Mankind has valued precious metals for millennia. Gold artifacts have been discovered dating back 7,000 years and the oldest known gold coin was made in the ancient kingdom of Lydia (located where Turkey is today) more than 2,700 years ago.
Precious metals have typically included gold, silver, and platinum. More recently, pallidum has been added to the list. All are considered “precious” because of their rarity, durability, and other desirable characteristics. Many people choose to invest in precious metals for retirement, as collectors, or because they prefer having some of their assets in a tangible form. Understanding what makes precious metals rare and valuable is an important part of buying and selling.
The Rarity of Precious Metals
The rarity of precious metals is determined both by the quantity available and the level of difficulty required to obtain the metal. While it’s the third most prevalent element found in the earth’s crust, aluminum was once rare because it was incredibly difficult to mine. Since the advent of modern mining techniques, aluminum is now found in nearly every household and is no longer considered precious.
Other metals, such as gold, are only found in limited quantities. Of all naturally found elements in our crust, gold is found in only 0.004 parts per million (ppm). For comparison, aluminum is 20 million times more prevalent. Silver is found in .075 ppm, making it about 18 times more common than gold.
Precious Metal Values
That lustrous yellow metal’s price is much greater than 18 times its shiny silver counterpart (typically around 60 times more), which doesn’t align with what we know about availability. So why the vast difference? The vast majority of precious metal pricing is related to factors so complex it would take a college textbook to explain them all; politics, financial markets, oil prices, war zones and world economies among them. However, there are a few less complicated reasons we can tackle here.
Mining & Production Costs
Every metal pulled from the earth is found in different quantities and purities. Only 10% of gold is found in gold mines and it can take up to 30 tons of iron ore to extract an ounce of gold. By contrast, 30% of silver is found in silver mines. The remaining production for both metals comes as a byproduct of other mining efforts, such as those for copper. There are far more silver mines around the world than gold, which means that availability, combined with the net result of mining, makes gold more expensive.
Changes in mining for other metals also plays a role. When copper production goes down, so does the volume of those byproduct metals. There is typically extra cost to extract gold from other metals. When mining for gold only, an acidic solution is used to dissolve the gold so it separates from other particles. Separating gold from other precious metals requires multiple steps and therefore additional cost.
Influence of Consumer Demand
Silver is commonly used to produce a large number of products including medical devices, consumer electronics, household appliances, and even solar panels. Our houses, cars, and workplaces are filled with things that require silver. Over 50% of the silver mined today is used for industrial purposes. This means that the price you are willing to pay for products made with silver ends up influencing the price of the silver itself. Imagine how much all the items that use silver in their production would cost if the price of silver went up dramatically.
The price of gold is partially due to our history of, “wearing wealth.” War and conflict have always been a part of human history. In times of trouble, people would pack their most valuable items and flee on foot. In this regard, jewelry served both as decoration, and portable wealth.
The need to keep valuables close at hand is perhaps less important than it once was, but the tradition remains. Of all the gold produced in the world today, a whopping 70% of it is used for jewelry. Like silver, the price of gold is influenced by our desire to own (and wear) it.
Investing in Precious Metals
Jewelry and coins you already own can be considered investments in precious metals, but when people talk about owning gold, silver, and platinum, they are often referring to bullion. All are ways to invest and each has its advantages and disadvantages.
Almost everyone has at least one piece of jewelry made of precious metal. Whether it’s a wedding ring, family heirloom, or a gift you received, you likely have something made of silver or gold. Much of the value of our jewelry is related to how we feel about it and how society perceives it; love, beauty, power, and wealth. The actual value of jewelry is generally based in the amount of precious metal it contains, the workmanship involved in making the piece, gemstones used, who made it, and how old it is. This can be hard to hear when you go to sell part of your collection and are offered far less for it than you feel it is worth.
When investing in jewelry, your best options are pieces with a high purity of the more expensive precious metals. A ring made of 18K gold is 75% pure, which means if gold is at $1,200 an ounce, a half ounce 18K ring or bracelet is worth $450 in simple melt value. You can collect silver rings too, but it takes a lot of them to make up significant melt value (15-20 heavy rings to make $100).
Jewelry is also valued based on other factors such as maker’s marks, the complexity of design and the value of gemstones. Makers Tiffany, Chopard and Ebel are prized above an equal-weight piece of jewelry without a mark. Diamonds, sapphires, rubies, emeralds and some semi-precious stones also add value. It’s relatively simple to weight a piece of gold and calculate its precious metal worth, but much more complicated to estimate the value of other factors.
Coins are among longest running and most varied forms of universal exchange in human history. You can buy coins in silver, gold, platinum, palladium and even copper. They have been minted around the globe for thousands of years, amounting to millions of varieties. There are essentially two ways to invest in coins; for their melt value (silver and gold coins are typically around 90% pure metal), or for their numismatic value (coins that are rare, in perfect condition, are unique, or are very old).
Some coins fall into both categories. A 1922-S $20 gold coin sells for more than twice its melt value when in excellent condition and graded by a coin expert. The value of these coins will only go up with collectors because there will never be any more produced. They are also coveted for their universal gold value.
Other coins only have melt or numismatic value. A 1943 copper penny is worth .03 cents in melt value but sells for around $100,000 because of its rarity. Only 40 were ever produced. A United States dime from 1964 (the last year they were produced in silver) that has been through a lot of hands is likely only worth its melt value; about $1.25 at the time this article was published. These coins are often called, “junk silver.” For comparison, there were just under a billion 1964 dimes put into circulation and many are still available.
Numismatics is a wonderful hobby and way to invest money but with millions of different coins produced around the globe, it takes dedication and research to learn what to buy and how much to pay.
Buying bullion is the simplest way to invest in precious metals. While there is some value attached to certain types of bullion (Chinese gold pandas are popular and demand a small premium), you are typically paying for the value of the metal. Bullion can be purchased in bars and rounds. They come with ornate decorations and simple surfaces. Some styles will go up in value more than others due to that popularity factor but knowing which ones are a gamble
The larger the individual unit, the lower per ounce price. It costs 10-15% less to buy a single 1-ounce gold bar than it does to buy ten, 1/10th-ounce bars. The same is true for other precious metals. A 10-ounce silver bar is roughly 13% cheaper than a 1-ounce bar.
It stands to reason that you should only buy precious metal bullion in larger units. However you also have to consider your ability to purchase, and how easy it will be to turn gold into cash if needed. You might have to save for a while to buy an ounce, whereas a 1/10th-ounce unit could be purchased more frequently. Finding a buyer for a 1/10th-ounce bar might be easier as well. This is not true of gold buying stores, including pawn shops. They will almost always give you just below melt value regardless of the unit size.