Precious Metals: Definition, How to Invest, and Example

What Are Precious Metals?

Precious metals are metals that are rare and have a high economic value due to various factors, including their scarcity, use in industrial processes, hedge against currency inflation, and role throughout history as a store of value. The most popular precious metals with investors are gold, platinum, and silver.

Understanding Precious Metals

In the past, precious metals played a central role in the global economy because many currencies were either physically minted using precious metals or else backed by them, as in the case of the gold standard. Today, however, investors purchase precious metals mainly as a financial asset.

As an investment, precious metals are often sought after to diversify portfolios and as a store of value, particularly as a hedge against inflation and during times of financial uncertainty. For commercial buyers, precious metals may also be an essential component for products such as jewelry or electronics.

The single most popular precious metal for investment purposes is gold, followed by silver. Precious metals used in industrial processes, meanwhile, include iridium, which is used in specialty alloys, and palladium, which is used in electronics and chemical applications.

Investing in Precious Metals

Investors who want to add precious metals to their portfolios have several ways of doing so. Those wishing to hold the metals directly can purchase physical bullion, such as minted coins or bars, and then store them in a safety deposit box. This method of ownership has the advantage of reducing counterparty risk but also increases storage and insurance costs.

Other popular methods include buying futures contracts for a particular metal or purchasing shares in publicly traded companies engaged in the exploration or production of precious metals. Mutual funds and exchange-traded funds (ETFs) also offer a variety of strategies, including funds backed by bullion, portfolios of mining companies, and leveraged exposure.

Although they may come with a certain degree of security, there is always some risk that comes with investing in precious metals. Prices can drop during times of economic certainty, as investors are forced to liquidate assets to cover margin calls or fulfill other securities requirements.

Similarly, physical assets may be difficult to sell at reasonable prices, particularly during times of heightened volatility. And of course, precious metals carry the added risk of theft if they are stored at home.

Example of a Precious Metal: Gold

Gold is the most high-profile precious metal, consistently generating lots of attention from the financial media, as well as market participants. Until 1973, the U.S. currency system was based on the gold standard.

Several factors account for an increased desire to hoard the shiny yellow metal:

1. Systemic financial concerns: When banks and money are perceived as unstable and/or political stability is questionable, gold has often been sought out as a safe store of value. 
2. Inflation: When real rates of return in the equity, bond, or real estate markets are negative or are perceived to drop in the future, people regularly flock to gold as an asset. 
3. War or political crises: War and political upheaval have always sent people into a gold-hoarding mode. An entire lifetime's worth of savings can be made portable and stored until it needs to be traded for foodstuffs, shelter, or safe passage to a less dangerous destination. 

Gold reached a peak inflation-adjusted price of roughly $2,200 in February 1980, before declining to a low of under $400 in April 2001. In the past 20 years, its price has generally risen, reaching nearly $2,000 in October 2020 and breaking over $2,000 later that year. Gold price as of June 2022 is around $1,850.

The Bottom Line

Precious metals are mined and traded as a way to hedge against inflation and offer the benefit of being able to invest in a physical asset. That makes these metals beneficial in times of geopolitical upheaval, when you may need to leave the country or protect assets and don't trust or believe in the strength of your domestic equity markets.