How to Invest in Gold & Precious Metals

Precious metals are often seen as a hedge against inflation.

With concerns about the strength of the U.S. dollar, the size of the U.S. deficit, and potential inflation, many investors have begun to look at investing in precious metals as a hedge to protect wealth. The most common examples of precious metals are gold, silver and platinum. It used to be that to add precious metals to a portfolio, an investor would have to buy the physical asset and then would have the risk and/or cost of safely storing it. However, today an investor can have the portfolio protection of precious metals by purchasing a futures contract that will give the investor the price appreciation (or loss) of gold, silver or platinum. Actual delivery of the metal can be deferred, eliminating the need and cost of safe storage.

Instructions

1. Research and select a futures broker. There are several available with varying services, such as online brokerages (no assigned broker), and brokerage services where you have your own personal broker available to answer your questions and execute trades on your behalf.

2. Set aside funds to pay for the metal. It is best to set aside the full purchase price in advance, although that is not required. If gold is trading for $1,000 per ounce set aside with your broker $100,000 to facilitate the purchase of 100 ounces.

   The exchange has a minimum amount you must keep with your broker depending on the current market price--for example, 5 percent of the total value. The amount is called the margin, and your broker will advise you on this.

3. Buy a futures contract on the specific precious metal(s) that you would like for your portfolio. A futures contract entitles you to the delivery of the metal on a particular date.

   For example, purchasing one futures contract of gold will entitle you to the delivery of 100 troy ounces of gold for the months of February, April, June, August or December, up to five years in the future.

   Silver is sold in futures contracts for 5,000 troy ounces, and platinum is sold in contracts of 50 troy ounces.

   Your portfolio now has a precious-metal component.

4. Take delivery of your metal after the expiry of the contract, or sell the futures contract before the contract expires. If before the expiry date you decide that you no longer want to take possession of the metal you can sell the futures contract. Your broker will provide you with the profit; if the price has declined, you pay the loss.

Tips & Warnings

• If the size of a full futures contract is daunting, discuss with your broker purchasing a smaller size, called an "e-mini."

• Even if you do not set aside the full amount to purchase the metal, always keep multiples of the required margin. Futures contracts can have volatile swings that lead to heavy losses for investors carrying the minimum or a low margin.

• There is a great debate on whether precious metals are a true hedge or not. If you choose to invest in precious metals, it's best to do so as part of a diversified portfolio.

References

• CME Group: Gold Futures