How Precious Metals Mutual Funds Work

Gold rings are one way of investing in precious metals. Though many own some gold or silver jewelry, precious metals mutual funds are more profitable and less risky.
Gold rings are one way of investing in precious metals. Though many own some gold or silver jewelry, precious metals mutual funds are more profitable and less risky.
Justin Sullivan/Getty Images

Chances are you already own some precious metals. Maybe you have a gold necklace, a silver watch or even a platinum ring. You probably know that these precious metals can be expensive -- but did you know you could be making money on them, too?

You can invest in several different precious metals: gold, silver, platinum or palladium. Such investments can take a variety of forms, including bullion (bars), coins, jewelry, futures, stocks or mutual funds [source: ThinkQuest]. One of the safest ways to invest in precious metals is through mutual funds. Mutual funds have a fund manager who invests your money into specific stocks and bonds, letting you diversify your investments without a lot of work on your part.

Just as you're more likely to have gold or silver in your possession than platinum or palladium, gold and silver mutual funds are more popular than other precious metals. By investing in a precious metal mutual fund, your investments will have less risk and volatility than they normally would if you were investing in coins, jewelry or bars. However, as with any investment, you should think and discuss your options with an advisor before buying a mutual fund because there are always risks with the unstable market.

Gold­ and silver look good, but why does that mean you can make money investing in a precious metals mutual fund? There's more to gold than bling-bling. Read on to find out why investing in precious metals mutual funds can be a lucrative idea, especially in a downward economy.




Why Invest in Precious Metals Mutual Funds?

A mine worker cleans a newly poured gold bar at Driefontein Gold Mine near Carltonville, South Africa. Owning an actual gold bar is not always the best investment route. Read on to find out why.
A mine worker cleans a newly poured gold bar at Driefontein Gold Mine near Carltonville, South Africa. Owning an actual gold bar is not always the best investment route. Read on to find out why.
Tom Stoddart/Hulton Archive/Getty Images

You wear a gold watch, and you have a silver picture frame on your desk. You have silver coins in your wallet, and you've even given a gold necklace as a gift. You're quite the consumer of precious metals -- and you're not alone. Because consumption of precious metals is so high, demand exceeds supply and the price goes up. If you're investing in a precious metals mutual fund, your investments go up as well, making a precious metals mutual fund a good decision.

If you have the jewelry or coins, it seems like you're already investing in precious metals. Why bother with the work of a mutual fund?

  • First of all, your jewelry or coins are often not completely pure.
  • Unless you plan to sell that special ring someone gave you, you can't make any money off of it.
  • Bullion or bars of gold can be a sound, conservative investment, but can be very difficult and costly to store. Are you prepared to turn your living room into Ft. Knox?

While mutual funds may take some research and work, they're one of the least risky ways to invest and can yield great returns.

Although it takes some legwork to research and pick a mutual fund, mutual funds do a great deal of the work for you. Precious metals mutual funds can manage a variety of precious metals. They can also contain stocks in mining companies. Diversification is key with an unstable market, and the mutual funds do that. Someone else -- the mutual fund manager, whose pay should be tied to the performance of the fund -- has taken the time to pick a balanced variety of stocks and bonds that work well together. If one stock plummets, several others should perform well and keep the fund's earnings stable.

While mutual funds may not give as high returns as that new hot stock, your money is much safer in the long run. Many precious metals mutual funds have stocks for multiple precious metals, further diversifying a portfolio.

As with any investment, however, a high return is not guaranteed. In fact, you could lose all of your money. Historically, precious metals have rather large price swings. They enter a long boom cycle, but then go bust -- and stay bust -- for a long cycle before rebounding [source: Anderson]. Currently, precious metals are in a boom market with high consumption. Because mutual funds help distribute the risk more evenly, disastrous monetary losses are less likely. However, because precious metal prices are so volatile, most experts recommend putting only between two and 10 percent of your total portfolio into precious metals mutual funds.

Gold and silver aren't just for the blissfully married. They're also the most popular mutual funds. Continue reading to discover why.

Gold and Silver Mutual Funds

With gold trading near $900 per ounce, people are flocking to California’s gold country in search of gold. Companies offering gold panning tours are being inundated with reservations, and mining supply stores are seeing a spike in people interested in purchasing supplies.
With gold trading near $900 per ounce, people are flocking to California’s gold country in search of gold. Companies offering gold panning tours are being inundated with reservations, and mining supply stores are seeing a spike in people interested in purchasing supplies.
Justin Sullivan/Getty Images

Out of all of the precious metals mutual funds, gold funds are, by far, the most popular. Here are some reasons why:

  • Gold has soared since the turn of the century. Gold has risen by more than 200 percent since 2001 and continues to regularly surpass highs last seen in 1980 [source: Anderson].
  • Gold has a high correlation against the dollar. Since gold is priced in dollars, it has a defense against inflation. As the U.S. dollar grows weaker, gold prices rise [source: Anderson].
  • While just about every other product's demand goes down when the price goes up, gold works the opposite way. Gold's investment demand rises with the price, giving it a significant advantage over any other product or investment [source: Middleton].

Gold itself is becoming increasingly popular, and supply can't keep up with demand. Exploration and development in the gold-mining industry dropped 70 percent between 1980 and 2000. Since then, greater wealth around the world has created more gold buyers, especially in India and China, which have long been gold-loving countries [source: Middleton]. Couple those factors with the fact that gold's demand and price rise in tandem, and you'll see why gold is a very popular investment.

What also makes gold a popular investment is that it often becomes expensive when other investments are dropping. Gold's high performance as other stocks and bonds tank make it look even more appealing to investors worried about their portfolios.

Silver is also a popular precious metals mutual fund, although not nearly as popular as gold. Many mutual funds have both gold and silver as part of their stocks. Platinum can also be invested in through a precious metals mutual fund, but it's more complicated. There are no platinum funds on the New York Stock Exchange so the investments must be made in a foreign market.

For all of the benefits of gold and silver mutual funds, there are still risks and potential downsides. Some funds can be more volatile than others. Because mutual funds are handled through fund managers, transaction fees and other expenses can differ greatly. What's more, funds may charge fees or penalties for cashing out before a certain period, which can hurt your investments if the precious metals market shifts before you can pull out.

There are risks and rewards with all investments, but the current market and economy might make gold or silver mutual funds a good addition to your portfolio. To learn more about investing, visit the links below.

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Sources:

  • Anderson, Thomas M. "The High Price of Precious Metals." Kiplinger.com. 2/22/08. http://www.kiplinger.com/columns/fundwatch/archive/2008/fundwatch0222.htm (Accessed 5/19/08)
  • Bankrate.com "The best ways to buy gold." MSN Money. 1/30/06. http://moneycentral.msn.com/content/invest/extra/P143352.asp (Accessed 5/19/08)
  • Lifton, Jack. "Peak Platinum, Perhaps?" Resource Investor. 2/27/07 http://www.resourceinvestor.com/pebble.asp?relid=29380 (Accessed 5/19/08)
  • Midas Funds. "What are gold mutual funds?" http://www.midasfunds.com/gold-mutual-funds.html (Accessed 5/19/08)
  • Middleton, Tim. "Fool's gold for your valentine." MSN Money. 2/12/08. http://articles.moneycentral.msn.com/Investing/MutualFunds/FoolsGoldForYourValentine.aspx (Accessed 5/19/08)
  • ThinkQuest. "Precious Metals." http://library.thinkquest.org/3298/doc/metal.html (Accessed 5/19/08)

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