5 Reasons You Should Consider Before Investing in Metals

Key Takeaways: 

• Gold and metals offer a flurry of benefits in trading, we take a look at five of them 
• Safe-haven properties and hedge against inflation are attributed to gold and silver 

Five Benefits of Precious Metal Investing

Whether it’s gold, silver, or copper, any investor has experienced the thrill of holding precious metals in their portfolio. A few unique characteristics make investments in metals worth considering. First of all, they allow you to diversify your portfolio.  

In addition, investing in metals could give you much-needed protection against inflation. As you probably know, inflation in 2021 has skyrocketed to record-high levels of 6% year-over-year. To this end, holding metals in your portfolio could reduce the strain of rapidly-climbing consumer prices.  

Thirdly, the increased global demand for gold and silver could fuel their prices to new highs. Also, precious metals are regarded as a crisis asset. In other words, safe haven assets enable you to withstand strong headwinds that usually hit stocks and currencies. And finally, supply chain constraints could drive demand for metals further due to the limitations of physical markets. 

Now, let’s dive deeper and get a closer look at why you should hold precious metals in your portfolio. 

Diversify Your Portfolio

In today’s broad financial markets, it’s getting increasingly difficult to spot an asset that does not have its price correlated to others. Still, a sensible investor will look for ways to diversify. The idea of diversification was first floated by the economist Harry Markowitz in his “Portfolio Selection” in 1952.  

Essentially, to diversify means to build a portfolio of non-correlated assets. That way, if the price of one falls, the rest will hold steady or rise. In other words, they won’t be influenced by the same factors that brought the price of the first asset down. 

This is what you can hope to achieve with gold and other precious metals. The yellow metal, for example, is famous among investors as a store of value and a diversification asset. To this end, gold has been offering diversified yet stable returns over the years. With this in mind, if you are looking for a simple way to diversify and make money in the long run, be sure to check gold. 

Hedge Against Inflation

Gold and precious metals are the go to choice for investors looking to hedge their bets against inflation. More precisely, if inflation starts eating into your portfolio, gold must be there to provide protection.  

Over the years, gold’s reputation as a hedge against inflation has been tested multiple times. To this day, gold has been able to maintain its competitive edge in the global markets and continues to offer protection against rising consumer prices. 

For the past 50 years, for example, gold has successfully performed as an asset that could hedge against inflation. According to the chart above, gold has returned roughly 15% on an annualized basis since 1971. Inflation, on the other hand, has been creeping up by 3% year-on-year. It’s worth noting that some years, gold has returned about 6%, while inflation has been fairly muted below 3%.  

More recently, however, gold has failed to keep up with rising inflation. As a matter of fact, consumer prices rose about 6% in the US in 2021. For the same period, gold’s price fell about 3.9%.  

Increased Global Demand

Precious metals could be fueled to higher grounds in times of increased global demand. The gold market, for example, is widely driven by demand from countries, central banks, and businesses. The World Gold Council estimates that “since the early 1970s, the volume of gold produced each year has tripled. Moreover, “the amount of gold bought annually has quadrupled.” 

In that context, gold has many uses and participants in the gold market are increasing constantly. Application in jewelry, technology, engineering, or just store of value and a reserve asset, gold offers it all.  

The diversified demand for gold makes it an attractive asset for any investor. Even more so when its uses are widespread around the globe, thus guaranteeing a continued inflow of capital. With the combination of these factors, gold could be seen as a strong contender for so-called risk-adjusted returns. 

Crisis Asset

Perhaps one of the most pronounced features of gold is its safe-haven allure. In all markets, every investor has been drawn to it over the years during times of crisis. In more detail, gold and other metals tend to perform well under stress. What does this mean? It means that gold and silver, among the precious metals, usually rise in value when the world goes through a difficult period.  

This is the time when gold truly shines as it boasts protection from uncertainty in a critical moment. For example, gold rose about 25% in 2020. In other words, when the world did not have a certified vaccine against the newly-discovered Coronavirus, investors flocked to gold. On that note, once the first vaccine was unveiled in November 2020, the price of gold reversed course and started moving lower. 

With this in mind, be sure to monitor the price of gold when the world faces health and social crises, geopolitical or economic uncertainties.  

Supply Constraints

The fifth key factor to drive demand for gold and precious metals is supply constraints. With looming inflation pressures, supply chain issues have underpinned a sharp rally in consumer prices. To this end, investors may look favorably toward gold and other metals that offer protection in strained physical markets.  

On that front, rising production costs, and supply-chain disruptions could translate to more demand for gold if market participants decide to look for safety. 

This said, the limited supply of gold could also be interpreted as another reason to get exposure to it. Owning gold will give your portfolio the stability it needs in times when supply constraints rattle the market. 

Summary

All this said, you can now consider whether you are ready to invest in gold and precious metals. As mentioned above, investors around the world have been holding metals in their portfolio for years. And will continue to do so for the number of benefits they offer. 

Among them, protection from inflation, and safe haven in times of market turbulations. Additionally, precious metals may soften the blow to your portfolio if supply-chain issues disrupt the financial markets. 

 

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