Overview of Precious Metals
Precious metals are rare metallic chemical elements. The best-known precious metals are gold, silver and platinum. Other precious metals are, for example, palladium, rhodium or iridium.
Its rarity makes a precious metal ‘precious’. Different precious metals have different uses. All precious metals have technological applications, and some are used in jewellery or for investment purposes.
Precious metals, which are regularly used as investments are also called bullion metals. The typical bullion metals are gold and silver, but in recent years, platinum and palladium have also gained more popularity with investors. Precious metals for investment purposes are available in the form of bullion bars or bullion coins.
Due to the relatively higher industrial demand, the prices of precious metals other than gold regularly have a stronger positive correlation with overall economic cycles, and therefore with stock market prices, than gold.
Silver is often called the ‘smaller brother of gold’, since an ounce of silver is regularly significantly cheaper than an ounce of gold. Industrial demand (incl. photography) is the main source of demand for silver, whereas industrial demand makes up less than 15% of total demand for gold.
The role of silver as an investment asset has grown over the past couple years, especially since the start of the financial crisis. In 2011, about one quarter of total demand for silver came from investors.
Silver is considered by many a ‘store of value’ in times of crises, similar to gold. But the demand and supply characteristics of silver make the silver price move in a different way than the gold price. Due to silver’s higher positive correlation with economic growth, many investors consider silver as a way to profit from economic growth or a kind of hedge against growth-induced higher inflation rates.
- More on silver investment
Precious metals from the Platinum Group
Another group of precious metals besides gold and silver are the so-called Platinum Group Metals. Platinum Group Metals or PGMs refer to six metallic elements. Platinum and palladium are the two widest known PGMs and are the only metals from the Platinum Group which are also used by private investors as investment assets.
The demand for platinum is mainly driven by industrial applications and jewellery. Investment demand for platinum accounts for only around 5% of total demand and is therefore much lower than is the case with gold or silver.
According to GFMS Thomson Reuters, about 60% of demand for platinum stems from industrial applications incl. catalytic converters in automobiles. Approximately 35% of the demand for platinum comes from jewellery. The demand drivers of platinum make it a precious metal, which is less a store of value but more an asset used to speculate on economic growth. The price of platinum follows growing industrial demand as well as increased demand for jewellery in times of economic prosperity.
The demand for the precious metal palladium is even more dependent on industrial demand than the demand for platinum. According to GFMS, more than 80% of palladium is used for industrial purposes incl. catalytic converters in automobiles. Less than 15% of palladium is used for jewellery, and the use of palladium as an investment accounts for a mere 2%.
This demand structure makes the reasons for investing in palladium very different from the reasons for investing in the precious metals gold and silver.
Comparing precious metals as investments
As outlined above, total demand for the precious metals silver, platinum and palladium is much more dependent on industrial demand than in the case of gold. Silver occupies a position in the middle between gold and precious metals from the Platinum Group, i.e. platinum and palladium, since the investment demand for silver is significantly higher than that for platinum or palladium.
Historically, silver, like gold, played an important role as a currency. Even today, all major mints still issue silver coins in addition to gold coins. In an investor’s portfolio, silver can therefore act as insurance against scenarios of significant economic or political risk. On the other hand, silver can also be used as an investment to profit from global economic growth which results in growing industrial demand for this metal.
Compared to gold and silver, the investment demand for the precious metals platinum and palladium is negligible. Total demand is driven mainly by industrial demand and demand for jewellery. This means that the prices of the precious metals platinum and palladium are primarily driven by positive economic growth. Platinum and palladium do not provide appropriate protection against negative geopolitical or economic risks, but they can be good investments during times of economic growth. They can also serve as hedges against higher inflation rates, which often accompany such times of increased economic growth.
Taxation of precious metals other than gold
Many tax regimes have different regulations for gold than for other precious metals like silver, platinum or palladium. In the European Union, for example, investment gold which meets some formal criteria, e.g. in terms of purity, is exempt from Value Added Tax (VAT – similar to a sales tax). This is not the case for other precious metals. Silver, platinum and palladium all are taxed with VAT.
In terms of capital gains tax, gold and other precious metals are often treated in the same way. Taxation can depend on the individual’s country of residence, specific tax rates and realized gains. VAT on precious metals other than gold can be avoided, if the metals are held offshore and the investor does not take delivery of its holdings, as in the case of vaulted silver or other vaulted precious metals. Typical locations for the offshore storage of precious metals are, e.g., Switzerland and the United Kingdom (for non-residents).
Storage of physical precious metals
Investors who invest in physical precious metals have to consider storage costs. Storage costs are driven by weight and volume as well as the value, which drives the premiums for insurance coverage.
While platinum has a price to volume/weight ratio similar to gold, palladium and silver are cheaper in terms of weight. A fixed amount of money will buy around double the weight in Palladium than gold or platinum and around 50 times the weight in silver. Therefore, especially the storage of silver can be much costlier than the storage of gold or other precious metals.
Most providers of vaulted gold also offer storage of silver. Some of the providers even allow customers to store platinum or palladium. Offshore stored precious metals, i.e. precious metals held outside of the investor’s country of residence, do not incur VAT as long as the investor does not take physical delivery.
We provide an overview of providers of vaulted precious metals and the precious metals offered by them on our comparison table.