What it means
Precious metals are valued because they are scarce, durable and hard to produce in large amounts. Gold and silver have served as money and jewellery for thousands of years, while platinum and palladium are widely used in industry, especially in catalytic converters for vehicles.
Their prices are quoted in dollars per troy ounce on global markets. For businesses and investors, these metals play two roles.
They are an investment, often bought to protect wealth when currencies weaken or markets are uncertain. They are also a raw material, so jewellers, electronics makers and carmakers need to manage the cost of buying them.
You can hold precious metals in several ways: physical bars and coins, exchange-traded funds that track the price, futures contracts, or shares in mining companies. Each route has different costs and risks.
Physical metal needs secure storage and insurance, and funds charge annual fees. Precious metals pay no interest or dividends, so their return comes entirely from price changes.
That makes them quite different from bonds or shares, which pay income while you wait. Prices can swing sharply with interest rates, the strength of the dollar and investor mood.
For accounting purposes, a company holding metal as inventory or as an investment must follow the rules for valuing it, which may involve marking it to market. A business that uses metal in production often uses hedging, such as futures, to fix its future cost.
The key is to treat precious metals as a price-driven asset rather than an income-producing one. Market structure also matters.
Gold trades almost around the clock through London, New York and Asian centres, and a benchmark price is set each day, while industrial metals such as palladium have thinner markets and can move sharply on supply news. A buyer should always check how easily a position can be sold before committing a large sum.
In practice
Real-world examples.
Example
A jeweller in a busy market buys gold in bulk each quarter to make rings and necklaces. To avoid being hurt by a sudden price jump, it agrees a futures contract fixing next quarter's purchase price. The jeweller can then price its products with confidence.
Example
A car parts manufacturer relies on palladium and platinum for exhaust catalysts. Its finance team reports the metal cost separately and reviews the price each month. When prices rise, the company adds a metal surcharge to its invoices.
Example
A family office holds 5% of its portfolio in physical gold and silver as protection against currency weakness. It stores the metal in a secure vault and pays an annual fee. The office accepts that the holding produces no income.
Formula
Calculation
Value of holding = quantity in troy ounces x price per troy ounce.
An investor buys 50 troy ounces of gold at $2,000 per ounce, paying $100,000. Later the price rises to $2,300 per ounce, so the holding is worth 50 x $2,300 = $115,000. The gain is $115,000 - $100,000 = $15,000, a return of $15,000 / $100,000 = 15%. Storage and insurance costs would reduce this net result. If the metal were instead held at a dealer who buys at a price 2% below the market, the realisable value would be $115,000 x 0.98 = $112,700. That is why the gap between buying and selling prices, known as the spread, should be taken into account when judging the real return.Case study
Seen in the real world.
Brightwater Electronics is a fictional company used here to illustrate the idea. It buys small amounts of silver and gold for circuit connectors, and metal represented about 8% of its cost of production.
When metal prices rose sharply over a single quarter, the illustrative company's gross margin shrank by two percentage points. The finance director had not hedged and had to absorb the extra cost.
After the episode, the company set a policy to hedge 60% of expected metal needs for the next six months. It also added a pricing clause allowing it to pass on large metal price moves to customers.
Watch out
Common mistakes.
- Assuming precious metals always rise in a crisis. Their prices can fall too, especially when interest rates rise or the dollar strengthens.
- Forgetting the costs of ownership. Storage, insurance, dealer margins and fund fees can eat into the return.
- Expecting income from the holding. Metals pay no interest or dividends, so profit only arises from a higher selling price.
Questions
People also ask.
Which metals count as precious?
The usual list is gold, silver, platinum and palladium, though some people also include rhodium and other platinum group metals.
Why are prices quoted in troy ounces?
The troy ounce is the traditional unit for precious metals, and it is slightly heavier than the ordinary ounce, at about 31.1 grams.
How can a company manage precious metal price risk?
It can use futures, forwards or options to fix its costs, or write price adjustment clauses into customer contracts.
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