Throughout history, precious metals have been renowned as a great store of value due to their rarity and scarcity of supply which in turn increases their economic value. One might think that their uses would be limited. However, they are used in a wide range of industries including chemical, automotive, electronic, pharmaceutical, and jewellery industries to name a few.
Gold, silver and platinum come out on top in the race in terms of their popularity. When interest rates increase because of Federal Reserve policies (causing a rise in inflation), investor's concerns follow, and investment into precious metals increases, causing an increase in the price of these metals.
Previously used as the basis for money, these precious metals now serve as a hedge against inflation. This means that because precious metals are “real assets”, they are expected to hold on to their value even when currencies are devalued, which tends to occur in the aftermath of an inflationary increase. With rising inflation, demand for commodities such as gold and oil increases as people prefer to store their savings in the value of commodities. Then naturally, the prices of these goods also begin to rise.
Investors consider precious metals to be good long-term investments owing to their tangible and portable characteristics. Gold is most commonly used to protect against inflation because as the purchasing power of the dollar decreases, its value increases. But investors have shown great interest and have encouraged investment in other precious metals like silver, platinum, palladium and even rhodium. They all come with their own risks and benefits but the bottom line is that in times of economic uncertainty these metals are perceived as safe havens.
Acquiring metals is increasingly accessible as it is not restricted to physical bullion (bars or minted coins) holdings alone. There are metal ETFs and mutual funds, derivatives markets, and a recent trend in mining company stocks.
Their inflationary protection is guaranteed because they hold intrinsic value. They have their own value independent of fiat currency, pose no credit risk, and the quantities available in the market are limited by mining. In other words, the government can't just make more gold as they can with fiat money. Many investment theories put forth the idea that precious metals have a low or negative correlation with other classes of assets like stocks and bonds i.e, even a minimal quantity of these metals in a portfolio decreases the risk and volatility.
Their importance is further highlighted by the fact that the U.S government now allows precious metals to be a part of a retirement portfolio. This was a result of the 1997 Taxpayer Relief Act which gave access to gold, silver, platinum and palladium to be placed in special custodial IRA accounts. However, it does come with specific instruction for what can be included.
Precious metals have proven to protect against inflation historically and in numerous ways that are applicable now more than ever. These investments turn out to be rather beneficial in most cases. As inflation devalues cash savings and fixed income investments, precious metals like gold tend to spike in value as the purchasing power of the dollar declines.