Invest Successfully in Precious Metals

Since ancient times, precious metals such as gold, platinum and silver have been the main source of financial stability for people, especially in times of uncertainty. Wars begin and end, centuries pass and metals remain the best safe haven assets to invest in. Why are they so recognizable among investors? Let’s find out.

Gold Investments (XAU)

When you plan to make investments in gold, do not think that you will buy or sell a bar as such. Instead, you will trade the spot price of gold. It can be driven by various factors and reflect global changes in the markets. Let’s see why choosing gold is good for your investment strategy. The “yellow metal” has been part of the financial markets for a long time. In the past, it was even used to back fiat currencies. During the gold standard period, paper money had to be backed by an equal amount of gold in its reserves.

From the 1980s to the early 2000s, interest in this precious metal was very low due to rising stocks and strong, stable growth in economies. That is why the price was in a range between approximately $300 and $500 during that period of time. Interest in investing in gold grew after the 2008 financial crisis. The price even reached $1,907 in August 2011. The recovery of the US economy, as well as the Fed’s rate hikes since 2013, have weakened the gold; However, the precious metal continues to attract the attention of investors.

So why do investors choose Gold?

•It is a safe haven asset that remains stable during times of uncertainty,
including investment market declines, extremely high national debt, currency
weak, high inflation, war and social instability;
•The history of the gold standard makes the gold asset behave more like a currency than a
a raw material;
•Gold acts as an object of speculation;
•Gold is universal: it is durable, wearable and widely accepted.

Factors that influence the price of Gold

Unlike key currencies, gold is not backed by employment, production and infrastructure levels. It can be compared to other assets such as oil or corn, since they all have physical characteristics. However, the price of gold usually acts independently of its supply and industrial demand. Below, we explain the most important drivers for the price of gold.

1.Central bank reserves. Central banks hold the yellow metal for diversification purposes. Gold can also be used to fund emergency liquidity or monetary interventions. Additionally, central banks pay attention to a country’s economic conditions when deciding to buy or sell gold. For example, if a central bank decides to diversify its monetary reserves, the price of gold rises.

2.Risk aversion. Sentiment in the stock market also plays an important role in the price of gold. If the risk aversion dynamic increases, investors will prefer to sell their shares and opt for a safe and more stable asset.

3.Interest rates of central banks. This is a historical factor that affects the price of gold. When real interest rates are set low, investment alternatives can provide a low or negative return, driving investors toward gold. If interest rates are high, the investment attractiveness of a safe haven asset decreases.

4.The dynamics of the USD. Since gold is priced in US dollars, there is a huge inverse correlation, meaning they move in different directions. If investors sell dollars to the market, gold becomes more attractive and, as a result, more expensive. Alternatively, if the USD strengthens, gold prices tend to fall. However, you should know that this does not happen in all cases, but mainly during times of crisis and great uncertainties in the
economy.

5.The consumer price index tends to correlate directly with changes in the price of gold. If inflation is high, investors look for more “solid” and reliable assets and choose to invest in gold. Otherwise, if economic conditions are good, demand for gold falls and the asset becomes cheaper.

6.Gold producing countries. Political uncertainties in gold-producing countries, as well as the sanctions applied to them, can affect production levels and therefore increase its price. However, since there is no widely known official document that represents the level of production to investors, this factor is the least informative for investment purposes.

Silver Investments (XAG)

Silver is the second most popular metal among investors. Like its yellow brother, it has been considered a currency for a long time. For example, the pound sterling is called a pound because it was equivalent to a pound of silver. Most of the factors that affect the price of this asset are similar to those of gold, however, there is a slight difference in volatility. The price dynamics are similar, however, silver is less volatile than gold.

Investments in Platinum (XPT)

Platinum is the rarest metal used for financial purposes. Its price is mainly affected by industrial demand and the mining process. Because production is concentrated in fewer countries than gold production, platinum’s volatility is greater than in any other metals market. Additionally, it tends to be more affected by global uncertainties than other metals.

Investments in Copper (XCP)

Copper is a soft red metal with limited supply. People use it for pipes, electrical wiring, car radiators and other necessary things. Due to rapid industrialization and electrification, the demand for copper has increased tremendously.

If you want to invest in copper, you can do it directly or indirectly. In the first case, you can buy bullion bars or copper coins and hold them while their price strengthens.

You can also invest in copper futures. Investors can buy or sell a certain amount of copper on a specific expiration date.

In the case of indirect investment, you can buy shares of copper producing companies, such as BHP Group, Southern Copper or Freeport-McMoRan. There are also copper ETFs that track the price of copper. They may hold copper bullion, copper futures, or shares of copper mining companies. Other indirect copper investment options are copper mutual funds and options.

Like the price of any other raw material, the cost of copper depends on supply and demand. It also depends largely on economic activity in the world. There is a notable correlation between Chinese GDP growth and the price of copper, with China accounting for the majority of global coil demand.

Another interesting correlation is the one that exists between copper and oil prices. The price of copper will rise following the upward trend in oil prices due to its energy consumption.

Below you can see the bullish trend of copper futures since 2021.

Investments in Palladium (XPD)

Palladium is a metal similar to platinum. It is a necessary element to produce electronic products and automotive catalytic converters. It is also used to develop carbon monoxide detectors.

If you want to invest in palladium directly, you can buy it at its spot price or through a futures contract. You can also trade palladium as contracts for difference.

Among the main factors driving the price of palladium are supply and demand. The situation in the automotive industry also affects the price of palladium, as drivers have switched from diesel cars to gasoline vehicles, which use palladium in their catalytic converters.

In the chart below, you can see the weekly performance of palladium since November
2021.

To conclude, investors choose metals as safe haven assets during times of instability. They can generate a more stable profit and are less affected by changes in the markets.