Precious metals are in high demand. Although gold has historically been the primary investment metal, silver, platinum and palladium are quickly becoming popular portfolio diversifiers. Here’s what you need to know about investing in these precious metals, organized into three easy, action-oriented steps.
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Precious metals are alternative assets, meaning they react to economic conditions differently than stocks and bonds. This is good for portfolio diversification, but can test your risk tolerance if you’re not prepared.
Let’s review the uses, risks, growth drivers, and investment purposes of silver, platinum, and palladium so you know what to expect before you buy.
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Silver is purchased for industrial and investment purposes. As an investment, physical silver takes the form of coins, jewelry, cutlery, and decorative pieces. The white metal is also used to make electronics, automotive components, medical devices and solar panels.
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Risks: The price of silver is more volatile than the price of gold. Silver is also less liquid than gold, meaning gold is easier to sell for cash.
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Growth drivers: The value of silver increases with increased industrial demand, supply constraints, and economic uncertainty.
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Investment objective: “Silver provides inflation protection and industrial exposure,” explained Eric Croak, president of Croak Capital, a wealth advisor.
Platinum is rarer than gold or silver. This metal is popular for jewelry applications and essential for producing catalytic converters that help reduce gasoline emissions.
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Risks: The price of platinum is more volatile than that of silver or gold. Fluctuating industrial demand and a geographically limited supply (mainly from South Africa) contribute to platinum’s unpredictability. Platinum also has low liquidity relative to gold.
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Growth drivers: Industrial demand and emissions regulations influence the value of platinum.
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Investment objective: “Platinum can be a stabilizing play,” Croak explained. Croak sees platinum as a promising “hidden” asset due to its long-term supply prospects and its role in the energy transformation.
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Palladium, a member of the platinum group of metals (PGM), is rarer than platinum. Palladium is chemically similar to platinum but weighs less and tolerates higher temperatures. It is also used as a jewelry metal and in industrial applications, and automobile manufacturers often use platinum and palladium together in catalytic converters.
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Risks: The value of palladium depends on automotive demand and reacts to geopolitical risks. Compared to platinum, palladium is less liquid and has lower trading volumes.
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Growth drivers: Automotive demand is a key driver, along with electronics manufacturing activity, clean energy innovation and jewelry demand.
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Investment objective: Croak described palladium as a short-term play “due to its low liquidity and ultra-volatile price action.”
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You can invest in precious metals digitally or physically.
Digital options include:
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Precious metal basket funds: These funds offer exposure to multiple metals and broader diversification benefits compared to single-metal funds. Aberdeen Investments has a popular precious metals basket fund under the symbol GLTR. GLTR tracks London Bullion Market Association (LBMA) prices for each metal.
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Single Metal ETF: Single-metal ETFs, such as iShares Silver Trust (SLV), are less diversified than basket funds. SLV tracks the performance of the LBMA silver price.
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Futures contracts: Futures contracts obligate you to buy or sell a precious metal according to stated terms. These are very risky because the out-of-pocket cost is small relative to the metal exposure you gain and how much you stand to lose. Comex, a platform for trading futures contracts, defines separate terms for silver (SI=F), platinum (PL=F) and palladium (PA=F) futures.
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Mining stocks. Mining stocks tend to rise and fall faster than underlying metal prices. You can opt for a focused miner like Hecla Mining Company (HL) or a diversified operation like Sibanye-Stillwater (SBSW). HL mines silver and SBSW is a large producer of platinum, palladium, rhodium and gold.
Physical precious metal options include jewelry or bullion in the form of bars and coins. If you decide to purchase physical metals, you need to arrange storage, security, and possibly insurance.
More information: What to know before buying gold, silver or platinum at Costco
Your investment objective should guide key precious metals investment decisions, including:
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Whether you buy a metal or a basket of them
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What form should your investment take?
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How much you allocate to precious metals within your portfolio
Two common precious metals investing goals are diversification and short-term gains.
Long-term investors often look to precious metals for diversification and protection against inflation. Silver, platinum, and palladium have a low correlation with other asset classes, such as stocks and bonds. This means that metals can appreciate when stock prices are falling, particularly when inflation is the root cause. These compensatory behaviors, in small doses, can limit overall portfolio volatility.
Croak characterized silver, platinum and palladium collectively as “useful pieces of an uncorrelated trio,” suitable for investors who already own stocks, bonds and cash. He advises a 3% to 5% allocation for the trio, primarily as a hedge against inflation.
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Short-term trading of precious metals is an advanced and high-risk strategy. Best to avoid unless you are experienced, well funded, and brave enough to tolerate big price swings.
Silver, platinum and palladium individually are volatile enough to provide short-term profit opportunities. A position in silver is the least risky of the three, while investments focused on palladium are the riskiest. According to Croak, palladium trades at a huge premium to silver and gold, “but if you can stomach their wild swings, there’s an opportunity in palladium’s peaks.”
Your allocation for a short-term strategy should be low, that is, an amount you can afford to lose.
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Silver can provide diversification and inflation protection within a well-structured portfolio.
Platinum is more volatile than silver and gold, but has diversification benefits. A small, strategic position in platinum could act as a long-term portfolio stabilizer.
You can invest in palladium bars or opt for digital assets such as ETFs, futures contracts or mining stocks.
Tim Manni Edited this article.