What it means
What makes a metal precious is scarcity combined with durability, so it does not corrode, rust or get consumed the way most commodities do. Almost all the gold ever mined still exists somewhere, which is exactly why it works as a store of value across long periods.
They matter to businesses and investors for two quite different reasons. For an investor, precious metals often move differently from shares and bonds, which can steady a portfolio when equity markets fall; for a manufacturer, silver, platinum and palladium are inputs into electronics, catalytic converters and medical devices, so the price is a direct cost exposure.
Exposure can be taken physically, through bars and coins held in a vault, or on paper through exchange-traded funds, futures contracts or shares in mining companies. Physical holdings carry storage, insurance and verification costs, typically a fraction of 1% of value each year, while paper exposure trades cheaply but introduces counterparty risk, meaning you rely on another institution honouring its side.
The key nuance is that precious metals produce no income. A bond pays a coupon and a share may pay a dividend, but an ounce of gold sitting in a vault pays nothing and costs money to keep, so the entire return has to come from the price rising.
Prices are quoted per troy ounce, which is about 31.1 grams and slightly heavier than the ordinary ounce used for groceries. Quotes are almost always in US dollars, which means an investor outside the dollar zone is running a currency exposure alongside the metal exposure whether they intended to or not.
In practice
Real-world examples.
Example
A jewellery retailer buying gold six months ahead of the Christmas season fixes its metal cost using futures contracts, so a sudden rise in the spot price does not squeeze margins on stock that has already been priced in the catalogue.
Example
A pension fund with 70% in equities allocates 5% to a physically backed gold exchange-traded fund, not because it expects gold to outperform, but because it wants an asset that historically has not fallen in step with shares during market shocks.
Example
An electronics manufacturer using palladium in its components sees the metal price double within a year and has to choose between absorbing the cost, redesigning the part to use less palladium, or passing the increase on to customers.
Think of it
“Precious metals are valuable metals-gold, silver, platinum.
Formula
Calculation
Value of a holding = Quantity in troy ounces x Spot price per troy ounce
Net return = (Closing value - Opening value - Carrying costs) / Opening value
A family investment company holds 250 troy ounces of gold. With gold at a spot price of $2,400 an ounce, the holding is worth 250 x $2,400 = $600,000. Against a total portfolio of $5,000,000, that is $600,000 / $5,000,000 = 12% of assets.
Over the following year the gold price rises 10% to $2,640 an ounce. The holding is now worth 250 x $2,640 = $660,000, an unrealised gain of $60,000.
Vaulting and insurance are charged at 0.5% of the average value over the year. The average of $600,000 and $660,000 is $630,000, so carrying costs are $630,000 x 0.005 = $3,150.
Net gain = $60,000 - $3,150 = $56,850. Net return = $56,850 / $600,000 = 9.5% for the year, against the 10% headline move in the metal price.Case study
Seen in the real world.
Halberd Family Office is an illustrative, fictional wealth manager looking after $5,000,000 for a retired founder who wanted "something that is not shares". The adviser proposed a 12% allocation to physical gold held in an allocated vault account, on the understanding that it would generate no income at all.
The first year justified the decision on paper: the metal rose 10%, and after $3,150 of vaulting and insurance the position returned 9.5%. The second year was flat in price terms, and the same carrying cost turned a zero return into a small loss, which is precisely the trade-off the adviser had described up front.
The useful lesson from this fictional example was not about the return but about the framing. Because the client had agreed in advance that the allocation was there to reduce swings in the portfolio rather than to produce income, the flat year prompted no panic and no selling at the wrong moment.
Watch out
Common mistakes.
- Expecting precious metals to pay income. They generate no coupon or dividend, so a holding costs money to store every year and only rewards you if the price rises.
- Assuming gold always rises when inflation rises. The relationship holds loosely over long periods but breaks down over months and even years, and investors who bought expecting a mechanical hedge have often been disappointed.
- Treating a mining share as equivalent to the metal. Mining companies carry operating costs, debt, political risk and management risk, so their share prices can fall even in a year when the underlying metal rises.
Questions
People also ask.
Is physical metal safer than an exchange-traded fund?
Physical metal removes counterparty risk but adds storage, insurance and authentication costs plus the practical difficulty of selling quickly, so neither is simply safer than the other.
How much of a portfolio should sit in precious metals?
There is no universal figure, but diversified portfolios that include them commonly hold somewhere between 2% and 10%, sized as an insurance position rather than a growth engine.
Why are prices quoted per troy ounce?
A troy ounce is the traditional unit for precious metals at about 31.1 grams, heavier than the ordinary ounce, and mixing the two up will overstate the value of a holding by roughly 10%.
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