Income+
Case for investing in precious metals
Tan Jee Yee 
Gold has always been king of commodity investments. The alternatives, though, may give it a run for its money, in the right circumstances
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THERE is a Latin saying – aurum potestas est or gold is power. And for the longest time, that has held true.

Gold has always symbolised materialism, wealth and power. The thrones of Chinese emperors were made of gold, and so were the crowns of kings. The US Gold Rush, from 1848 to 1855, started industries and ended lives.

The yellow metal has risen in value over time and has solidified itself as a means to protect oneself from economic uncertainties.

Gold prices have always risen when stocks plummeted. If anything, it makes for a good portfolio diversification.

The allure of gold may have waned of late, with even Warren Buffett arguing that the metal is far inferior to stocks as an investment. Yet, it hasn’t lost its lustre.

But not all that glitters is gold. There are other metals that we hold to lower value, yet they make for equally good investments in their own right.

In fact, at certain times and during economic changes, some of these alternatives to gold were actually worth more.

At any rate, investing in precious metals has its benefits. Fans of the solid and shiny say that precious metals are tangible commodities that keep their intrinsic values intact.

Hence, if the value of our currency falls, at least part of your portfolio will retain its value. In times of uncertainty, buying metal is considered a safe haven approach to diversification.


Hi-ho, Silver!

When we talk about investing in alternatives to gold, silver comes to mind. And while it is perceived as second-tier to its golden cousin, silver may at times be the better investment, if not the closest in terms of value.

Keith Lee Choon Teck, an IT security consultant who has invested heavily in silver, says: “Silver is seen as an investment alternative because its value has been increasing over the past 10 years.

“Unlike gold, the price of silver swings between its perceived role as a store of value and its very tangible role as an industrial metal.”

Silver’s demand isn’t primarily in the creation of coins and jewellery, but actually in industry, where it has many uses ranging from electronics to medicine.

In fact, about 55% of all silver consumed annually is for industrial use, according to nonprofit organisation The Silver Institute.

In contrast, only 10-15% of the world’s annual gold demand comes from industrial use.

Industrial supply and demand for silver exert a strong influence on its price. For this reason, its price fluctuations are more volatile than gold.

“It’s the pros and cons [of dealing in] the metal. Sometimes the price goes high enough to make it worthwhile, yet this volatility is a barrier to investing in it,” says Lee.

There are times when such fluctuations can be huge. For instance, silver used to hold a predominant role in the photography industry, due to the silver-based photographic film. But the advent of digital cameras severely affected the silver market.

On the other hand, emerging market economies in Asia created an explosive demand for electrical appliances and other industrial items that require silver, thus raising its value.

Does this still make it a good investment? Lee certainly believes so. “Even if it’s not as valuable as gold, silver is still roughly 100 times pricier than copper.

“Because of its industrial usage and the fact that it may be increasingly limited in supply, many are confident its prices will increase,” he says.

At the time of writing, silver is only around 2% the price of gold. Its price per ounce is at US$16.54 (RM70.80) while gold is valued at US$1,256.20 per ounce. This can be seen as a positive, says Lee.

“Silver is more affordable than gold, and as such, investors can accumulate more silver dollar for dollar,” he says.

This makes silver purchases more achievable for small investors, as RM2,250 can roughly get you 1kg of silver, while to get 1kg of gold would require approximately RM172,980 today.

Lee says so far, prospects for silver appear to be good. “It is expected to bounce higher, as demand for it increases. I would say that in terms of non-gold precious metals, silver should be considered.”


Going platinum

Like gold and silver, platinum is traded round-the-clock on global commodities markets.

One thing platinum investors have noted is that the metal has a tendency to fetch a higher price than gold during routine periods of market and political stability.

This is because it is a much rarer metal since less platinum is extracted from the ground annually compared to gold.

Platinum investors, including Anthony Balan, believe that platinum is a more worthwhile investment than gold, mostly because of its relative closeness in value, and also the fact that platinum has seen more varied uses.

“Platinum prices have sometimes overshadowed gold. But while it has dropped, the value has consistently been closer than other metals,” says Balan, who is a fund manager.

Platinum currently fetches US$937.40 per ounce, which is some US$300 cheaper than gold. “But what makes it more engaging is that it has more industrial uses than the latter,” he says.

Like silver, platinum is considered an industrial metal. Almost 40% of its demand comes from automotive catalysts, which are used to reduce harmful emissions.

Jewellery also accounts for the majority of demand, while petroleum and chemical refining catalysts and the computer industry utilise the rest.

Balan says that because the auto industry relies heavily on the metal, platinum prices are determined largely by auto sales and production numbers.

“Carmakers are also increasingly pressured to make ‘greener’ cars, which will require more catalytic converters and thus increase demand for platinum. This is another reason to invest in the metal,” he says.

The fact that it is the rarer of the metals means its value will rise as demand increases, Balan says. “Growing demand and limited supply essentially make it a good investment to consider.”


Palladium alternative

It’s likely that one would not have heard of palladium, and even more so consider it an investment option.

Still, there are reasons to eye this silver-white metal for part of your portfolio.

Like silver and platinum, palladium has extensive industrial uses. It essentially follows platinum in being a core component in catalytic converters, which means it too relies on automobile industry growth to thrive.

“For this reason, palladium is considered a sound investment as well,” says Balan, who has started investing in palladium as well.

He says both platinum and palladium are also used in petrochemical facilities to process shale gas, which could “help increase their prices as the industry grows”.

Like platinum, palladium supplies are also falling. Reports say that production of palladium and platinum are less than 10% of gold production.

This implies that these two metals could trade at several multiples of gold prices at the right times.

The world's largest online retailer of precious metals, Apmex lists palladium at US$846.00 per ounce, which is slightly lower than platinum.

Palladium’s core appeal to investors at the moment is that it’s a much rarer metal compared to platinum.

When it comes to production, palladium is about 15 times rarer than platinum, and 30 times rarer than gold.

A bulk of the world’s palladium is mined in Russia (accounting for about 41% of world supply), followed by South Africa (38%). Canada, the US and Zimbabwe make up the rest.

As such, whenever production decreases, price increases can be expected.

Over the last decade, investors noted that there has almost always been a supply deficit. Hence, investing in palladium may be the right thing to do by now.


Base metals

We’ve essentially covered the three most precious alternatives to gold, but what other metals are worth investing in?

Freelance financial advisor Lee Chin Lien says two such metals could be copper and zinc.

“Copper is a versatile metal that is extensively used in various industries from electrical wiring to musical instruments and solar powered cells,” he says.

At the same time, copper can be mixed with other metals to make valuable alloys such as bronze, pewter and brass, which are also required in various industries, especially art.

“While it doesn’t fall under the ‘precious metal’ spectrum as platinum, silver or palladium, there is some merit to investing in copper,” Lee says.

Zinc is also present in many alloys (in fact, zinc and copper are constituents of brass and bronze), and have an equally wide industrial use.

It is an important element in die-casting, galvanising and rubber making, and can be used as a paint pigment, wood preservative and agricultural fungicide.

Zinc is also used as a dietary supplement and thought to have antioxidant properties that speed healing and slow ageing.

Lee says not many think of zinc as an investment, but zinc stocks exist and could be considered part of a portfolio. “Both copper and zinc are not as valuable, but they’re not as volatile either,” he says.

The two fall under the “base metals” category, which is essentially materials used in industrial business operations. Also included are lead, aluminium, nickel and steel.

“Base metals are in much higher demand in countries that have yet to develop fully, and in countries in the process of rebuilding their infrastructure,” Lee says.

“They can always be viewed as sound investments, though their overall worth is always determined and prompted by increases or declines in the global economy,” Lee says.

So, essentially, base metals work inversely compared to precious metals like gold, which are considered safer investments for when economies get tough.

“You’d want to invest in base metals based on where the economy is growing,” Lee says.

Base metals have their own drawbacks, such as their low underlying price compared to precious metals.

Mining for base metals is done on a larger scale and at lower cost, which means the companies have greater opportunities for high profits.

Hence, investing in them makes more sense. “Unlike precious metals, you don’t hold the physical material. You invest in stocks and the companies in the industry,” Lee says.

You may still want to dig your hands into gold, but it’s worth remembering that all metals have their worth.

Perhaps it’s wiser to fill your treasure chest with more than those which sparkle and shine.

Four ways to make your investment

“Investing in precious metals don’t just involve buying and storing bars of them,” says financial advisor Lee Chin Lien. Essentially, when we talk about investing in precious metals, there are several ways to approach it: 

1. Commodity ETFs 
Lee says that exchange traded funds (ETF) are a convenient and liquid means of purchasing and selling precious metals, including gold.

2. Common stocks and mutual funds
You can alternatively buy stocks or mutual funds of companies that mine precious metals. Shares of precious metal miners are leveraged to price movements in the metals themselves, Lee says.

“However, unless you are aware of how mining stocks are valued, you may want to approach this only with the right fund manager to help,” he says.

3. Bullion 
Of course, one can buy precious metals in coins and bars, though Lee says it should only be an option for people who can afford to store them.

Physically buying these metals have the benefit of them being available at the worst of times, as you keep these metals close by. However, bullion is typically cast as ingots or bars and can be bothersome to store and keep safe.

4. Certificates 
This method offers investors the benefit of physically owning the precious metals without the hassle of transportation and storage.

“But if you’re looking for insurance in a real disaster, certificates are just paper, so it is also a risk in the end,” Lee says.

While precious metals make a good portfolio diversification, Lee says that one shouldn’t put too much money into them.

“Over investing is risky for any asset, but metals are volatile and the returns may not be that high,” he says.

Depending on risk appetite, Lee says one should only invest a ballpark of three to 10% of their portfolio in precious metals. “I’d say that would be the safer approach,” he adds. 



This article first appeared in Focus Malaysia Issue 243.