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How to Buy Precious Metals: All you Need to Know

Gold, silver, and other precious metals are a subset of the “commodities” asset class that can provide opportunities to de-risk your portfolio by diversifying away from other asset classes such as stocks (equities).

In this guide, we look at the opportunities for trading precious metals, and the inherent risks. And we tell you how to go about buying precious metals.

Start Trading in 3 easy steps

1. Open a Free Account

You can open an account with a broker for free, and it takes only a few minutes to fill out the online application form with your name, email address, residential address, and any other information. To fully activate your account with a regulated broker, you will have to prove your identity (e.g., by uploading a copy of your passport). Funding your account can be done by bank transfer, credit/debit card, or PayPal.

2. Choose Your Precious Metals

The broker’s mobile app or web-based trading platform will list the markets you can trade. You can search or scroll through this list to find the precious metal(s) you’re interested in, which might be categorised as “metals” or something more generic like commodities. Click each one to see more information, including the latest buying and selling prices and a price chart.

3. Place a Trade

You will typically press the “buy” button to open a trade ticket that asks you to specify your trade size as an amount in USD or GBP (or other currency) that you wish to win or lose per “pip” of price movement. The ticket might also allow you to specify a “stop” level, which is a price at which your trade will be closed — at a manageable loss — if it goes against you.

What Are Precious Metals?

Precious metals are naturally occurring commodities that hold high economic value due to their rarity. Demand for precious metals varies according to their potential uses (e.g., in jewelry, cutlery, or electrical appliances) and their speculative value (how much traders think they will go up in price). 

The main precious metals are gold, silver, platinum, and palladium. Gold (XAU) and silver (XAG) are the two most popular. Gold, which once underpinned the value of the US dollar, holds the highest economic value, and its price peaked at more than $2,000 per ounce in 2020. 

How Do Precious Metals Work?

Precious metals have high economic value because they are scarce: there is a finite amount of gold in the ground, and someone has to dig it out. The same goes for silver and other precious metals.

These metals are also valuable because they’re useful. Gold can be used to make jewelry and some electronic components. Silver is used for spoons and other cutlery. Palladium is used in fuel cells and catalytic converters.

Precious metals are not valuable only because of their uses. In the particular case of gold, it is seen as a safe haven asset against the US dollar’s decline. When the dollar goes down, the gold price goes up, and vice versa.

When buying precious metals, it’s important to understand the factors — such as the dollar price and the supply/demand characteristics — that affect their value. When you think the price will go up, you can buy physical precious metal assets such as gold bars, but it’s more likely that you will simply speculate on the price move by opening a spread bet or a contract-for-difference (CFD) trade. These leveraged derivative financial instruments also allow you to profit from a falling price by placing a “short” trade.

Types of Precious Metals 

Brokers typically categorise metals as base metals (including copper, lead, and iron) and precious metals, which are: 

Gold is one of the most popular financial instruments in the market. Many traders admire gold as it is often subject to high levels of volatility, which traders and investors see as an opportunity to make money. You might see gold listed as XAUUSD on your broker’s trading platform.

Silver is seen as a cheaper alternative to gold. It is priced lower but silver prices move in a similar way to gold prices. At the time of writing, silver (XAGUSD) is valued at about $26 per ounce while gold stands at $1,781 per ounce. 

Platinum is more expensive than silver but is not as actively traded as the other main precious metals. The fact that it is used for jewelry, dentistry, and decorations makes it an interesting investment opportunity.

Palladium is used in fuel cells and catalytic converters. Just as silver may be known as the poor man’s gold, palladium may be regarded as the poor man’s platinum, but this doesn’t mean you can’t get rich by trading it in the right way.

Should You Invest in Precious Metals?

The very word “precious” makes precious metals sound attractive to trade. However, there are a few things for you to consider before you start trading.

First, you must be aware of the volatile nature of such assets. This could be a good thing if you buy and then the price rises rapidly in your favour. But beware that financial markets don’t only go up, so the downside volatility could see you lose more money than you expect in a very short time.

Second, consider your investment size. Unless you are day trading the asset (not holding overnight) on high leverage, you may be wise to buy precious metal that is not too expensive. 

Finally, make yourself aware of the events that could lead to fluctuating prices. For example, wider market uncertainty could send investors searching for safety in gold and other precious metals.

Unlike with stocks, where time in the market may be more important than timing the market, with precious metals it’s important to buy and sell at the right times because you don’t get any ongoing income from dividends while holding them.

Pros and Cons of Investing in Precious Metals

Pros

Potential for lucrative returns
Extremely liquid markets
Trade long term or trade short term
An alternative to other assets like stocks and indices.
Safe haven security

Cons

Extremely volatile
A large account size may be required to trade
Must be aware of the factors that move these markets

Invest in the Most Popular Metals

Things to Consider When Buying Precious Metals

Remember that gold and other precious metals are usually denominated in dollars, so their prices go up when the dollar goes down. It may be worth watching the Federal Reserve’s announcements on things like interest rates to assess the future direction of the dollar.
- Shams Ul Zoha

Top Precious Metals to Invest in Right Now

Precious metal prices peaked in late 2020 and early 2021, either because of their “safe haven” status during the coronavirus crisis or because investors were piling into all asset classes as a result of government stimulus programs. So, what can we say about some of the precious metals in 2021 and beyond?

Gold

The gold price reached an all-time high in August 2020 and then fell back in the first half of 2021. With equity markets at all-time highs, a stock market crash could be coming, and this may send investors back into safe haven assets. Therefore, 2021 may be a good year to buy gold on the dip.

Silver

The silver price reached a peak in August 2020 and tested this level again in February 2021 as amateur investors posting on social media platform Reddit reportedly tried to bid up the price of silver stocks in the same way as they had for “meme” stocks such as GameStop and AMC Entertainment. With the silver price trend achieving higher lows (but not higher highs) at the midpoint of 2021, it could be ripe for an upside breakout later in the year.

Copper

While some brokers categorise copper as a base metal, some people put it in the same basket as precious metals. It can certainly command a high price, as evidenced by the fact that criminals sometimes steal copper wires from railway lines or take copper from church roofs. The copper price was subject to a very significant and sustained uptrend between the March 2020 trough and the May 2021 peak. Although the price has since fallen back, it has not fallen below the baseline of the uptrend at the time of writing.

Precious Metals Summary

Precious metals are among the most popular assets for short-term traders and long-term investors alike. The sometimes volatile prices present many opportunities to make money but also the risk of losing more money than you intend to on leveraged CFD trades. Therefore, you should diversify across several uncorrelated asset classes (including stocks) and risk no more than 1%-2% of your available funds on any one trade.

Frequently Asked Questions

  1. Precious metals such as gold and silver will be very familiar to beginner investors, and they’re easy to understand in the sense that you don’t have to pore through balance sheets and other financial statements like you do when valuing stocks. However, trading precious metals via brokers usually means using CFDs which can be dangerous if you don’t understand leverage.

  2. With CFD trades, it’s as easy to bet on a falling price by “going short” as it is to bet on a rising price by “going long”. Just press the BUY button rather than the SELL button, but beware that your losses are theoretically infinite when going short because an asset’s price can potentially rise without limit.

  3. Precious metal markets are very liquid, which means that there should always be willing sellers for you to buy from and willing buyers for you to sell to.

  4. You might be cautious about the dangers of leveraged CFD trading. Or, your current stockbroker or share dealing account might not allow CFD trading. It is harder to access the precious metals markets in these cases but you can gain indirect exposure by buying shares in precious metal mining company stocks instead. However, these companies’ share prices don’t move in lockstep with the prices of the precious metals themselves.

  5. Each broker will have a minimum deposit, which could be $100 or even more. Leveraged CFDs allow you to buy more gold (or other precious metal) than this amount would usually buy, but you have to be careful. Consider using a regulated broker that offers negative balance protection so that you can’t lose more money than you deposited into your account.

  6. Not all brokers allow you to trade precious metals, so research the most suitable brokers before you sign up for an account.

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