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Investing in precious metals

From ancient times to our days, gold has been, is and will be an indicator of status and prosperity. And even despite the fact that today gold is not a popular method of payment, it did not go out of circulation at all, but acquired the form of a tool for investment or money saving.

Often, during global crises or wars, exactly gold that became the main haven for capital. This noble metal is the most important element of the global financial system, and its global banking reserves are estimated at 32 thousand tons. In this article, we will look at how to invest in gold, how best to store it, and see if it really is profitable.

Options for investing in precious metals

The most popular and common method of investing in gold or other metals among ordinary citizens is the acquisition of bullion. This option is available even to investors who do not have significant investment funds.

You can buy bars in banks, and their price will depend on the weight. For example, in most banks you can buy gold or other metals, such as silver or platinum, in ingots from one gram to several kilograms. The most popular among banking metals are invariably bars weighing 100 grams of gold. This is due to the fact that the heavier the ingot, the lower the price for 1 gram of metal in it, but after 100 grams this difference quickly disappears.

Naturally, buying an ingot is not the only option to invest in gold or silver. Such a purchase is relevant for long-term investment or capital preservation. For short or medium-term goals, derivatives trading is better suited (gold futures contracts are the most popular). Since all contracts are standardized, the investor will not be able to buy exactly as much as he has enough money, and will acquire the entire contract.

Such trading can be more profitable than just buying an ingot, but it also carries much more financial risks.

In case you are not ready to take a high risk, and buying and storing an ingot is burdensome for you, you have the opportunity to open an impersonal metal account. Such an account is a hybrid of a demand bank account and an investment product. Its essence is that you buy a certain amount of virtual metal and wait for it to rise in price. Such an investment also has a number of advantages and disadvantages.

For example, you will not need to think where to store an ingot or rent a bank cell for it. Such an account can be replenished, partially withdraw funds from it, or close at any time without penalties and loss of accumulated income.

Of the main disadvantages is low interest rates and basic earnings can be obtained from fluctuations in the course. Also, such accounts are not insured in the deposit guarantee fund, therefore, under force majeure circumstances, depositors will not be able to return their funds.

What metal to buy and where to store it

Gold has always been the most popular precious metal for investment, and there are several reasons for this. If you compare it with platinum and palladium, the liquidity of gold is higher and you can sell it faster. In addition, when you buy gold, you will have more flexible conditions. Compared to silver, the cost of 1 gram of gold is higher, which allows you to keep your investments more compact.

As we have indicated in the previous chapter, investors have several options for investing in precious metals and will depend on this where and how the investor will store it.

When buying bars, an investor can rent a cell for him in a bank and store it there. Naturally, this will bring additional costs. The second option is to simply take the bar home and store it yourself. It can also bring a number of problems, one of which will be the difficulty in selling an ingot, as banks are very reluctant to buy them back, and if they agree, then at a very unfavorable rate for the investor.

If the investor purchased the metal without physical delivery (non-cash), then its storage falls on the bank. To open such an account, the depositor needs to contact the bank, which provides options for such deposits and write an application for opening two accounts: simple, from which funds will be converted into metal and credited for its sale, as well as accounts in the metal.

A possible option to invest in precious metals is to buy coins made of precious metals. This method is very simple, since here the least of all is required of the investor to come to the bank and buy coins from them. However, this option is difficult to consider as an investment, since these coins have low liquidity and are more suitable for saving value or collecting.

Technical situation

For completeness, I propose to consider changes in the price of gold against the US dollar over the past 15 years. This will give our readers a complete vision of the picture and prospects for increasing capital due to the rising cost of the metal.

investment in gold

As we can see on the chart, since the beginning of 2005, the price of gold has increased significantly. Gold received the greatest impulse for growth at the end of 2008 at the very beginning of the global crisis. This clearly demonstrates the use of gold as a hedge and capital preservation tool. During periods of global instability, the demand for drag is greatly increased. metals, as most investors transfer their funds to them. Subsequently, in times of global recession, the price of these tools not only does not fall, but also grows steadily.

However, after the end of the crisis and the economic recovery, the price of gold has almost returned to its 2008 values. This, in turn, demonstrates a reverse market process precious metals are no longer popular with other instruments with medium and low risk, but with higher returns.

Since the beginning of 2015, the gold / dollar pair is growing moderately and is trading in the ascending channel.

Starting from January 1, 2019, an ounce of gold was worth $ 1,285, and at the time of this writing, the price was already 1,410. In 2019, the price rose on a variety of macroeconomic factors:

  • trade war between the USA and China;
  • tensions in the Middle East;
  • other global conflicts.

However, in percentage terms, this increase was only 9%. And do not forget that these are futures prices, and their price does not fully characterize the market, in particular in each individual country.

For example, in Ukraine the price per gram of gold at the beginning of the year was 1220 UAH for the purchase and 1,400 UAH for sale. At the time of this writing, the price for the purchase was UAH 1,232, and for sale there was 1.357 UAH. As we see, growth in the global market has not been reflected in the domestic market of banking precious metals in Ukraine, since in addition to global trends in the local market there are such factors as:

  • political and economic situation in the country;
  • inflation rate and devaluation of nat. currency;
  • domestic demand and so on.

In addition, there is a huge spread, which completely kills the option of not only short-term, but also medium-term investments.

Disadvantages and advantages of investing in precious metals

Precious metals are now mainly used to diversify risks associated with fluctuations in foreign exchange markets, and to reduce the overall riskiness of the investment portfolio. Compared to bank deposits, gold bullion is a less liquid store of value. And since bullion in Ukraine sells a limited number of banks, the selling price for bullion in the local market is greatly overestimated compared to world prices.

For example, the average spread between the purchase price of gold bars and the sale price in the Ukrainian market often exceeds 15%. For comparison, the difference between the purchase rate and the selling rate of a cash dollar, as a rule, does not exceed 3%.

Add to this the cost of storing bullion and as a result, even with a good trend for gold or silver, there is very little chance of reaching the average yield on a bank deposit.

And if one can unequivocally say with the purchase of ingots it is unprofitable, then it is worthwhile to stop separately on an impersonal metal account.

It should be noted that the profitability of deposits in metals is formed primarily not at the expense of interest, but due to a change in its value. Over the past 8 years, such returns have averaged from 7% to more than 30% per annum in dollar terms. This, of course, a big plus. However, in this case, most of the investor’s income is in the hands of the market, which will not always strive upwards. In addition, with such an investment, it is important to “catch the wave”; we also note a lot of important points about the lack of insurance of such deposits.

Conclusion

As a result, we can state that the attractiveness of investing in gold very much depends on the situation in the domestic market. These factors include:

  • demand and supply for metals;
  • bullion liquidity;
  • bank fees and storage costs.

Specifically, in Ukraine such a contribution can bring tangible profits only with an investment for a very long time with a positive economic and political background. A slightly different situation with an impersonal metal account, but the riskiness of such a deposit is several times higher than a simple bank deposit, with similar potential profits.

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