In a way, investing in precious metals seems kind of counterintuitive. After all, they generate no profits or dividends. Warren Buffett thinks precious metals aren’t even worth considering.
Yet there is still money to be made. For example, in volatile times, gold can be a great safe haven, while other precious metals like silver and platinum serve critical industrial purposes as well.
In fact, some of the world’s best investors like George Soros, David Einhorn and John Paulson have set aside a part of their wealth in these shiny investments.
So, how can you participate? Well, the good news is that there are a variety of exchange-traded funds (ETFs) to help out. Some invest in the actual metal while others are based on equity indices, which means you can invest in precious metals according to your particular investment needs and goals.
So let’s take a look at some of the ways to buy precious metals.
SPDR Gold Trust ETF (NYSEARCA:GLD)
There are some economic uses for gold, such as for semiconductors, medical equipment, dental work and even aerospace. Of course, jewelry is still a key part of the precious metals market.
But for the most part, the value of gold is about its historical role as a currency and a safe haven. Consider that during the late 1970s — when inflation was getting out of control — people saw gold and other precious metals as a way to seek protection from the dwindling value of the US dollar.
From August of 1976 to January of 1980, the price of gold soared from $100 per ounce to more than $800 per ounce.
Gold has also proven to be a reliable way to find safety during periods of extreme economic or geopolitical distress. Just look at the financial crisis of 2008. During this period, gold posted a return of about 5% — one of the few assets that actually saw a gain.
The good news is that there are various ETFs that offer the benefits of gold ownership, such as the SPDR Gold Trust (NYSEARCA:GLD). Its total asset value is about $29 billion and the bullion is stored in vaults in undisclosed locations. The fee structure on the GLD is also low, at 0.4%.
In terms of performance, the past few years have been mostly choppy. Yet over the past decade you would have generated a nice 9.65% compound annual return with the GLD ETF.
iShares Silver Trust ETF (NYSEARCA:SLV)
Silver has some great qualities. Besides being highly malleable, it also has the highest conductivity of precious metals — even higher than copper.
Because of these features, silver has wide economic applications, including batteries, medical devices and smartphones. But like gold, silver is often viewed as a safe haven in times of distress.
The largest physically-backed silver ETF is the iShares Silver Trust (NYSEARCA:SLV) fund, which has $5.2 billion in assets and an expense ratio of 0.5%.
The SLV has had a tough couple years, though. In 2013, the fund plunged by 36% before dropping another 23% in 2014.
Unlike some other precious metals, the SLV ETF did not fare well during 2008 either, falling an ugly 26%. The drop in economic activity had a major impact on the demand for silver. But precious metals bounced back in 2009, with the SLV ETF posting a gain of 45% and then another 82% in 2010.
ETFS Physical Platinum Shares (NYSEARCA:PPLT)
Platinum has a high resistance to corrosion, which makes it one of the best precious metals for industrial purposes. Consider that platinum is used in lab equipment, LCDs and video equipment. However, the main application is for catalytic converters.
At the same time, platinum is very difficult to mine and produce, even compared to other precious metals. The limited supply means that the value of platinum is generally higher than gold.
A top ETF for platinum is the ETFS Physical Platinum Shares (NYSEARCA:PPLT) fund, which has $593 million in assets and an expense ratio of 0.6%. Unfortunately, the recent performance has been rough. In 2013, the PPLT fund dropped 12.8% and then fell another 15% in 2014.
Yet the precious metal can be a great way to play a rebound in the global economy. During such periods, there is generally a big surge in car sales that leads to strong demand for catalytic converters.
SPDR S&P Metals and Mining (NYSEARCA:XME)
Another good way to capitalize on precious metals is to invest in the miners. Miners of precious metals can often post higher returns than funds that simply hold the metal. Miners’ costs are relatively fixed, so a spike in the price of precious metals can lead to outsized profits and dividends, so much of the gains go straight to the bottom line.
But that higher reward comes with significantly higher risk. A miner may miss out on rallies because of issues that are specific to the firm. Perhaps there may be a strike or a government crack down or terrible weather. In any case, when things go wrong for miners of precious metals, they can post substantially deep losses.
This is why it is a good idea to buy a basket of miners, such as with the SPDR S&P Metals and Mining (NYSEARCA:XME) ETF. The fund has assets of about $370 million and an expense ratio of 0.35%.
The volatility inherent in precious metals can sometimes work against investors. During the financial crisis, the XME lost a grueling 57%. But there’s plenty of upside, too. The XME has done particularly well during upswings in the global economy. In 2009, the return was a sizzling 73%. Then in the following year, it was up 34%.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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