With many economic experts declaring that the new normal for the securities marketplace will actually be volatility, many investors are looking for new ways to save for retirement and build nest eggs for college funds, housing upgrades and well deserved vacations. The precious metals market has historically held up in the midst of volatility; hence, many investors are finding their way to it. Gold, silver and platinum are leading the charge with less well known but just as valuable metals like palladium also providing a great deal of leverage for investors.
If you are ready to diversify into precious metals, there are some strategies that you should consider in order to maximize your ability to capitalize on the opportunity. Below are some of the things that you must know before you begin investing in the precious metals market.
Why Precious Metals Perform Well in Volatile Markets
Almost without fail throughout history, precious metals are able to provide an indefatigable hedge for speculators and protection for the average long term investor in search of financial security. Properly managed, precious metals can build wealth, provide financial freedom and provide a great financial start for beneficiaries.
Precious metals perform extremely well because of their limited supply. Unlike any other investment (and Fiat money) precious metals cannot be created. The supply is therefore limited. As they are used in products such as jewelry and real estate, the supply of precious metals that can be purchased as bullion can only go down. With constant demand, a lower supply necessarily means a higher price for the resource in theory. This theory has shown itself to be true throughout history, and although no investor should make the mistake of thinking that an investment will always go up, in theory, precious metals are the perfect supply side hedge.
The Best Way to Create a Precious Metals Investment Vehicle
Although there are many legal ways to hold precious metals, the way that has been shown to be the most cost effective, profitable and safe is to hold bullion. Taking physical possession of precious metal bullion protects you from the precious metals derivatives market, which can respond to the emotional short term whims of the market.
Although it is possible to trade precious metals quite conveniently using options and derivative securities, most financial experts do not recommend the strategy as a long term move because of the volatility and the pressure to move when the market does. Also, investors in paper trades never actually take possession of the bullion, which offers a great deal of leverage in emergency situations.
Mutual funds and 401ks that include precious metals is perhaps the most convenient way to expose a market portfolio to precious metals. However, the individual has very little control over the amount of exposure and the quality of the investment within these two options. True investing in precious metals is done under the close, watchful eye of governments and accredited institutions. The only physical assets that can be fully trusted in the market are bullion and currency that has officially passed muster with a national government.
Investors can hold a self directed IRA along with any of the above investment vehicles for the sole purpose of holding precious metals. However, keep in mind the maximum investments that are allowed per year for IRAs – having more than one account does not necessarily increase the amount that an investor can deposit.
The Process of Investing in Precious Metals
Because precious metals are made to be a long term investment, they are usually held in a long term vehicle such as a self directed IRA. The process below will go over the steps to include physical bullion inside of a self directed IRA because this has been singled out by many financial experts as the most effective way to include precious metals in a portfolio.
One – Investors must make sure that they are doing transactions within a self directed IRA in order to invest in physical bullion. This is one of the only types of investment vehicles that have no restrictions on the types of investments that you can hold. However, investors should know that self directed IRAs place the whole of the burden of portfolio management on the individual.
Two – In order to complete a transaction for physical bullion, an investor must first have two things: a depository for the physical bullion and a custodian to perform the actual transaction. The IRS does not allow holders of IRAs to complete transactions that directly benefit themselves, even in an indirect way. The custodian is the legal way around this rule and only companies with a sterling reputation in the market like Monex.com should be trusted with such an important transaction.
The depository for the physical bullion should be accredited by the IRS. It is also quite important to perform proper due diligence on the depository in order to check out their fee structure and the services that they provide for you. Depositories that are accredited by the IRS are publicly noted.
Custodians have the final approval over the transaction as well as the ability to facilitate the procedure. Choose a custodian by his turnaround time and his reputation. Experience in this field should also be commensurate with the fee structure.
Three – Once all of these pieces are in place, the investor is ready to purchase precious metals bullion from an accredited dealer. In order to determine the best investment, an investor can check certain tried and true metrics such as the gold to silver ratio and the performance of the US dollar against other major world currencies such as the Yen. Learning to interpret the findings of these metrics is essential to being able to purchase precious metals at a competitive market price.
Four – Once an investor has found the right bullion, he or she will express the interest in the order, but the official transaction will be made by the custodian. The depository will need to be informed of the purchase ahead of time. When the transaction takes place, the investor should be immediately informed of the delivery of the bullion to the depository as well as confirmation of the correct order.
Other Safe Ways to Invest in Precious Metals
If you find the process of obtaining bullion a bit difficult for you, you can invest in reputable products from private companies who use precious metals in high quality products such as Rolex. In practice, the reputation of companies like these is as protected as it can be against bankruptcy, buyout or repurposing. However, no investor should think that a commercial product has the same kind of surety as pure bullion.
Real estate is another safe way to invest in precious metals. However, investors that take on this responsibility must realize that the real estate as well as the metals within the property will need constant maintenance to maintain their value in the commercial market. Fine artists who use precious metals in their work can also provide an opportunity for investment; however, the market for these types of investments can be quite small.
Cashing in on Precious Metals
If it is at all possible, an investment in precious metals should be held as an heirloom. However, if for any reason an investor wishes to cash out, the custodian and the depository will play a significant role. This is where the choice of the custodian and the depository become extremely important. Reputable buyers of precious metals like to do business with people of reputation; therefore, if you have a reputable custodian and depository, you will likely receive a higher cash out for your investment.
Your custodian should be able to perform the transactions that you need within a few weeks of you expressing a desire to cash out. Although the final responsibility for finding a buyer falls on you, the investor, in practice the custodian can be quite a helpful resource in finding a buyer for bullion.
If your investment is being held inside of a self directed IRA, be sure to respect the rules of withdrawal so that you do not incur more of a tax expense than you need. Many investors actually time their sales to coincide with opportunities for the lowest tax consequence.
Many savvy investors will actually work with their custodians to sell their bullion at their death. The sale is used to cover costs of death and the relevant estate taxes so that all assets can pass on to beneficiaries without being cut up by the government.