Many years ago, precious metals were the cornerstone of ancient economies, which lead to today’s currency systems. These rare and unique metals have always carried a high prestige, but why do people infuse such value behind them? The demand for precious metals originated from their beauty and rarity, and was increased by their usefulness as the eventual anchor of the world economy. Their demand is unlikely to dwindle anytime soon, as investors turn to them in droves during periods of high uncertainty. Fear, volatility and inflation are all driving factors that contribute to potential surges in demand for precious metals.
Symbols of Prosperity
Perhaps the most well-known precious metals are gold and silver. For years, they have been regarded as an investor’s “safe haven.” Whenever the markets experience high volatility or uncertainty (such as the recent United States and French elections), the value of gold and silver rise, as investors scramble to reallocate their portfolios. Even with countries eradicating the gold standard, investors still turn to gold and silver during times of uncertainty, as it is widely believed that it will always hold value, even if the current fiat system fails. These precious metals hold a strong track record for providing a reliable way to hedge against inflation.
There has been an abundance of volatility in 2017, which is good news for precious metals investors. Recently, the French election created mixed feelings among the global markets, as either of the final two candidates had the potential to dramatically alter the projected value of the Euro. As a result, the price of gold spiked as investors sought a safe haven from the high amount of doubt rippling through the markets. (If Le Pen was elected, it would have created some longer term uncertainty, likely pushing gold higher).
Despite the dissolving of the gold standard over the last 80 years, gold still has a profound influence on currencies. If a country has a high amount of gold and silver exports, or reserves on-hand, their currency is likely to strengthen. (The opposite is likely true for importers). Precious metals and currency have a strong correlation, and many people believe that we should return to the gold standard instead of fiat currency to reduce potential manipulation. (China intentionally manipulates their currency to their advantage instead of the level many believe it should be set at).
A Less Well-Known Precious Metal
Beyond gold and silver lie other precious metals, such as palladium. It is widely used in automotive manufacturing and many other industrial uses. Its rust-resistant qualities and reasonable price points make it an attractive metal. Palladium is another viable option for investors seeking shelter from inflation, or for those who believe the fiat currency system will one day be replaced. Palladium’s heavy industrial uses drives its demand, and calls for consideration in portfolios during times of surging automotive and industrial markets, or general periods of industrial expansion. Currently, its future may be bright, as it is one of the metals used in constructing the infrastructure for drilling shale oil.
How Do Precious Metals Fit in a Portfolio?
A well-diversified portfolio will consist of stocks, bonds and managed futures, but how much of your managed futures should consist of precious metals? While there is never an exact answer to that question, as it relies on current or projected market conditions, precious metals should hold ground in a section of your portfolio. (Gold and other precious metals typically hold their value even during dire economic periods). Precious metal investments behave differently than traditional stocks and bonds. They make for reliable investments for holding long-term or for short-term buying and selling to capitalize on deflationary scenarios.
Precious metals should always maintain a relevant level of demand due to their prestige, limited quantity and usefulness. As always, it is critical to factor in current and future forecasts of market conditions, trends and world events prior to investing in any market. Working with a registered advisor, such as the ones at Icon Alternatives, is the best way to create a sharp investing strategy for a financially secure future.