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3 Advantages to Trading Precious Metals
In a highly volatile global market, precious metals such as gold, silver and platinum may continue to provide investors with a number of advantages. Although the market for precious metals has weakened in recent years, prices have generally appreciated over time, driven largely by investor and consumer demand.
Below is a breakdown of three advantages of trading precious metals.
1. Precious metals hedge against risks
Long considered safe haven assets, precious metals such as gold and silver may be an important part of a well-balanced portfolio. Although precious metals also face price fluctuation, when leveraged properly they may be used to hedge against inflation and curb against economic uncertainty.
Inflation and inflation expectations are a major driver of the global financial markets. Each day, investors monitor economic data and central bank press releases to determine the current and projected path of inflation. When inflation is too low or too high, central banks can intervene in the economy by adjusting interest rates. This has a significant impact on financial assets. However, according to a 2007 study by Conover et al. investing directly or indirectly in precious metals may hedge against tighter central bank policies.
Commenting on the US Federal Reserve, Conover et al. note that, “During periods of Federal Reserve tightening, the returns to precious metals commodities are significantly higher than they are during expansive policy periods. This result is in stark contrast to the U.S. equity market and the equities of precious metals companies.”
2. Precious metals may diversify investment portfolios
Diversification is a tool used by investors to minimise risk exposure, increase stability and maximise returns. In this sense, precious metals may be an important aspect of any diversified portfolio. They may provide gains in periods of market instability and may be used as a buffer against economic uncertainty.
With precious metals, investors have the added potential benefit of investing either directly in physical assets or indirectly through ETFs and mutual funds. Additionally, they may also invest in precious metals companies, which provide another layer of diversification. According to Conover, et al. investors who allocate 25% of their portfolio to precious metals equities increase their annual return by 1.65%.
Investors may also turn to precious metals to mitigate against a volatile currency market. Because precious metals are considered a store of value that limit exposure to other losses, they are perceived as a global hard currency that may protect against the weakness of national currencies, such as the US dollar.
3. Precious metals have universal value and are very marketable
Unlike national and regional currencies, hard currencies such as gold have intrinsic value that extend beyond their market value. This doesn’t mean that precious metals aren’t influenced by the market – they most certainly are – but unlike the foreign exchange, their value remains intact over long periods of time. Gold, for example, has been used for thousands of years, signifying its value throughout the ages.
Precious metals have almost universal marketability and may be bought and sold relatively easily around the world. Investors who own physical assets such as bullion, coins, bars and jewelry usually find an ample market for their precious metals. With precious metals experiencing their biggest supply shortage in over a decade, physical demand may continue to increase in marketplaces worldwide.
Final Considerations
Precious metals may provide the necessary backbone to every well executed trading strategy. Risk aversion, portfolio diversification and marketable universal value are just three of the many advantages to precious metals trading. Understanding how precious metals are used to counteract other market forces may help investors become financially savvy and build wealth in a period of great instability and opportunity.
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