Since the first person picked up a rock and noticed that it was shinier than others, humans have been obsessed with precious metals. Precious metals are beautiful and rare, and they were the basis for most of our early monetary systems. To this day, they are still considered valuable the world over – and that, in turn, means that you can invest in them.
Why are precious metals valuable?
If you go into a jewelry store and look at gold, silver, and diamond jewelry, you’ll find plenty of pieces that are as expensive as they are beautiful. There are a few reasons for this, of course. First, the pieces are beautiful, and that creates demand. If people want to buy something, it will cost money! But that alone isn’t enough, of course – a poster print of a renaissance painting can be beautiful, but if will never cost you much cash. The craftsmanship of the actual jewelry makers is factored into the price, too, of course. That craftsmanship shouldn’t be understated, but it’s not the whole story, either. The final piece of the puzzle is rarity.
You’ve probably heard the fun fact that diamonds aren’t so rare as we’ve been led to believe. A monopoly held by De Beers has restricted the supply, though, so diamonds are rare to us, and we pay big bucks for them. De Beers has created “artificial rarity,” and the fact that they’d want to illustrates something important: rarity drives price. If Walmart had millions of diamonds to sell, they’d price them cheaply! But they don’t, and diamonds are in short supply, so we go to special stores and pay top dollar.
The artificial nature of the rarity doesn’t matter for buying jewelry, but it matters (along with some other factors) for investment purposes. So diamonds aren’t a good investment – they actually lose value when you buy them – but that’s not the case with some other rare natural rocks.
Unlike diamonds, gold and silver (as well as platinum and other rare metals) are not controlled by any one monopoly. And there’s only so much gold and silver in the world, so these precious metals are reasonably rare. That gives them value.
The rarity of these precious metals (and their ability to be molded into shapes) made them popular for early currency systems. Even when they were replaced, some old monetary systems pinned the value of their currency to gold (the “gold standard”). To be clear, gold doesn’t have “inherent value” in the way that something you can eat or use would – it’s valuable because we all agree that it is and because there’s a limited supply of it, so in this sense it works just like dollars or Euros or Yen.
Why invest in precious metals
If gold is just another monetary system without inherent value, then why invest in it?
Hedging against uncertainties
Imagine this: you hold nothing but investments in U.S. companies and money. Your savings accounts are in U.S. dollars and your stocks are in U.S. companies. Then the U.S. economy crashes. You’re in trouble, right?
If you had some gold, you’d be in less trouble, because gold is relatively independent of all this. If the U.S. dollar suffers from runaway inflation, that means it can buy less and less of everything – including gold! So if you have gold, you’re essentially seeing the value of your investment rise, at least relative to U.S. dollars.
Diversifying investment portfolio
Traditionally, gold is seen as “recession proof.” No investment is fully recession-proof, of course, but precious metals may hold their value better in tough times than things like stocks. You wouldn’t want to invest in only precious metals any more than you’d want to own only stocks, but a diverse portfolio that includes investments in gold and other precious metals as well as stocks and bonds will help you be better prepared in the event of an economic recession.
Takeaway
And that’s the whole idea behind investing in precious metals! Precious metals are rare things that have value worldwide because we all agree that they do. They can be swapped for currency just about anywhere, and they won’t necessarily plunge in value just because of a recession. That makes them valuable for investors looking for secure ways to diversify their holdings.