Invest In Precious Metals Mutual Funds: Diversify Your Portfolio

Precious metals mutual funds are an investment option that focuses on mining stocks and, to a lesser extent, the physical metals themselves. Gold is the most popular precious metal for investment, and gold-mining stocks are the primary allocation in most portfolios. However, some funds also offer exposure to other precious metals, such as silver, platinum, and base metals. These funds can be a good way to diversify an investment portfolio and hedge against inflation. The performance of precious metals funds varies, with some delivering average annual returns of around 10-16% over a five-year period.

Gold and silver bullion

The London bullion market has created a system that verifies gold bars, starting with the manufacturer, the assayer, and the storage facilities in LBMA-recognised vaults. This best practice has reduced the risk of counterfeit bars entering the system. Silver is also well-regulated, providing investors with a transparent market where their money is safe as long as they deal with registered, reputable brokers and dealers.

Precious metals like gold and silver are an excellent hedge against economic turmoil and inflation. Their value tends to rise when mainstream assets fall, so gold and silver investments thrive during times of economic instability. Gold and silver prices have remained relatively stable over the years and are not affected by volatility in the same way that other asset classes are.

However, there are some disadvantages to investing in gold and silver bullion. There is no income from owning bullion unless it is sold. There are also costs associated with buying, selling, and storing gold and silver. The spread between the buying and selling price is higher for physical bullion than for electronic assets. Additionally, investors need to pay for secure storage, either in their home or through a professional storage solution.

Diversifying your portfolio

• Reducing Risk: Diversification is a key investment strategy to reduce risk. By investing in precious metals mutual funds, you can lower the overall risk of your portfolio. Precious metals often have a low or negative correlation with other asset classes, such as stocks and bonds. This means that when the stock market or other investments are performing poorly, precious metals may hold their value or even increase in price, thus balancing out the losses in other areas of your portfolio.
• Inflation Hedge: Precious metals, particularly gold, have historically been seen as a hedge against inflation. As inflation rises, the purchasing power of paper currencies decreases, but the value of precious metals tends to increase or remain stable. Including precious metals mutual funds in your portfolio can help protect your wealth during times of high inflation or economic uncertainty.
• Long-Term Capital Growth: Many precious metals mutual funds focus on long-term capital growth. These funds typically invest in mining stocks of companies involved in the exploration, mining, and processing of gold and other precious metals. By investing in these funds, you gain exposure to the metals industry without having to purchase and store physical metals yourself.
• Exposure to Multiple Metals: While gold is the most popular precious metal for investment, mutual funds can offer exposure to a variety of metals. Some funds invest in gold, silver, platinum, and other base metals. This diversification within the precious metals sector can further reduce risk and provide a more well-rounded investment strategy.
• Global Exposure: Precious metals companies are typically headquartered in countries with significant deposits of these resources, such as the United States, Canada, Australia, and South Africa. By investing in precious metals mutual funds, you gain exposure to a global industry. This diversification across different economies and markets can help reduce the impact of country-specific or regional economic downturns.
• Volatility and Returns: Precious metals mutual funds can add a layer of volatility to your portfolio, which can be beneficial when managed appropriately. While these funds may experience more volatility than the average equity or stock fund, they can also provide higher potential returns. The average annual returns for precious metals funds have been around 16.56%, with some funds offering even higher returns over the years.

In conclusion, investing in precious metals mutual funds can be an effective way to diversify your portfolio. By including these funds, you can reduce risk, hedge against inflation, gain exposure to a global industry, and potentially achieve long-term capital growth. Remember to consider your investment goals and risk tolerance when deciding if and how much to invest in precious metals mutual funds.

Hedging against inflation

Precious metals, such as gold, silver, platinum, and palladium, are considered a good hedge against inflation. This is because they are seen as a good store of value, having held their worth over long periods of time. Gold, for example, has been used as a form of currency for thousands of years and is still recognised as a global currency.

Precious metals are also a finite resource, and their rarity gives them high economic value. This means that they are often in high demand, which can push up prices. As a result, precious metals can be a good way to protect the purchasing power of an investment portfolio against the negative effects of inflation.

The Victory Capital Precious Metals and Minerals Fund, for instance, seeks to preserve the purchasing power of capital against inflation and to reduce portfolio volatility. To achieve this, the fund typically invests at least 80% of its assets in companies that are primarily involved in the exploration, mining, or processing of gold, silver, and other precious minerals.

Precious metals mutual funds can be a good option for investors looking to hedge against inflation, as they can provide exposure to the metals industry without the need to purchase and store physical metals.

Mining stocks

• Majors are well-capitalised companies with long histories, global operations, and steady cash flow. They are often large, diversified miners with low-cost operations and strong balance sheets. Examples include Barrick Gold, BHP Group, and Rio Tinto.
• Juniors are smaller, newer companies with less capital and shorter histories. They are riskier ventures, mainly involved in commodity exploration, and have high hopes for future returns. Juniors either fail, get acquired by majors, or occasionally strike a large deposit that the market demands.

When investing in mining stocks, it's important to consider the cyclical nature of the industry. Demand for mined materials typically increases during economic expansions, while mining stock prices tend to decline during recessions. Additionally, investors should be aware of the risks unique to the mining industry, such as commodity price fluctuations and geopolitical factors.

If you're considering investing in mining stocks, it's crucial to carefully evaluate the instrument, including the financials of the company and the prospects of the specific industry.

Precious metals companies

Precious metals portfolios primarily consist of mining stocks, with companies involved in the mining of metals such as gold, silver, and platinum. Some funds, however, purchase small to moderate amounts of gold or silver bullion. While the primary allocation is given to gold mining stocks, many funds also offer significant exposure to other precious metals.

The bulk of metals investment funds hold a large portion of their assets in the stocks of mining companies, though some do purchase physical metals. For example, the Fidelity Select Gold Portfolio Fund invests a minimum of 80% of its total assets in gold-related operations and gold bullion and coins.

Some well-known precious metals companies include:

• Allspring Precious Metals Fund
• Fidelity Select Gold Portfolio Fund
• Gabelli Gold Fund
• Victory Capital Precious Metals and Minerals Fund
• Invesco Gold and Special Minerals Fund

Frequently asked questions