Three of the more common reasons for investing in precious metals (for example, gold, silver, platinum, palladium, etc.) are diversification, inflation protection and portfolio insurance.
Diversification means precious metals as a group will behave differently than other asset classes over time.
Precious metals – gold being a popular example – are also seen as a store of value. Since there’s a finite supply, many investors find the metals attractive when governments print large amounts of currency. The additional supply decreases the worth of the currency over time leading to higher inflation.
Investors in precious metals often see calamitous world events as additional justification. They take solace in knowing that no matter how crazy things get, they hold an asset that will always have value to someone, somewhere.
Now how do you invest in precious metals? You can buy the metals directly, or – perhaps more likely – invest in mutual funds, Exchange Traded Funds (ETF’s) or shares in companies that work directly with the metals (for example, gold mining companies).
If you choose to invest in precious metals, please keep in mind that they can be quite volatile. Furthermore, unlike most assets that generate an income stream, they are particularly difficult to value.