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Why invest in precious metals? Research Team | Posted On Friday, April 24,2009, 04:56 PM

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Why invest in precious metals?



1. Gold as an investment

In all the precious metals, gold is the majority popular as an investment. Investors usually buy gold as a hedge or safe haven against any economic, political, social, or currency-based crises. These crises include investment market declines, inflation, war, and social unrest. Investors also buy gold during times of a bull market to gain financially.

Gold price

Throughout history the gold has frequently been used as money and instead of quoting the gold price, all other commodities were measured in gold. After World War II a gold standard was established when the US closed the direct convertibility of the United States dollar to gold. Since 1968 the usual benchmark for the price of gold is known as the London Gold Fixing, a twice-daily (telephone) meeting of representatives from five bullion-trading firms. Furthermore there is active gold trading based on the intra-day spot price, derived from gold-trading markets around the world as they open and close throughout the day.

2. Silver as an investment

Silver is like other precious metals may be used as an investment. For more than thousand years silver has been regarded as a form of money and store of value.

Silver price

The price of silver has been notoriously unstable as it can vary between industrial and store of value demands. At times this can cause wide ranging valuations in the market creating instability. Silver often tracks the gold price due to store of value demands, even though the ratio can vary. The gold and silver ratio is frequently analyzed by traders, investors and buyers.

3. Palladium as an investment

Palladium may be used as an investment. Palladium price peaked near US$1,100 per troy ounce in January 2001 (approximately US$1300 in 2007 dollars) driven mostly on speculation of the catalytic con1verter demand from in the automobile industry. In recent years palladium surplus condition was caused by the Russian government selling off government stockpiles built up throughout the Soviet Era, at a pace of about 1.6 to 2 million ounces a year. The amount and status of this stockpile is kept as a state secret.

Exchange-traded funds

ETFS Physical Palladium (LSE: PHPD) is backed by allocated palladium bullion and was the world's first palladium ETF. Listed on LSE, Euronext and Milan.

Bullion coins and bars

An old way of investing in palladium is buying bullion coins and bars made of palladium. Available palladium coins include the Canadian Maple Leaf and the Chinese Panda. The liquidity of direct palladium bullion investment is not as good as gold and silver due to low flow of palladium coins and wider spread between buying and selling price.

4. Platinum as an investment

Platinum has a much shorter history in the financial sector than either gold or silver, which were known to very old civilizations. Platinum is comparatively scarce even among the precious metals. New mine production totals approximately only 5 million troy ounces a year. In difference gold mine production runs approximately 82 million ounces a year, and silver production is approximately 547 million ounces. As such it tends to trade at higher per-unit prices.

Platinum is traded on the New York Mercantile Exchange (NYMEX) and the London Platinum and Palladium Market. To be saleable on most commodity markets, platinum ingots must be examined and hallmarked in a manner similar to the way gold and silver are.

The price of Platinum changes along with its supply and demand. During periods of continued economic stability and growth the price of platinum tends to be as much as twice the price of gold whereas throughout periods of economic uncertainty, the price of platinum tends to decrease due to reduced demand, falling below the price of gold, partly due to increased gold prices.

Exchange-traded funds

Platinum is traded on the London Stock Exchange as an exchange-traded fund under the ticker symbol LSE: PHPT.

Platinum coin

Platinum coins are another way to invest in platinum though relatively few varieties of platinum coins have been minted due to its cost and difficulty in working.

5. Diamonds as an investment

Diamonds are known as gemstones since the ancient times. Popularity of diamonds has risen since the 19th century because of successful advertising in spite of a greatly increased supply. Diamonds are not generally used as a mainline store of value during times of crisis, due to their lack of fungibility and low liquidity. However, they may still be useful during times of hyperinflation. Approximately 20% of mined diamonds are used in jewelry and 80% for industrial uses (such as lasers, drill parts and surgical equipment).

Diamond price

Historically the wholesale diamond price has been controlled by De Beers Group which has an estimated 40% to 50% of the market. Botswana is currently the largest creator of diamonds with mines operated by Debswana, a joint venture between De Beers and the Botswana government. The price of diamonds fluctuates with global demand and the world economy. Diamond prices vary widely depending on a diamond's carat, color, clarity and cut (The 4 C's). In contrast to precious metals there is no universal world price per gram for diamonds. The industry does use tools such as the Rapaport Diamond Report and The Gem Guide which are published weekly or quarterly, as a price references.

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