How to Invest in the Precious Metals ETFs

May 10, 2022 05:43 PM ET
How to Invest in the Precious Metals ETFs

Precious metals are defined as those that are not found in abundance and those that have an intrinsic value. Some of these metals don’t have a lot of use in the industrial sector. In this article, we will focus on how to invest in precious metals ETFs and some of the top strategies to use.

What are precious metals?

Precious metals are those that are relatively rare in nature and those that don’t have a lot of use globally. In the past few years, however, the list of these metals includes those that are used widely in several industrial sectors, such as automotive. 

Gold is the best-known precious metal in the world. It has had a special role in all civilizations. Indeed, very few ancient books don’t mention gold in a good way. The metal has no major industrial use. Instead, most of the mined gold is bought by central banks and investors. 

Gold is viewed as both a store of value and even as a currency. Most investors also view it as an ideal hedge against inflation since its price tends to rise over time.

Silver is another precious metal that is often seen as a smaller brother to gold. This happens because of the significant price gap between the two metals. While gold is trading at $1,880, silver is trading at just $22. Unlike gold, silver is found in abundance in several countries, and it has an important industrial role. For one, it is widely used in the manufacture of semiconductors, solar panels, and mirrors. 

The other metals at the intersection of precious and industrial metals are platinum and palladium. The two belong to the Platinum Group Metals (PGM) and are known for their high melting point, high heat resistance, and excellent catalytic activities. 

As a result, they are widely used in the automobile industry, where they are used as catalytic converters. Platinum and palladium are rare and attract a premium price. Palladium trades at over $2,000 while platinum trades at $948.

What moves precious metal prices?

Precious metal prices are moved by diverse catalysts since they have unique characteristics. For example, since gold does not have much industrial use, its price is mostly affected by monetary conditions. In most cases, its price tends to react to the overall sentiment of the Federal Reserve. Ideally, lower interest rates usually lead to high inflation and push more people to gold. 

The other precious metals are equally moved by monetary policy. At the same time, their prices are affected by the demand and supply dynamics. For example, palladium prices did quite well after the Volkswagen emission scandal as countries enforced more emissions standards. They also tend to outperform in a period of a booming industrial economy. 

There are several ways of investing in precious metals. First, one can buy and hold physical metals. In most cases, this is usually a time-consuming and less safe process. Second, it is possible to buy these metals in the form of CFDs. Further, it is possible to buy precious metal mining stocks and ETFs.

Precious metal ETFs

An Exchange Traded Fund (ETF) is a financial asset that allows you to track a single or a group of assets. These funds are usually offered by large companies like VanEck, Vanguard, and Schwab. The benefits of investing in ETFs are that they are often cheap and give you exposure to a group of assets at once. They are also bought in the same way that stocks. Here are some of the top precious metal ETFs.

Physical bullion funds

One of the popular approaches to investing in precious metals is to buy physical bullion ETFs. These are funds that have physical metal in storage that other investors can track. As a result, they give a more direct approach to investing in precious metals. 

There are many of these bullion funds that you can invest in. For example, there is the Sprott Physical Gold and Silver Trust, which holds a substantial amount of physical metal. It has over $4 billion in assets and an expense ratio of 0.51%.

Examples of other similar trusts are the Sprott Physical Gold Trust, Sprott Physical Silver Trust, and Sprott Physical Platinum and Palladium Trust. 

Gold vs. Gold ETF

All these funds have billions in assets and are good at tracking the prices of precious metals. The chart above shows the performance of physical gold and the Sprott Physical Gold Trust.

Precious metal miners ETFs

Another way of investing in precious metals is to buy mining stocks. The idea is that mining stocks will typically do well when the prices of metals are rising and vice versa. While this is true, the reality is that companies are entities that come with unique features like dividends and debt. The management of a company could also have an impact on the performance of these stocks.

Another fact is that mining companies spend millions of dollars in exploration, which is priced-in in their stock performance. The benefit of investing in these funds is that they give you access to some foreign companies that are usually not available in the United States. 

Examples of popular precious metals ETFs are the iShares MSCI Global Gold Miners Fund, iShares Gold and Silver ETF, and the VanEck Junior Gold Miners ETF. The chart below shows the performance of gold and the iShares Gold Miners ETF. 

iShares Gold Miners ETF vs. gold.

To a large part, this ETF has outperformed that of the physical gold.

Summary

Investing in ETFs is usually seen as a better way of allocating money. These funds are diversified and give you a good opportunity to achieve returns. In this article, we have looked at the precious metal industry and some of the best ways to invest in these ETFs.


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