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How to Invest in Precious Metals: A Comprehensive Guide


How to Invest in Precious Metals

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​Key Takeaways
  • Precious metals (e.g., gold, silver, platinum et al.) are considered a 'safe haven asset,' a 'hedge against inflation,' a 'store of value,' and a 'medium of exchange.'

  • There are three ways to invest in precious metals:

    • Purchase the physical asset,

    • Invest in precious metal funds and/or precious metal mining stocks, or

    • Trade futures and/or options contracts.

  • Understanding the risks of each of these strategies is essential before investing, as these strategies are not prudent for every investor.

  • Precious metals also have a special capital gains tax rate.

Precious metals have been a staple of human civilization for thousands of years. While today, currencies are not backed by precious metals, it was not long ago that most of the world's economy relied on the Gold Standard as the base of currency value. Today, precious metals are still one of the most popular commodities and serve as a way to help diversify an investor's portfolio.

Precious metals, particularly gold, are considered 'safe-haven assets,' meaning they are expected to retain or even increase in value during economic volatility. Individuals seek shelter in precious metals due to their tangible nature and potential to protect wealth during economic uncertainty.

That said, precious metals are not always a safe investment, even though they are a safe haven asset. Like any other investment, there is a fair market price for precious metals (a spot price). And just like any other investment, the spot price can go up or down.

In addition, precious metals are seen as a hedge against inflation and a store of value. This means that precious metals hold their value over long periods. However, history has proven this to be unreliable in the short term. This is because there are periods when precious metals outperform inflation and times when they do not. Like any other investment, you may unknowingly purchase gold at a high price, and when the price drops, it may take many years for it to come back up to get a return on your investment.

This is not to say that precious metals are a bad investment. On the contrary, precious metals have historically had a low correlation to the stock market, suggesting they can be powerful tools for diversifying your portfolio. In addition, there is comfort for some investors in the physical nature of the asset, which is otherwise not true in the stock and bond market.


How to Invest in Precious Metals

There are three predominant ways to invest in precious metals:

  1. Purchasing the physical asset directly or through an account such as a gold IRA,

  2. Investing in precious metal exchange-traded funds (ETFs), closed-end funds (CEFs), and mutual funds, or precious metal mining stocks, or

  3. Trading futures and/or options contracts.

It is crucial to weigh the pros and cons of each of these strategies before investing. In addition, some of these strategies are only prudent for some investors, depending on your overall investment goals, expertise, experience, and capacity to take on risk.


Buying the Physical Asset Directly

Physical precious metals (or bullion) can be an alluring and emotionally satisfying way to own precious metals. They come in various shapes and sizes and can be purchased through a reputable online or local dealer. The value of the bullion is derived from the content and purity of the precious metal, with at least 99.5% (995) being the international standard for investment-quality gold bars. The various forms of precious metals include:

  • Ingots (also called bars) are cast and molded into a shape, usually rectangular, for easy transport. These are also traditionally stamped with the manufacturer's name, the purity, and the weight of the piece. People typically think of these when conjuring the image of gold in a bank vault.

  • Coins are issued by government mints (e.g., the U.S. Mint is the division of the U.S. Treasury Department responsible for producing coinage) and are legal tender, meaning they can be used to buy goods at a store. Collectible coins may have a higher fair market price due to their collector value, the rarity of the design, and the mintage (the number of coins produced in that year). They may also be graded based on their quality. The Sheldon Scale is the industry standard, and it rates coins on a scale of 1 to 70 -- 1 being poor quality and 70 being perfect and flawless. One thing to remember with coins is that using them to pay for goods would be inadvisable. This is because its denomination is substantially lower than the value of the precious metal within it. For example, you could purchase $50 worth of goods with a one-ounce American Gold Eagle coin even though it contains potentially thousands of dollars worth of gold.

  • Rounds are often confused with coins as they are both circular; however, rounds are not legal tender, nor does their design change year after year.


Private mints manufacture rounds and bars, whereas government mints usually make coins. Some of the most well-known coins include:

  • American Eagle,

  • Canadian Maple Leaf,

  • South African Krugerrand,

  • Australian Kangaroo,

  • Chinese Panda, and

  • British Britannia.

Another way to invest in physical precious metals is by purchasing jewelry. Jewelry is something you can wear proudly and can be a fun hobby to share and appreciate with others. Often, long-standing, high-quality jewelry companies produce pieces with a tremendous history, so owning that piece can be like owning a piece of history.

However, the price of jewelry is affected by both the cost of the metal within it and the piece's craftsmanship. Jewelry is usually made of alloys (mixtures of metals) rather than pure gold, silver, etc. The jewelry's gold contents are measured in karats, with 24 karats being 100% pure gold. Moreover, the price of jewelry typically fluctuates more than just owning the precious metal outright due to the added volatility of the fashion of the time and any deformities to the jewelry from wearing it.


Pros and Cons of Owning the Physical Asset

Pros:

  • ​You own a tangible asset that can be easily passed on for generations.

  • Physical precious metals have a store of value.

  • Precious metals are intended to be held for long periods, so you do not have to worry as much about short-term price fluctuations.

Cons:

  • ​One of the most significant risks of owning physical metals is that they can be lost or stolen. Therefore, you will need to bear the cost of securing a way to store the assets (like in a safe or safety deposit box), and you will likely want insurance to protect them further.

  • Finding a reputable dealer and manufacturer is crucial but can be challenging.

  • It may be difficult to determine the purity of the metal on your own.

  • Precious metals dealers and brokers will charge a markup for their services when you want to buy or sell, which can be expensive.


Open a Gold IRA

A gold IRA, also called a Self-Directed Precious Metals IRA, has the same tax structure as a Traditional IRA -- money can be contributed pre-tax, investments in the account grow tax-deferred, and when money is withdrawn upon retirement, you pay income taxes on the distributions. The main difference between your average Traditional IRA and a gold IRA is that the latter can purchase physical bullion, whereas the former cannot. The Internal Revenue Code also regulates which precious metals can be held in gold IRAs. Only bullion that meets minimum fineness requirements and is produced by governments or approved private manufacturers/refiners can be purchased within a gold IRA.

Not every brokerage firm offers gold IRAs. There are three entities involved in getting started with a gold IRA: a distributor/dealer, a custodian, and a depository. If you want to open one, you will have to go to a dealer -- the company that sells physical precious metals. These dealers work with specialty brokerage firms called custodians, who set up the gold IRA, manage the transfer, rollover, or contribution of funds into the account, and facilitate purchasing and transporting the precious metals to where they will be stored. The place where the metals are stored is called a 'depository' and is separate from the custodian. The investor can take possession of the metals at any time, however, the IRS deems this a distribution from the account, and the investor will pay taxes and likely a penalty if they are under 59 1/2 years old. That being said, most major depositories offer the ability to visit and inspect your metals on-site upon request.

Gold IRAs are also subject to the same contribution limits as Traditional IRAs, and you must also take required minimum distributions (RMDs) once you reach your required beginning date.


Pros and Cons of Opening a Gold IRA

​Pros:

  • There are IRS-approved custodial and depository entities that comply with strict regulations and guidelines and specialize in alternative assets like precious metals.

  • Gold IRAs can help diversify your retirement portfolio by investing in the physical metal rather than precious metal stocks and funds.

  • You can open a gold IRA and fund it using cash, or, depending on the firm, you can do a partial transfer or full rollover of your existing retirement account into a gold IRA. This can be initiated by either your current brokerage firm issuing a check from your retirement account or by an electronic transfer.

  • Gold IRAs have similar tax advantages as Traditional IRAs.

​Cons:

  • The custodian may charge a one-time account setup fee and annual administrative and maintenance fees. The depository typically charges yearly fees for storage and insurance. Other transaction-based fees may apply, and fees may vary based on your account size and the precious metals in which you invest.

  • There may be rollover/transfer minimums.


Investing in Precious Metal ETFs, Closed-End Funds, and Mutual Funds

Many individuals already have at least one investment account and can purchase exchange-traded funds (ETFs), closed-end funds (CEFs), and mutual funds. This is a more liquid and lower-cost entry into the precious metal market. These funds may buy the precious metal themselves, and the fund's price will track the cost of the physical precious metal. Like most other funds purchased in the stock market, these funds charge fees that can be higher or lower than the cost to store and insure the precious metal yourself. The ongoing fee is called the expense ratio, and mutual funds may have an additional commission for buying the fund, referred to as a load.

Mutual funds tend to have higher fees than ETFs if they are actively managed, meaning the fund manager and their team research and analyze the investments and make decisions for the fund on an ongoing basis. Meanwhile, ETFs are usually passively managed, which means there are very few if any, ongoing changes and decisions made about the investments in the fund after it is opened.

Pros and Cons of Investing in Precious Metal

ETFs, CEFs, and Mutual Funds

​Pros:

  • No storage or insurance is needed.

  • These are simpler and more conducive for novice investors.

  • Minimal research is required to find a high-quality fund in which to invest.

  • They can be easily invested in from an existing investment account.

  • They may provide income through distributions from the fund.

  • They are more easily sold for cash at the fair market price rather than bullion which can have substantial transaction costs.

​Cons:

  • Charge an ongoing fee.

  • Depending on the fund's investments, these can be more volatile than owning the physical asset.


Invest in Precious Metal Mining Stocks and Funds

In addition to purchasing funds, investors can buy stock in companies that mine, refine and trade precious metals. Like with funds, individual stocks can be purchased directly from an investment account, which is often simpler than buying the physical metal.


Mining stocks have the added benefit for investors in that the companies can profit in two ways: firstly, the price of the metals rises and, therefore, so too do their profits; and secondly, the company may raise production over time. Also, these funds may provide income through dividends and interest for individuals looking for extra portfolio income.


Pros and Cons of Investing in Precious Metal

Mining Stocks and Funds

Pros:

  • Many gold mining stocks pay dividends to their investors.

  • This can also be more cost-efficient than purchasing the metal because many investing apps will allow you to buy fractional shares of stock.

  • Mining funds own many individual mining companies, giving you the benefit of owning mining companies along with the safety of diversification.

Cons:

  • These can be more volatile than the physical asset.

  • Mining stocks are susceptible to additional risks, such as the ramifications of business decisions made by company management. Additionally, some miners (particularly smaller companies) may take on risky endeavors, so it is essential to understand the business carefully.

  • Mining for precious metals can take a toll on the environment, and the mines may be located in conflict-affected areas.


Purchase Futures and Options Contracts

Of the ways to invest in precious metals listed above, trading futures is the riskiest. Futures contracts are agreements between two parties in which one party agrees to sell, and the other agrees to buy a good at a set price at a future date. When the settlement date of the contract arrives, the seller delivers the goods, and the buyer receives the goods at the agreed-upon price. These contracts are traded on an exchange (for U.S. gold futures, the exchange is the New York Mercantile Exchange) by speculators and commercial traders (those who make and use the commodity).


An individual could also purchase or sell options on precious metal stocks or ETFs. If you purchase an option, you make a contract with another party representing the right, but not the obligation, to buy the investment at a specific price. These contracts have expiration dates, and for more experienced investors, they can be a way to invest without needing to put up a lot of upfront capital.


These forms of investing are very complicated and highly speculative. For these reasons, it is mainly done professionally by sophisticated investors, not at a beginner level. Moreover, investment accounts need special approval from the brokerage firm to trade these investments.


Taxation of Precious Metals

Sales of precious metals are subject to special tax rates. This only applies if you own the asset directly or invest in ETFs backed by precious metals in a taxable account like an individual brokerage account or a trust. These special rates do not apply in a tax-advantaged account, like a retirement account. In a retirement account, there are no taxes paid for selling precious metals. It is only when you make distributions from the retirement account that you pay taxes at your ordinary income tax rate. Usually, when you sell an asset, it is subject to capital gain rules:

  • If you hold an asset for a year or less and sell it for a profit, the gain is taxed at your ordinary income tax rate. This is referred to as a short-term capital gain.

  • Conversely, if you hold an asset for longer than one year and sell it, the gain will be taxed at a rate of up to 20%. This is called a long-term capital gain.

However, for tax purposes, precious metals are treated the same as collectibles (like art, comic books, baseball cards, etc.), and these items have special, less favorable tax rates:

  • If you hold a precious metal for a year or less and sell it for a profit, the gain will still be taxed at standard short-term capital gains rates -- at your ordinary income tax rate.

  • However, if you hold it for longer than a year and then sell it, the gain will be taxed at your ordinary income tax rate up to 28%. For example, if you are in the 22% bracket, the gain will be taxed at 22%. But if you are in the 32% tax bracket, it will be taxed at 28%.

Note that these special capital gains rates also apply for trading ETFs backed by physical precious metals. This is because the IRS deems each share of the ETF as ownership in the underlying metal itself. This is not true, however, for stocks, ETFs, or mutual funds not backed by physical precious metals (like individual shares of mining companies or funds of mining companies).


Final Thoughts

Owning precious metals can be a great way to diversify your investment portfolio and hedge your investments against downward swings in the stock market and real estate. For example, from November 2008 to March 2009, the S&P 500 fell about 30%; meanwhile, the price of gold increased by about the same amount. For this reason, precious metals are often seen as a 'safe haven asset' -- an asset that tends to retain (or even increase) its value during challenging economic times. Investing in precious metal stocks, ETFs, closed-end funds, and mutual funds is often the most prudent way for investors to get exposure to the asset.


That being said, be careful. Every form of investing carries risks, and investing in precious metals is no different. Like any other asset, the value of precious metals goes up and down. For example, if you had bought gold when it peaked in September 2011, you would not have seen a nominal return on your investment until July 2020, and in between then, your investment would have bottomed down over 40% in November 2015.


If you want to buy or sell precious metals and are wondering what the price is, look for the metal's 'spot price.' At this price, buyers and sellers mutually agree to trade for the asset today. The spot price is usually measured as a dollar amount per troy ounce. Troy ounces are the standard unit of measurement for precious metals and are typically abbreviated 't oz' or 'oz t.' Note that standard ounces and troy ounces are not the same. Troy ounces are about 10% heavier than standard ounces. As measured in grams, a troy ounce is about three grams more than a standard ounce.


Overall Pros and Cons of Investing in Precious Metals

Pros:

  • Precious metals are highly liquid, tangible assets, meaning it is very easy to find a buyer for the asset if you need to sell it quickly.

  • Despite short-term differences in inflation and the change in the price of precious metals, they can be great stores of value in an otherwise well-diversified portfolio of assets.

  • Investing in precious metals can be a great way to diversify your portfolio.

Cons:

  • Physical precious metals do not produce income or dividends like investing in the stock market. However, investing in certain precious metal funds and mining stocks do pay dividends and/or distributions.

  • The price of precious metals can be volatile.

  • There are additional costs to purchasing and holding physical metals, such as storage and insurance.

If you have questions about whether investing in precious metals may be right for you, talk with a financial advisor or tax professional. You can schedule a complimentary, no-obligation call with us here!


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About the Author

Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.


** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.

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