Investment Opportunities in Precious Metals

The prices of gold, silver, platinum, and palladium have been on a tear for the past few years. The big profits for "gold bugs" have easily out-paced the rest of the market. How do you get in on the excitement without losing your shirt? Consider investing in a precious metals mutual fund or an ETF. While the usual warnings about avoiding hefty expense ratios still apply, the big risk with investing in gold and silver is insufficient diversification.

It makes plenty of sense to diversify your investment exposure across a wide array of positions. You need to understand that gold and other precious metals are almost completely unlikely to beat the broader market over any long period. This is because the long-term price potential that these commodities can rise to are strictly limited.

Gold and silver are famous for their use in ancient coins, but these days most gold and silver goes for industrial purposes. Precious metals are important components in computers and other electronics. These industries are enormously price sensitive. If the price of gold somehow rose to $1800 an ounce, manufacturers would use other materials. This would drive the demand for gold through the floor, making investors who foolishly bought at the peak big losers.

Commodities in general have been hot for several years now, but the long-term trend is actually downward. Improving technologies and increased competition have made it easier to extract more gold more quickly.

The reason gold is so expensive is its tremendous scarcity. All of the gold ever refined anywhere on Earth would form a giant cube just 66 feet on a side. That may seem like a lot, but compare that with millions of tons of other industrial metals like iron that are refined every year.

Production of precious metals and gold in particular is highly localized. Nearly 80% of the world's gold production since 1900 has come from South Africa. Even within a large, diverse country like the United States, almost all production has come from just 3 states.

Mutual funds and ETFs are clearly the way to go if the commodities boom continues to take precious metals higher. Just don't make the mistake of investing too much in gold or silver. These lustrous metals look shiny, but in twenty years their cumulative returns will be anything but stellar.