What are precious metals?
Precious metals are rare metals that have significant economic value. They are typically non-corrosive, durable, and considered to have aesthetic value. Precious metals have been used for a variety of purposes throughout history, such as currency, jewellery, art, industrial processes, and investments.
What are some examples of precious metals?
Gold, silver, platinum, palladium, rhodium, iridium, and ruthenium are a few examples of precious metals. Gold and silver are the most commonly traded precious metals globally, followed by platinum.
What factors influence the prices of precious metals?
The prices of precious metals tend to be volatile as they are impacted by various factors that influence their demand and supply. These factors include:
- Currency fluctuations
Most precious metals are traded in US dollars and hence their prices are impacted by currency fluctuations. When the US dollar strengthens, demand for precious metals tends to fall as buying these metals using other currencies becomes expensive. And a fall in the dollar leads to a fall in the price of precious metals.
- Industrial demand
Precious metals have wide industrial applications like medical equipment, electronic devices, automobile and aerospace. Therefore, increased demand from any of these sectors leads to an increase in the prices of precious metals.
- Geopolitical factors
Precious metals are either rare or difficult to extract in a cost-effective manner. A lot of the supply of precious metals is heavily concentrated in certain geographical areas. Any geopolitical tensions like wars and embargoes in such areas tend to escalate prices.
Price chart for SPDR Gold Shares, the biggest precious metal ETF by assets, from March 2019 to March 2023 (Chart courtesy of StockCharts.com)
Why precious metals?
Precious metals make great commodities investments for two primary reasons — portfolio diversification and hedging against inflation.
During times of economic downturns, while other asset classes, such as stocks, underperform, precious metals like gold tend to do well. That’s because precious metals are seen as safe-haven investments that have historically held their value.
Precious metals are also used as a hedge against inflation, currency devaluation, and political instability. Since precious metals have a limited supply, they don’t tend to inflate as easily as currencies. The fact that they are considered valuable universally and have a high demand outside of being a financial asset — jewellery and industrial uses — also helps.
Scarcity is value
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