How to Finance Precious Metals
You can finance precious metals many ways, from simply buying gold and platinum jewelry with store credit to leveraging warehoused gold to buying precious metal futures on margin. Each method has its own positives and negatives but, with precious metals appreciating rapidly over the past several years, many investors are interested in learning how to invest in and finance the purchase of these metals. The methods progress from the simplest method of financing precious metals to the most complex and risky.
- Difficulty:
- Moderately Challenging
Instructions
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Buy jewelry on credit at a jewelry store. This is the simplest method, but also the method with the least upside. You can purchase gold and platinum jewelry with either store credit or a credit card to finance the purchase. Unfortunately, you'll be paying retail prices for the metal and the interest rate will be very high (relative to other methods). Jewelry is not typically investment grade and the value depreciates rapidly.
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Invest in precious metal coins. Numismatics is the study of coins, and a reputable numismatist can recommend gold or silver coins that are likely to appreciate in value over time. Coins have long been a popular investment and some, such as the South African Krugerrand, have consistently been a store of value and a safe harbor during inflationary market cycles. Financing the purchase of precious metal coins can be done with a credit card, but a better method is to get bank financing. The interest rate will be lower, the terms will be better, and the bank will be more inclined to loan the money if the coins are held for safekeeping in their vault. When purchasing precious metal coins, keep the dealer's commission in mind because it increases the cost of each coin purchased.
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Invest in leveraged warehoused metals. Leveraged metals schemes have been around since the 1970s and gained popularity in the 1980s after the Hunt brothers attempted to corner the silver market. Unfortunately, leveraged metal investing is appropriate for almost no one. Essentially, the investor makes a down payment on an amount of gold or silver and receives a warehouse receipt instead of the metal. If the metal appreciates in value, the investor potentially makes money. However, due to the high commissions and exorbitant warehouse storage fees, if the price of the metal remains flat or declines, it is possible for the investor to lose everything and then be forced to send in more money to satisfy an equity call.
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Buy a precious metals futures contract. By far the most common way to finance the purchase of precious metals for investment purposes is to buy a futures contract on the metal of your choice. When purchasing a futures contract, the investor makes a down payment (known as initial margin) and the rest of the value of the contract is financed. If the price of the metal goes up, the holder of the futures contract makes money. If the price goes down, however, the holder of the futures contract must send in more money (known as maintenance margin) to maintain the position. Futures are extremely risky and are only appropriate for the most seasoned investors.
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Tips & Warnings
It is possible to finance the purchase of precious metals, but it is almost always a better idea to pay cash for metals if you plan to hold them for the long term.
Investing in leveraged metals and futures is extremely risky. You can lose your entire investment and end up owing even more money.
