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Why Purchase Precious Metals?
The Comparative Advantage of Physical Possession
Precious metals have long been treasured both for their beauty and rarity. As a result, these metals have been used by many civilizations as a store of wealth, and in some cases, a foundation for currency.
Historically speaking, these stores of wealth have not experienced the kind of boom and bust cycles present in other forms of investment. This observed stability exists for several reasons. First, precious metals such as modern bullion have intrinsic value. The fact that precious metals consist of something that actually has value makes them more stable than fiat currency which is made of near-worthless paper.
In addition, these metals in many cases have practical applications. Moreover, in times of economic instability, investors wisely turn to the stability of precious metals. This increased demand has the effect of increasing their values, making them an even better investment.
Assessing Your Options
There are many ways to accumulate precious metals. When considering the acquisition of physical precious metals however, one is able to choose from the purchase of either modern bullion or numismatic coins. The single most important step in purchasing precious metals is learning first what the relative advantages and disadvantages to each type are. Besides that, your purchase should suit your preferences and interests. Accumulating coins should be interesting and fun. Coins are, after all, works of art expressed in precious metal!
Modern Bullion
The larger of the two markets for physical precious metals is that of modern bullion.
If considering bullion bars there are a few things to keep in mind. Generally speaking, the price of a modern bullion bar is dictated primarily by the spot price of its respective metal, and not a numismatic value. In addition, the bar, if issued by a minting authority, is likely to be guaranteed as to its quality and composition. These two facts greatly simplify the evaluation process whether you’re looking to buy or sell the asset. For this reason, modern bullion bars enjoy great liquidity on the market. If your eventual goal is to sell your precious metal purchase, and you’re not concerned with the asset earning collectible status, it may be prove wisest to go with a bullion bar.
If modern coins better suit your tastes however, slightly different conditions apply. While most modern coins minted by a government authority are certified as to their quality and composition, and are therefore relatively easy for which to establish some base price, there is the added potential benefit of numismatic value. Each minting of a particular coin is done in some fixed supply. This supply can never be expanded, which means that in the event of an increased demand for a particular issue, the numismatic value of the coin will increase, in some cases over and above the intrinsic value of the coin. The flip side to this is that some precious metals investors will be particular as to which coin they would like to buy. This can decrease marginally the liquidity of your investment.
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Lastly, there are purely numismatic coins. While these assets usually contain a high level of precious metals, they are valued primarily for their numismatic value. It is for this reason that when purchasing such a coin, one will pay far above the intrinsic value of the coin, and when selling it, can expect to collect much more than the intrinsic value of the coin. As should be expected, the market for such investments is smaller than that of the precious metals market on the whole. Depending on market conditions, it may be difficult to find either a buyer for such a coin; if you do however, you can expect to make great returns on your initial investment.
Determining How Much to Buy
The question of how much precious metal to buy boils down to one question: for which reason are you purchasing them? If coin collecting is a hobby of yours, and you enjoy spending the time it takes to learn the intricacies of the numismatic market, it may behoove you to purchase as much bullion as you can afford. You are certainly in the best position to evaluate how much of your time and money is worth investing in this market. If on the other hand, you are purchasing precious metals for the express purpose of investment, there are several factors you ought to take into consideration. Ultimately, how much of your portfolio you decide to dedicate to bullion should be determined by several price levels.
Price of Precious Metals
Perhaps the ultimate indicator dictating how much of any one metal to purchase is its price. How much of the metal can you actually afford? But being able to buy a quantity of an asset is no reason you should. Identifying trends within the price level of the commodity in which you are interested may be helpful in determining whether you want to buy or not. If you expect, based on the trend you have noticed, that the price of the particular metal will rise after you purchase and before you sell, you’ll likely want to purchase as much as you can.
Price of the Dollar
Gold, and to a lesser extent other precious metals, has often been referred to as “the anti-dollar.” Rather than being some ominous suggestion as to the role of these assets in times of economic turmoil, the term outlines quite simply the relationship precious metals have with the U.S. dollar.
In general, the price of these assets is observed to make moves of proportional magnitude in an inverse direction. That is, if the value of the dollar against other trade-weighted currencies falls, one can expect the value of precious metals to rise, and vice versa. This is thought to be the result of a multitude of investors enjoying the comparative liquidity and robustness of dollar-denominated assets during times of a strong dollar, but taking refuge in the comparative safety of precious metals during times of a weak dollar.
The simple principle of supply and demand is at work here, stating that as more investors move to a particular asset, demand for the other will fall, and so will its price. Determining, based on trends in the value of the Dollar, how much of a particular asset to buy can be tricky. Experiment with smaller fractions of your portfolio until you’re confident you have a handle on common price-altering mechanisms.
Quality Concerns
Regardless of which form of modern bullion you decided to purchase, quality ought to be of concern. Coins, even those of the same grade, often show significant variation in eye appeal. This is true because some characteristics of a coin, such as light copper spots or reduced luster, do not necessarily affect a coin’s grade.
Determining the quality of a potential purchase is an imperative step in deciding how much to purchase. Not only will this affect the purchase price of your investment, but it will almost certainly affect its re-sale value as well.
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