In the volatile economy of the 21st century, investors often look to the precious metals sector as an alternative to traditional securities such as stocks and bonds.
And sadly, the metal market is full of myths, half-truths, and urban legends that too many people take for granted. Here are some of the more common myths potential investors will come across:
Myth #1 – Small investors cannot enter the metal markets.
Unlike some stock markets, gold and silver are particularly suitable for small investors. There are indeed markups based on different sizes of bars and coins, but anyone willing to buy an ounce or more of silver or gold will only pay a small profit margin above spot market prices.
Myth #2 – Governments and banks control the price of precious metals, so no one can make a profit.
There have been a few instances of banks “trying” (note the quotes) to manipulate global prices in the spot metal market for short periods, but those actions have almost nothing to do with the profit or loss that a small investor gets. The truth is that the price of precious metals is mainly determined by supply and demand, so when the demand for the metal is soaring its price will also go up. Large and small investors have made profits and suffered losses in the precious metals markets, but they have never lost everything as is the case with the holders of Stocks or Bonds. Gold can never be worth zero.
Myth #3 – It is better to buy mining stocks because they offer higher profits.
Under certain conditions, quite rare indeed, gold and silver mining stocks outperform the metals themselves, but most experienced investors prefer the physical metal to mining stocks for the above reason. In bear markets, mining stocks also tend to fall much faster and lose much more than physical metals.
Myth #4 – Custody is a major problem for owners of physical precious metals.
The thick metal case can worry those who want to buy gold or silver. But today it is possible to deposit the metal in special safe deposit boxes at very low costs. Furthermore, even if it is not a solution that is recommended, it is possible to buy a safe for the home. In any case, unless large quantities of metal are purchased, it is advisable to rely on companies specialized in custody that also offer insurance.
Myth #5 – It is more profitable for investment purposes to buy rare gold or silver coins instead of bullion.
Nothing could be further from the truth than this persistent myth, which is older than many of the coins in question. Unless you are a numismatic expert and therefore find buying and selling rare coins more comfortable, bars are the simplest and easiest way to go.
Myth #6 – Gold and silver, as well as platinum and palladium, are only useful as hedging instruments within a larger portfolio of stocks, bonds, and other investments.
Yes, metals can be a good part of any properly diversified portfolio. Regular long-term precious metals investors, also referred to as “drawers,” routinely purchase gold and silver on a weekly, monthly, or yearly basis, balancing the purchase price over time. Thus, using precious metals as the standard 10 percent hedge in a larger portfolio is a commendable practice; there is nothing wrong with making precious metals the primary component of an investment strategy well managed.
Every investment carries its own unique set of risks and rewards. This is to be expected. But in the world of so-called “alternative markets” such as precious metals, there is often a veneer of mystery that must be stripped away before consumers can buy with confidence. Trust in a metal that boasts a 5,000-year history, the first form of commercial currency in human history, can be granted with confidence.