Precious metals are on a bull run but do these investments fare better than others? Some considerations before you jump in

Kimberly Wilson/graph provided by Bloomberg L.P

There is quite a bull run on precious metals right now, with gold futures hitting an all-time high today of $1535.80 an ounce and silver futures vaulting to $47.52 an ounce, also a record high. With the U.S. dollar sliding amid record-high budget deficits and an accomodative Fed monetary policy, few see gold and silver prices slowing down anytime soon. Uncertainty about financial stability remains at the fore after Standard & Poor’s Corp.’s warning on the U.S. debt outlook.

“Market turmoil in 2008 and 2009 introduced a lot of concern in the market for safe haven assets,” said Abraham Bailin, analyst for Morningstar Inc. And the pace of that trend has only quickened. But are precious metals really the best way to secure your money?  Here are some facts to consider before you buy.

Precious metal prices are volatile

If you want to invest in precious metals, you have to be willing to withstand many ups and downs, wrote Sonya Morris, Morningstar Inc. analyst, because shares in precious metals are not a sure bet.  For example, back in 2006, silver ETFs such as iShares Silver Trust, became extremely popular.  But in June that year, investors got shaken when the ETF tumbled 18.5 percent.  The iShares rallied back 13.2 percent that November before dropping 6 percent in December.  So while precious metals might seem like a golden ticket to wealth right now, be ready to hang on for the ride.

Some precious metals have higher tax rates

You might have thought you were getting taxed the 15 percent capital gains tax on precious metals, but not all investments are taxed equally.  The IRS considers gold and silver collectibles, and as such they’re taxed at a maximum rate of 28 percent on long-term gains.  However short-term profits are taxed at the same rate as ordinary income.

Industrial uses for precious metals can impact prices

 

While precious metals often provide solid returns during inflationary times, there are other drivers of demand that could leave you wondering why prices might be falling instead.  Silver, platinum and palladium all have industrial uses, which means they could have rapid price fluctuations outside of the market appetite to hedge inflation.  For example, silver is used in the production of flat-screen televisions, solar panels, mobile devices and more.  So when production in these products fluctuates, so will the prices of their inputs.  If you want your investment pegged only to inflationary risks, gold will be your best bet, as it has little industrial use.

How to invest in precious metals?

 

If you’ve decided you can weather the ups and downs of precious metals, Morningstar’s Bailin says they can offer a hedge against the risk of inflation and diversification for your portfolio. Here are some ETFs you might consider:

SPDR Gold Shares (GLD): This ETF is backed by gold bullion and performs in line with the performance of actual gold.  This fund has risen 28.37 percent over the past year and has generated a 15.65 percent three-year average return, according to Morningstar Inc.  This is a higher return than some ETFs that track gold-mining activities, such as GDX, which generated an 8.33 percent 3-year average return.

iShares Silver Trust (SLV): This is backed by silver metal and is the largest silver ETF. It has risen 21.84 percent over the past year and has generated a three-year average return of 29.22 percent, according to Morningstar.  This is a slightly higher return than PowerShares DB Silver which rose 21.35 percent.

For those who may be worried that gold is already peaking, analysts point out that when adjusted for inflation, gold has not yet hit its 1980 high. In today’s dollars, that would be between $2,200 and $2,300 an ounce.  Still, it can’t be emphasized enough that small investors should tread carefully.

“Gold has a role to play in your portfolio long-term,” Bailin said.  But he added:  You should be putting your eggs in more than one basket.

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