to noted natural resources expert Peter Krauth.

But for a number of reasons, Krauth, thinks investors should be keeping a closer eye on palladium right now.

You see, Krauth, who manages the Real Asset Returns investing service, has uncovered proprietary research that shows the country that controls 42% of the world's palladium supplies has depleted its reserves.

Combined with the labor unrest in South Africa, fully 80% of the world's supply of this rare precious metal is threatened.

Krauth identifies a mining company with vast, untapped reserves of palladium. He also identifies the best of the three available palladium ETFs.

Get all the information on how to invest in palladium here.

Related Articles: