Investing In Precious Metals

Investing in precious metals is not only one of the most spectacular offensive plays at the present, but also a prime defensive posture as well.  Individuals and nations alike are piling into precious metals for both profit and protection.  For the individual investor who lacks experience in gold and silver, the good news is that there are plenty of options for finding an investment vehicle that suits them.

Investing In Precious Metals By Way Of Bullion

The most obvious, if not prudent, place to start is with physical metal.  Owning bullion, in hand, is the best way to know you’ve converted financial resources to something of real value.  Best of all, it has worldwide appeal.  On a simple trip to Eastern Europe, you could find yourself carrying half a dozen types of paper money.  In each of these various countries, however, gold and silver are widely recognized and valued.

Even within the option of owning bullion, you have options.  The most basic is to hold the physical metal at home.  However, there are a number of storage programs that have cropped up.  You can choose from storage in allocated accounts, unallocated accounts, and there are even certificate programs backed by a government in Australia.  The big decision is choosing whether to house it for yourself, have someone safeguard it on your behalf, or a combination of the two.

Investing In Precious Metals Through Bullion-Based ETFs

Investing in precious metals is very easy these days, thanks to the proliferation of exchange traded funds.  Rather than buying physical bullion, which legions of folks have never even done, they can instead push a button within their online brokerage account and they are investing in precious metals as easily as buying shares of stock.  The sheer volume of funds pouring into silver ETF and gold ETF products testifies to their popularity.

One of the most common ways for investing in precious metals is through the highly popular GLD and SLV ETF products.  These are easily traded on the New York Stock Exchange.  The primary objective is for the ETFs to mimic the price movement of the underlying physical bullion.  The tracking with the underlying metal is supported by purchasing bullion and storing it in various places around the world.  Note that any given ETF may use multiple locations to house metal, but it’s also true that the locations can vary from one product offering to the next.  This is nice because you can choose countries that you’re more comfortable with.  Investing in precious metals via ETFs will differ from holding bullion at home in that there is an expense ratio to be paid.  When it’s time to pay fees, this happens by actually selling some of the bullion.  When physical metal is sold to raise money to pay fees, you lose some of the ability to fully track the underlying metal price.  In other words, the overall value of the fund is diminished over time, relative to what the capital could have purchased in bullion stored in your closet.

Investing In Precious Metals With ETFs That Track Miners

Some people prefer investing in precious metals through the companies that actually produce the metal, rather than through the metal on its own.  At the same time, a great number of people find that choosing individual mining companies is a daunting process.  To their relief, they discover that there are ETF products that rest on the fulcrum of a basket of precious metals miners.

As an example, there is the Global Silver Miner’s ETF (SIL), which is tied to the Solactive Global Silver Miner’s Index.  This ETF tracks  twenty-some silver miners.  It tends to focus on the larger companies that are actually producing metal, as opposed to the “junior” exploration companies.  This nice thing about an ETF that attempts to mirror the miners is that it participates in the leverage that mining companies can experience.  Distinct from the price moves in bullion, which are respectable in their own right, the companies benefit from a rapidly rising internal rate of return that makes them wildly profitable when bullion is in a bull market.

Before investing in precious metals by way of an ETF, it’s a good idea to simply assess some of the downsides so you can intelligently weight your options.  One of the issues has already been mentioned, with respect to the ETF products that are linked to bullion.  The issues there is that there is the tracking error that occurs when bullion is sold out of the fund to cover the expenses of running the fund.  The amount of bullion on hand, then, relative to the money invested no longer reconciles.  The take home message is that you can best track the price of bullion by simply owning the bullion.

A similar thing occurs with ETFs anchored to mining companies.  In this case, the ETF is usually based on an index of companies.  When things go well, there’s no problem.  However, if there’s a time when you would prefer to sell a given company, that’s hard to do when you “own“ that company merely as part of the index.

Investing In Precious Metals Via Mutual Funds

There are yet more options for investing in precious metals if you’ve ruled out bullion, ETFs based on bullion, and even ETFs related to groups of stocks that are tied to a given index.  If you want the movement that the miners can provide, but want more flexibility than being tied to an index, then you can look to a quality mutual fund.  Two of my favorite mutual funds are under the directly of Frank Holmes, who has won awards for his mining stock fund management.  There’s yet more diversity within the category of mutual funds as well.

Investing in precious metals via mutual funds is an option for those preferring the larger producers as well as people wanting exposure to junior resource stocks.  Specifically, USERX (U.S. Global Investors Gold and Precious Metals Fund) is suitable for people who want to concentrate on the more established companies that are already in production.  For those wanting the chance to share in the gains of small companies with a shot at really multiplying, there is UNWPX (U.S. Global Investors World Precious Minerals Fund).  There is really a good deal of overlap between the two funds.  The key distinction is that roughly one-fifth of the assets under management in UNWPX are directed toward the smaller companies.

The differences between investing in precious metals with the mutual funds and ETFs are notable.  Each of them allow you to participate in the volatility and leverage of mining companies.  However, the mutual fund is going to be actively managed, so there will only be participation in companies the manager deems appropriate at any given time.  The expense ratio can be higher, but you simply get what you pay for in this regard.  A well managed fund can easily justify the higher expense by attaining stellar results.  You should note that standard mutual fund facts apply.  As a result, you won’t be trading this investment like a stock.  Instead, you simply buy and sell after the net asset value is determined at the end of the trading day.  You won’t be engaging in options trading, but most people looking to a mutual fund generally are not trading options.  As long as you have the required $5,000 minimum to start, this can be a great alternative approach to investing in precious metals.