Are precious metals really safe havens?
In times of inflation, economic difficulties and geopolitical conflicts, precious metals have offered a life raft to reeling investors. Gold has long been considered a sound investment in turbulent times, and modern investors also add silver, platinum and palladium to their portfolios to hedge against inflation, but why are these precious metals such safe havens?
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A brief history of precious metals
Beauty, art and commerce are some of the reasons why precious metals were coveted by different ancient civilizations around the world. The Egyptians, Greeks, and Incas placed great cultural importance on gold and silver, using it to create religious objects, ceremonial tools, and jewelry. Also, with advanced civilization came advanced trade, meaning that currency became a key factor in the rise in popularity and mining of these precious metals.
In the year 600 a. C., King Alliates of Lydia minted what is considered the first official coin: the Lydian stater, which was made from a mixture of gold and silver that occurs naturally.
Gold, in particular, has often been used as currency throughout history because it is rare, hard to come by, malleable, and does not corrode. In fact, until the early 20th century, many countries around the world were still using gold coins as a form of currency.
What is a safe haven?
In times of uncertainty, investors look for opportunities to diversify their assets and keep their portfolios stable while the market recovers. A safe haven is a form of investment that is expected to retain or increase in value in times of market turmoil. These investments are uncorrelated or negatively correlated to the general market, meaning they are not tied to the large fluctuations of traditional markets. As such, they can help limit exposure to losses and strengthen holdings.
For example, gold is often considered a safe haven for investors because it is a physical asset that has historically held its value over time. Unlike paper money, it cannot be produced exponentially, which is why many see gold as a form of insurance or safety net against economic volatility.
When the market is rough, the market value of most investments drops sharply. Although these systemic market events are inevitable, some investors look to buy assets as a safe haven in times of trouble. While most assets lose value, safe-haven assets maintain or increase their value, depending on the specific conditions of a market crisis.
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Benefits and practical uses of precious metals
Although gold and silver are no longer used as currency, their modern utility, along with other precious metals such as platinum and palladium, is not in doubt, as they are essential to modern manufacturing methods and pervasive in coin technology. daily consumption, such as electronics, mobile phones, cars and airplanes. Let’s examine each of them in more detail.
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Gold
No commodity is totally guaranteed to survive the torrents of turbulent markets, but there is a reason why many investors tend to flock to gold when times are tough. Whether due to geopolitical turmoil, or periods of extreme inflation or rapid deflation , gold is considered a safe commodity as it does not typically fluctuate with market prices. As a scarce and tangible asset in limited supply, gold is considered a store of value when the value of other assets and fiat currencies can be manipulated. Ultimately, gold’s intrinsic value, coupled with mankind’s multi-millennium history of coveting the precious yellow metal, often make it a trusted choice for investors.
In terms of practical use, about half of all gold in existence is used in jewelry, meaning that much of its high value lies in its aesthetic appeal. Only 10% of gold is used for industrial purposes, which radically differentiates it from other precious metals. However, gold is highly malleable, does not corrode, conducts electricity and is highly resistant to heat, which means it is a perfect material for electrical components and has even been used for shielding in space exploration.
Silver
Just as gold is often considered a safe haven for investors, in recent times silver has also become an attractive alternative for those seeking stability in tumultuous economic climates. Silver has historically experienced more price swings than gold as it has a higher rate of use in manufacturing and therefore fluctuates with industrial supply and demand cycles. However, it is still chosen as a safe asset by some investors as it can provide a low negative correlation with other assets and can reduce overall risk.
Silver’s unique properties, such as its ductility and its thermal and electrical conductivity, lend themselves to increased technological and manufacturing use; 50% of the precious metal is used for industrial purposes. The production of solar cells, air conditioning, semiconductors, batteries and nanotechnology depend on silver. Furthermore, silver is also in the medical industry as it is one of the few metals with antibacterial properties. These strong links to industry mean that demand for silver is often correlated with industrial demand, and its price can be linked to global economic output.
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Platinum
The word “platinum” conjures up images of unlimited credit cards, jewelry, and best-selling records, but this precious metal wasn’t always as popular as it is today: In the 16th century, Spanish explorers often mistook platinum for an impure form of gold. or silver.
However, since World War II, platinum has become increasingly important as an industrial metal due to its resistance to tarnishing and corrosion, its high melting point, and the fact that it is one of the least reactive metals.
Although the scarcity of platinum makes it desirable for jewelry, 65% of the world’s supply goes to industrial and automotive use. This unique precious metal is used primarily as an essential component in catalytic converters that transform harmful emissions into carbon dioxide and water, and almost a third of newly mined platinum is used in these devices. Other uses for platinum include fuel cells, neurosurgical and dental tools, cancer drugs, and computer equipment. Like other precious metals, the price of platinum is considered to be negatively correlated with the stock market., which means that investors consider it a useful option for portfolio diversification and a safe bet against economic instability.
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Palladium
Although palladium was not discovered until 1803 and is relatively new compared to the precious metals mentioned, it is actually the most valuable of the quartet due to its multitude of uses and its scarcity. Palladium is used in a wide range of industries, often as a substitute for platinum in jewelry, electrical contacts, and catalytic converters. For a long time, platinum was the metal of choice for automakers, but as prices rose, palladium became a viable alternative. Palladium is also found in dental alloys, in hydrogen purification, groundwater treatment, and even in the production of concert flutes!
Unlike other precious metals, palladium is not particularly associated with wealth or exclusivity, but it is extremely rare, with high demand and low supply, making it attractive as a risk hedge.
However, like silver and platinum, palladium is somewhat dependent on industrial demand, so its price may be tied to the global economy.
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Are precious metals a good investment?
It’s important to remember that there are no absolute certainties when it comes to investing, and safe bets in one period of market turbulence might be different in another. However, precious metals have often been singled out as a safe haven in the past and will likely continue to be so in the future. In an unpredictable world with increasing geopolitical tensions, precious metals will be able to function as a good portfolio diversifier and hedge against inflation.
Historically, gold has been bought as a way to protect assets, and its price has tended to rise in times of economic crisis. In times of uncertain markets, people often turn to hard assets to store their wealth in the event of a market crash: following the 2009 financial crisis, the price of gold reached its highest peak in history.
Are you interested in learning more about investing in precious metals?
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Comment by Hans
April 24, 2024
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