How To Buy Precious Metals Like A Pro—The Most In-Depth Guide For Investors

April 19, 2017

Looking to diversify your portfolio? Choose investments with a low correlation to stocks and bonds. Hard assets like oil, real estate, natural gas, and other commodities fit the bill. But seasoned investors usually go for physical precious metals.

Why?

Because physical precious metals carry no counterparty risk. The security of being able to hold your investment in your hands if things go sour makes them the perfect insurance against any financial turmoil.

Why Precious Metals Make Good Investments

All investors should have an allocation to physical precious metals. Here are four main reasons why:

1. Precious metals are largely uncorrelated to stocks and other investments.

When traditional investments take a tumble, gold and other metals tend to rally. This makes them an excellent hedge against catastrophic loss during periods of financial downturn.

While silver, platinum, and palladium are slightly more correlated to stocks due to their role in industry (more on that later), they still offer many of the same protections as gold: namely that they won’t evaporate in an instant the way paper assets can. How many stocks and bonds have lasted for centuries the way precious metals have?

2. Precious metals don’t expose you to counterparty risk.

Physical metals are the only financial assets that are not simultaneously someone else's liability. No bank, government, or brokerage firm needs to back them. When you own them, you own them outright.

This is significant when you think about stocks, bonds, and ETFs, which all require another party to make good on a contract. If our financial system ever collapses (or just goes into crisis), these types of investments will be at high risk.

Precious metals protect against financial turmoil like no other asset. Inflation or deflation, recession or depression, terrorism, debt implosions, credit defaults, bank failure—some of these will happen in your lifetime, and precious metals will protect your portfolio from the fallout.

3. Precious metals are a safe haven in worst-case scenarios.

Precious metals are tangible monetary investments backed up by their own intrinsic value. They’re durable, universally recognizable, easily divisible, and value dense.

With inflationary fiscal policy devaluating fiat currencies, the benefit of maintaining a sufficient precious metals stockpile is obvious. And while we hope it never comes to this, gold, silver, platinum, or palladium coins can be used to buy goods and services if our paper currency ever collapses.

4. Besides being a hedge, precious metals can deliver decent capital gains.

Gold has never gone to zero, and its value has steadily increased over time, making it a solid long-term investment. Look at the chart below, which shows the significant spike in the gold price over the last 30 years:

Silver prices are much more volatile than gold, but that’s just part of the landscape in a small market. The advantage of these big price swings is that buying on down days can pay off when the price shoots back up again (it never takes long).

The investment potential of platinum and palladium is still in its infancy; industrial use of the metals far outweighs the demand from investors.

But like silver, the platinum and palladium markets are small. Demand keeps soaring, but supply is limited. In short, these metals are riskier and more speculative, but their gains can be much higher.

How Much Of Your Portfolio Should Be In Precious Metals?

Precious metals are something you buy and hold on to. You may want to evaluate your position on an annual basis and adjust up or down accordingly, but generally, you keep metal as portfolio insurance and you hope you never have to use it.

How much to invest in precious metals is a personal decision. But the three core benefits of owning precious metals are:

  • Risk reduction
  • Long-term store of value
  • Crisis insurance

So, how much of your portfolio should you invest in metal? It depends on the level of these benefits you want or need, but the conventional wisdom is 5­­–15%.

If your main concern is preserving your wealth, you should choose an allocation on the larger side.

Consider that the dollar has lost 98.2% of its purchasing power since 1900—and the trend is not going to reverse. Here’s how gold has offset the loss of the purchasing power of the US dollar:

Insider’s Tip: Buy a meaningful amount of bullion—enough that will make a difference to your wealth and standard of living if things go sour.

To get the absolute most protection, it pays to diversify within your metals holdings, too. While the different metals are closely correlated, there are unique properties of each that you should understand to make the best allocation for your needs.

Here’s what each type of metal has to offer.

Comparing Gold, Silver, Platinum And Palladium

Gold

As mentioned above, gold has intrinsic financial traits and offers a level of wealth protection unmatched by any other asset. Take a look at the pros and cons of owning gold:

Investor Takeaway:  Gold belongs in every portfolio as wealth insurance. It is intrinsically valuable, uncorrelated to stocks and other investments, highly liquid, and its price has steadily grown for decades. Gold is for every investor and should make up the largest portion of your precious metals allocation.

Silver

Silver is a sound addition to a precious metals portfolio. Like gold, it has intrinsic value, is highly liquid, can be used as money, and is largely uncorrelated to stocks and other investments.

What makes silver unique is its growing industrial demand. Currently, more than half of the silver mined is used in manufacturing to produce things like electronics, solar panels, and medical equipment.

As this demand continues to increase, it will put a squeeze on supply. Any investor holding a meaningful amount of silver will be positioned for high profits.

Here are some pros and cons of silver as an investment:

Investor Takeaway:  Silver is a good portfolio diversifier. With its many industrial applications and relatively small supply, growing demand for silver is expected to drive prices higher. Silver isn’t for the faint of heart—its price volatility can discourage some investors—but it is an inexpensive, practical store of wealth that has considerable investment potential. Silver shouldn’t be the only asset you own, but it would be a mistake to not have a meaningful amount.

Platinum And Palladium

Platinum and palladium are perhaps most recognized as popular metals for making jewelry. But like silver, they are also used in manufacturing—mainly in the auto industry.

This makes their prices in large part determined by auto sales and production numbers. This can be good or bad.

On the upside, both metals are extremely rare, and their rising demand could easily outpace supply. In fact, palladium is already struggling to meet industrial demand:

The downside is that their performance is more dependent on the health of the global economy than gold or silver.

The supply and demand dynamics of platinum and palladium offer the opportunity to invest at the beginning of a potential bull market. But a diversification into platinum and/or palladium has its own set of pros and cons:

Investor Takeaway:  Platinum and palladium both have investment potential, mostly because growing demand from the auto industry is expected to deplete supply and drive prices higher. They’re not absolutely essential to your precious metals portfolio, but can be a reasonable way to further diversify. If you choose to make an allocation to platinum and/or palladium, it should be only a fraction of your silver and gold holdings.

Physical Metal vs. Paper Metal

There are many types of precious metals, but they all boil down to two categories: paper precious metals and physical precious metals. ETFs are on the rise due to their convenience, but how do they measure up to the real thing?

While each offers investors its own set of benefits, ETFs and bullion are very different investments. Here are the main benefits of each.

If you’re looking for…

  • precious metals you own and control directly
  • a low-risk, enduring asset
  • a last line of defense in an economic crisis or bank collapse
  • an asset that’s always available for physical delivery
  • no counterparty needed to make good on the investment
  • a long-term store of wealth and portfolio insurance

…your best bet is buying gold, silver, platinum, or palladium bullion. When you buy bullion, you own it outright—no one can default on your investment. And physical precious metals are easier than ever to trade via online platforms similar to ETFs.

If you’re looking for…

  • a convenient, low-cost way to gain exposure to the precious metals market
  • no physical ownership of the metal
  • no delivery/storage fees
  • a highly liquid asset that’s easy to trade
  • the ability to employ leverage with options

…you may want to consider a precious metals ETF. If you don’t plan to take delivery of any metal, and are comfortable with a higher degree of risk (there are counterparties involved), ETFs can be great for quick trading and short-term gains.

But investor beware: there are potential hazards inherent in the structure and operation of gold ETFs.

The Hidden Dangers Of Precious Metals ETFs

Gold ETFs use what’s called a custodian to source and store gold for the fund. Usually this entity is a large bank.

Before buying shares of a gold ETF, decide how much do you trust the banking system. That’s who makes good on the investment—and ultimately, who is most positioned to put it at risk.

Because a bank is likely to be impaired if a crisis were to happen (not to mention that they’re hardly trustworthy to begin with), gold ETFs don’t offer the portfolio insurance that real, physical bullion—stored in a non-bank vault, of course—gives to investors.

Not only that, but If the fund’s management, structure, chain of custody, operational integrity, regulatory oversight, or delivery protocols break down, that also places your investment at risk.

Insider’s Tip: Precious metals ETFs can be good products for traders, but they’re no substitute for the long-term security an investment in physical precious metals can provide.

Where To Buy Bullion

Picking the right dealer is as important as knowing how to buy precious metals—if not more.

Here, we’ll cover the different types of dealers and what each has to offer so you can decide who you’ll be most comfortable doing business with.

First thing’s first: do not buy gold or other precious metals from TV dealers or gold shows. They have high premiums, very little selection of bullion products, and mostly traffic in numismatic (collectible) coins with high margins and questionable investment value.

Stick with local coin shops or online dealers for a better investment experience.

Local Dealers

The coin shop around the corner isn’t the best place to make major purchases, but it offers a few benefits to investors who just want a couple of coins to have on-hand for emergencies:

  • You can see and touch the metal before you buy it.
  • No need to wait for delivery—you can take your metal home immediately.
  • A face-to-face transaction gives you the opportunity to negotiate prices and buyback fees.
  • They usually give repeat customers their best deal.

However, there are some drawbacks to buying local:

  • Brick and mortar stores have overhead costs to recoup, which typically translates to higher premiums on products.
  • Local shops usually have limited selections.
  • A neighborhood dealer is unlikely to be able to fill large orders (or make large buybacks).

If you do decide to buy precious metals locally, visit a few stores and look for a dealer who isn’t pushy. You want someone who acts as a resource for how to buy precious metals, not someone who is only interested in pressuring you into a sale. If you feel even a little unsure about someone, move on.

Insider’s Tip: Avoid any dealer who tries to steer you into rare coins, collectibles, or other products you didn’t ask for.

eBay

For investors who know exactly what they want and have enough knowledge about precious metals to recognize a good deal, eBay can be a decent place to buy gold or silver. But for those not familiar with how to buy precious metals, it’s probably not the best place to invest.

Unscrupulous sellers can misrepresent their products or artificially inflate prices by bidding up their own listings. And counterfeit products (often from China) sometimes wind up on the site.

Online Sellers

Purchasing precious metals from an online dealer offers two distinct advantages that buying from other types of dealers doesn’t:

  • 24/7 trading
  • lower premiums

Online dealers make it possible to invest and take delivery with just a few clicks as well as manage your trading account around the clock.

They can also offer lower prices than other dealers since they don’t have the overhead of a physical store. Some online dealers even give you access to volume pricing because they trade on a platform shared with institutional investors.

In addition to convenience and cost savings, online dealers offer a variety of options for how to buy precious metals. There are a number of account types available for individuals and corporations, and investors can even set up a precious metals IRA or UTMA.

Pure gold is so soft that a strong man can squeeze it and shape it.