In recent years, precious metals have become an increasingly popular investment option for many Australians. Precious metals offer a lot of characteristics that make them a good investment, whether you are an experienced investor or just starting out. In this article, we’ll look at some of the advantages of investing in precious metals, as well as why they’re a good complement to any financial portfolio.
Diversification
Diversification is one of the primary advantages of investing in precious metals. Diversification is the technique of distributing your assets across several asset classes in order to decrease risk. Because precious metals have a low correlation to other asset classes, like stocks and bonds, they are an excellent addition to any diversified investment portfolio.
This means that when the stock market suffers, the value of precious metals is less likely to suffer. Likewise, as inflation rises, the value of precious metals rises as investors seek safe-haven assets to preserve their money.
Hedge Against Inflation
The pace at which prices for goods and services increase overall, decreasing the purchasing power of money, is known as inflation. When inflation occurs, the value of money declines, and it takes more dollars to purchase the same goods and services. This is where precious metals come in as a hedge against inflation.
Historically, precious metals have maintained their value during periods of high inflation. For example, during the 1970s, when inflation in the United States was running at over 13%, the price of gold increased by more than 400%. Similarly, during the 2008 financial crisis, the price of gold increased as investors sought out safe-haven assets.
Store Of Value
Precious metals have been used as a store of value for thousands of years. Unlike paper currencies that can be printed in unlimited quantities, the supply of precious metals is limited. As a result, they retain their value over time, making them a dependable repository of wealth.
Furthermore, precious metals are not subject to the same risks as other investments, such as counterparty risk. The risk that the other party in a financial transaction may fail to meet their obligations is referred to as counterparty risk. With precious metals, there is no counterparty risk, as they are physical assets that can be stored and owned directly.
Portfolio Protection
Another advantage of investing in precious metals is that they offer portfolio protection. Precious metals can act as a buffer against losses in other asset types, including equities and bonds, during uncertain economic times.
For example, during the 2008 financial crisis, many investors saw significant losses in their stock portfolios. However, those who had invested in precious metals saw their investments hold their value or even increase in price. This is because precious metals are considered safe-haven assets, which means they are in demand when other investments are performing poorly.
Liquidity
Precious metals are also highly liquid, which means they can be easily bought and sold. This is an important consideration when investing, as it allows investors to quickly convert their investments into cash if needed.
Unlike other investments, such as property, precious metals can be bought and sold in small quantities, which makes them available to investors of all sizes. In addition, because the value of precious metals is widely recognized, they can be sold in almost any part of the world.
Investment Options
There are several options available for investors who want to invest in precious metals. These include physical bullion, such as gold coins or bars, as well as exchange-traded funds (ETFs) and mining stocks.
Physical bullion is a popular choice among investors who want to hold their precious metals directly. This allows investors to have complete control over their investments, as they can store them in a secure location of their choosing.
ETF
Exchange-traded funds (ETFs) are another option for investing in precious metals. These funds invest in physical bullion or futures contracts and offer investors exposure to the price of precious metals without the need to hold the physical metal. ETFs are simple to acquire and sell, and they provide a high level of liquidity.
Finally, investors can also choose to invest in mining stocks. These stocks are shares in mining companies that extract and produce precious metals. Mining stocks offer investors the potential for higher returns than physical bullion or ETFs, but they also come with higher risks.
Tax Benefits
Investing in precious metals can also offer tax benefits. In Australia, the sale of physical bullion, such as gold or silver coins, is considered a capital gain and is subject to capital gains tax (CGT). However, if the investment is held for longer than 12 months, it is eligible for the CGT discount, which can reduce the amount of tax owed.
In addition, investing in precious metals can also offer potential tax benefits through self-managed superannuation funds (SMSFs). SMSFs can invest in precious metals, and if held for longer than 12 months, any capital gains are taxed at the concessional rate of 10%.
