analysis

How to invest in precious metals and why investors buy gold during the crisis – we tell you in this article.

During the crisis, investors actively buy precious metals because these instruments are backed by a specific commodity. The probability that the value of metals will approach zero is insignificant, so the risk of losing all the invested money is also small.

The most popular precious metals are gold, silver, palladium and platinum. They are divided into 2 groups: Gold and Industrial precious metals.

Gold
Traditionally, gold is considered a store of value asset: in most cases, this metal is invested in to save money, not to increase it. Gold bars can be stored for centuries and do not rust, so their value is not lost over time.

Investing in gold: conservatism and taxes

Gold is bought not only by private investors, but also by the reserves of the world’s banks. They replenish gold reserves to withstand during the crisis, when the prices of other investment instruments will fall.

The Central Bank of Russia has one of the largest gold reserves in the world. According to the World Gold Council, the Central Bank purchased 55.3 tons of gold in 2019 – more than any other country.

Where is gold used? Half of the world’s demand is jewelry, with another 40% being investment demand. Industrial demand is only 10%, with most of the use of gold in electronics manufacturing.

 

 

Industrial precious metals

Palladium is purchased by the automobile industry and is used to make devices that clean exhaust gases. The public is becoming more and more demanding about the “eco-friendliness” of cars, so car manufacturers are increasing the amount of this metal in their vehicles, which means that the demand for palladium will grow. Analysts forecast a deficit in the palladium market until 2024.

Platinum is also used in the auto industry, as is palladium. In other industries, platinum is used in some stages of oil refining and in the production of nitrogen fertilizers. Unlike palladium, platinum is a full-fledged precious metal and is used in jewelry.

Silver. As an industrial material, silver is used in electronics, chemistry, medicine, and military industry. It is also used to make jewelry.

How to invest money in precious metals

 

Ingots

In the bank, you can buy an ingot of pure metal. When buying it, you have to pay 20% VAT to the state and also to the bank for storing the ingot in a safe deposit box. The main disadvantage of investing in physical metal is low liquidity. You can sell the ingot only to a bank, jewelers or pawnshop.

 

Coins

Investment coins can be bought in the bank, you do not need to pay VAT. The cost of gold and silver coins starts from 1000 rubles. Bullion and investment coins must be properly cared for, otherwise the metal may oxidize and its value may decrease.

 

Impersonalized metal accounts (OMC)

An OMC is a special bank account into which grams of “virtual metal” are deposited. It is available for investors with small capital: in Sberbank you can buy 1 gram of gold for 3,894 rubles (as of 07.05.2020). If necessary, you can exchange the “virtual metal” for real, physical.

 

Mutual funds and ETFs

You can use your brokerage account to buy securities of mutual funds (unit investment funds) or ETFs (exchange-traded funds) that invest in gold.

The shares of the FXGD ETF fund are traded on the Moscow Exchange. This fund buys gold and earns income on the difference in the price of this instrument. The currency of the fund is the US dollar. But it is traded in rubles: its value depends on the dynamics of the dollar-ruble currency pair.

 

Shares of companies that mine precious metals

Replenish your portfolio with shares of Lenzoloto, Polyus or Polymetal. The share price depends on the prices for precious metals, but also on the reputation of the company, its financial indicators, and the general news background.

Many companies pay dividends – part of the profit that the issuer gives to its shareholders. For example, in May 2020, the gold mining company Polymetal will pay investors $0.42 per share.

To invest in mining stocks, you need to open a brokerage account and access the stock exchange. The My Broker app can do this in 5 minutes, download it here.

 

Futures contracts

This investment instrument is suitable for professional traders who speculate on the market. Buying a futures contract on precious metal, you undertake to buy the goods from the seller at a predetermined price. If the market price on the date of execution of the contract is higher than the futures price, the buyer earns money: he takes back the goods and receives the difference.

3 rules for investing in precious metals
  1. Form a protective part of your portfolio from precious metals
    Diversify your portfolio. Invest 10-15% in precious metals and this will be the protective part of your portfolio.
    It is pointless to increase the share because gold and other metals are an asset that does not generate cash flow, unlike stocks or bonds. You can use it to temporarily protect your money from inflation or wait out market volatility, but not to generate income.2. Trading precious metals should be situational
    Increased demand for gold occurs when risk-free rates (e.g., on U.S. government bonds) begin to fall below expected inflation.
    When trading industrial precious metals, pay attention to the balance of demand from consumers and supply from producers. Assess the market surplus/deficit and analyze the size of available inventories. For example, the shortage of palladium in 2019 amid the development of the electric car industry led to a sharp rise in quotations.3. Long-term investing
    In terms of centennial history, precious metals outperform inflation, but the fluctuations during the day are quite high. Therefore, it is worth investing in precious metals for a long-term perspective – 10-15 years.
    Why investors buy gold in a crisisIn the era of the gold standard, when each monetary unit could be exchanged for a certain amount of gold, this noble metal was considered a guarantor of value preservation. Since then, gold has gained the status of a protective asset.In the XXI century the situation is changing. The demand for gold during the economic downturn remains, but this market due to its limited size (a limited amount of metal is circulating in the market) is not able to “accommodate” all comers.

    The crisis of 2020, the most powerful economic downturn since the Great Depression, did not lead to the growth of metal to new historical highs. The precious metals will remain protective instruments for a long time, but each time the reaction of quotations to the crisis may be less sensitive.

    The real cost of gold is below $1000, and the profitability of gold mining companies is unfairly high. The growth of quotations is justified by investors’ expectations (everyone is used to the fact that at the next crisis the demand for metal should increase), but not by the real need for physical metal.

    How do metal prices change in a crisis? When interest rates fall, inflation rises, and a crisis approaches, the price of gold and to a lesser extent silver increases. Platinum and palladium as industrial metals can be under pressure during such periods. This is exactly the situation observed in February-March 2020.

     

    You can invest in precious metals as follows: buy bullion, investment coins or open an impersonal metal account. Or invest in securities: shares of gold mining companies, “gold” mutual funds and ETFs.
    Invest only 10-15% of your portfolio in precious metals – it will be a protective part of your portfolio. You should invest in precious metals for a long-term perspective – 10-15 years. Trading in precious metals should be situational. The growth of gold quotations in the crisis is justified by investors’ expectations, not by the real need for physical metal.

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