How to Invest in Gold, Silver and Precious Metals: Part 3

by Tuesday, September 23, 2014

Determining the Price of Precious Metals

As with most markets, supply and demand most directly affect the price of precious metals. Supply and demand is reflected in the bid and offer prices of daily transactions, which occur in the billions and trade freely on and off exchanges.

The spot price of the precious metal is reflective of the value of the asset at the moment of the quote, and is also called the current ( or spot) price.
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Typically spot prices are consistent through all types of precious metals in the market at a given time, meaning that if the price of one goes up, so does the price of another.

In addition to paying the spot price for a precious metal, large banks typically charge a minimum purchase amount, such as 1000 ounces of a gold for example, and a premium, an amount paid in addition to the standard rate. Unfortunately, this can sometimes make the market impossible to participate in for investors with little capital, and is one of the major downsides of investing in precious metals. Luckily, futures contracts make gold accessible to each and every one of us, but that’s a different report for a different time.

Get Started in Investing

When investing in precious metals, you may chose between physically possessing the metal or owning the paper version of your precious metal that represents its value. The latter is far more common, though the former is generally a lot more desirable, particularly amongst gold bugs.

There are various options to choose from when deciding how to invest in precious metals. First, there are commodity ETFs (exchange traded funds), which tend to be very convenient, as they are a liquid method of buying and selling precious metals. They allow for ownership while blending the best aspects of growth potential and risk management. The downside (as with all ETFs) are the fees which can sometimes make the cost of ownership prohibitive.

Second, there are common stocks and mutual funds. In this case, shares of precious metals change based on price movements in the market of precious metals, and you can rely on the managers of the funds to monitor the value of the mining stocks.

Next, there are futures and options markets, which have the highest potential to profit or lose as you bet on the future price of products. Futures and options allow for great customization on the part of investors but also require more than just base knowledge. Options in particular can be very advanced weapons in the hands of a sophisticated investor. Likewise, a novice investor can easily vaporize their trading account with options, so make sure to know what you’re doing before proceeding.

Bullion is the form of precious metals that is purchased and delivered in the form of physical bars and coins. While they are a burden to keep hold of, many investors like having the option of holding their investment in the palm of their hand. Finally, there are certificates, which are representative of value, and are not as cumbersome as bullion.

The major exchange for purchasing precious metals is the New York Mercantile Exchange (NYMEX). It is the largest physical commodity futures exchange in the world, and is broken down into two trading divisions.

Energy, platinum, and palladium markets are traded in the NYMEX division, while metals such as gold, silver, and copper are traded in the COMEX—commodity exchange—division along with the FTSE 100 index options.

Read more in Part 4Screen Shot 2014-09-23 at 5.18.57 PM

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