Top 5 Metals To Invest In
Metals can serve as a solid addition to your investment portfolio.
Published on 31 October 2017
With stock markets around the world hitting record highs this year, it is tempting to allocate a greater portion of your portfolio to equities. However, this may not be the best approach to follow. When the market crashes, you could sustain significant losses.
An investment in precious metals can help you to diversify your holdings – and thereby protect you against risk. Here we take a look at the top 5 precious metals to invest in.
The first option that comes to mind when thinking about an investment in precious metals is gold. It has been a favourite among investors for millennia and with good reason. In addition to balancing your portfolio, gold has several other attributes that make it an ideal investment. It is a hedge against inflation and retains its buying power when paper currency depreciates in value.
Another useful characteristic of gold is that it will usually not drop dramatically in value when there is an economic or political crisis. In fact, gold usually registers gains at times like these. For example, gold prices soared when the results of the Brexit vote were announced last year. More recently, gold prices spiked when North Korea conducted a nuclear test.
Gold prices are known to have a negative correlation with the stock market. Typically, when equity valuations nosedive, there is a fair chance that gold prices will surge upwards. When world stock markets collapsed in September 2008, gold was trading at about US$880 an ounce. Within a year of the crash, gold was at US$996. By September 2010, the precious metal’s price had risen to US$1,307. In August 2011, gold valuations peaked at US$1,900.
It is also very easy to invest in the precious metal. Buyers can opt for a gold ETF or physical gold in the form of coins or bars. You can even buy the shares of a gold mining company – although this could be a high-risk investment.
Palladium is a metal that is extensively used in the auto industry – it is utilised to make catalytic converters and the exhaust systems that help transform harmful pollutants into carbon dioxide. Demand for palladium has surged by 33% this year on the back of increased buying by car manufacturers.
The silvery white metal is mined in South Africa and Russia. Limited supply volumes have resulted in sharply rising prices. A year ago, palladium was at US$638 per ounce. On 25 October 2017, the price was 50% higher at US$962.
The demand for the metal is expected to remain strong as car manufacturers continue to face tightening emission standards. Johnson Matthey – a British manufacturer of catalysts for vehicles – estimates that the palladium market deficit will widen to 792,000 ounces in 2017, up from 163,000 ounces last year.
However, the surge in demand has attracted an increasing level of interest from speculators. The Financial Times reports that in the first six months of the year, there was a three-fold increase in speculative wagers on palladium.
Investors should remember that demand could fall with a decline in auto sales – as about 78% of the total quantity of palladium produced is used by the auto industry.
Cobalt has a wide range of industrial applications. It is used to make alloys for jet engines and gas turbines and is also used in the manufacture of certain types of stainless steel. But in recent times, the demand for cobalt has risen because it is used in the manufacture of lithium batteries. Electric cars, which are expected to see a rapid rise in production in the coming years, use lithium batteries as their power source.
Currently, there are about 2 million electric cars on the world’s roads. By 2020, this figure is expected to reach approximately 6.5 million. This will ensure increased demand for cobalt. Additionally, new battery technology favours using cobalt.
There has been a steep increase in cobalt prices this year: the precious metal was available at about US$12.5 a pound a year ago and today, and it currently trades at around US$27.
The supply of cobalt is restricted, as around 65% of the world’s cobalt is mined in the Democratic Republic of Congo. A unique feature about this metal is that only 6% is mined directly. The remaining 94% of cobalt is obtained as a by-product of copper and nickel mining – this results in erratic production volumes.
Platinum has a wide range of industrial applications. It is also used in jewellery and in the manufacture of medical devices. But one of its primary applications is as an auto-catalyst in diesel vehicles – it helps in converting diesel exhaust into carbon dioxide and water vapour.
However, two factors have led to a decline in the demand for the precious metal. Diesel vehicles are falling out of favour because of the pollution that they generate. Due to this reason, there has been a dip in the demand for platinum. Additionally, gasoline powered vehicles, which can also use platinum as catalysts, are increasingly using palladium in their catalytic converters.
Platinum prices have been in a gradual state of decline over the last five years. With electric vehicle manufacturers expected to ramp up production capacity, the demand for cars powered by fossil fuels is expected to decline.
The world’s largest car manufacturer, Volkswagen, says that it will make one million electric vehicles by 2020, up from just 80,000 in 2016. With the shift away from combustion engines and especially diesel-powered vehicles, platinum prices may remain depressed.
However, the precious metal has several other applications and could be a profitable long-term play especially as its value is currently quite low.
Lithium is one of the lightest known metals, and this quality makes it a natural choice for manufacturing certain high-performance aircraft parts. It also has medical applications, and is used to treat bipolar disorder.
But in recent times, lithium has become an attractive investment option because of its use in making batteries for cars and mobile phones. You can invest in lithium by buying shares in a company that mines the metal or by purchasing shares in an ETF that tracks the performance of several mining companies.
In mid-October, the spot prices of lithium in China were reportedly at a level of US$23,000 per ton, marking a 28% increase over the price at the beginning of the year.
Increased lithium prices are primarily due to supply not being able to keep up with demand. But lithium production capacity is being ramped up and it is expected that supply will increase to 500,000 tons by 2020 from the current level of 200,000 tons. There is an adequate volume of lithium available in the earth’s crust, and with rising production, the metal’s price could fall.
However, lithium miners may find it difficult to meet the massive rise in demand. Dr David Deak – a former Tesla engineer and currently the chief technical officer at Lithium Americas, a company that is developing a lithium mine in Argentina – says that production needs to rise to an average of 3.1 million tons for 20 years to meet the expected demand.
Investing in precious metals is an excellent way to diversify your investment portfolio and mitigate risk. Gold is a perennially popular choice, but you need to be ready to stay invested for the long-term. Other metals also provide excellent opportunities. However, the demand situation for a metal and market prices can change very fast. You need to carefully monitor your investments and be prepared to react if price trends change.