Risk And Return For Trading Investment-grade Bars

Trading investment-grade precious metal bars can diversify your portfolio and provide exposure to gold, silver, platinum, and palladium - but there are risks to consider.

Read on as we understand this asset class by covering everything from what makes a bar “investment grade” to phenomenal risks such as the market, liquidity, storage, and security risks. 

You’ll leave better prepared to evaluate if bars deserve a place in your portfolio.

Have You Heard About Investment-grade Bars Before?

Investment-grade bars refer to bullion bars of gold, silver, platinum, or palladium that meet a certain purity standard to be considered “investment grade.” The most common purity level is .9999 fineness, indicating the bars are 99.99% pure precious metal.

Investment-grade bars are available in various sizes, typically ranging from 1 gram up to 1 kilogram. The standard gold bar sizes are 1 ounce, 10 ounces, and 1 kilo. Silver bars can also be found in 100-ounce sizes. These bars often have a polished finish and may come sealed in protective packaging or with an assay certificate.

Compared to collectable coins or jewellery, investment-grade bars have lower premiums over the spot metal price, making them cost-efficient ways to invest in precious metals. Their high purity and simple design make them easy to stack, store, trade and resell.

Risks of Trading Investment-grade Bars

While investment-grade bars can be attractive assets to hold long-term or trade actively, there are several risks to consider:

Market Risk

Like other commodities, precious metal prices fluctuate daily based on supply and demand. Gold, silver, platinum, and palladium prices can experience significant volatility due to economic and geopolitical factors. This market risk exposes investment-grade bar traders to potential losses if prices decline.

Some drivers of volatility to watch include:

• Central Bank Policies - Actions by the Federal Reserve and other central banks influence interest rates and currency valuations, which impact precious metal markets.
• Inflation/deflation Trends - Precious metals like gold are considered inflation hedges, so rising consumer prices can lift prices.
• Global Economic Growth - Stronger expansions increase industrial demand for silver and platinum group metals. Recessions dampen prices.
• ETF Activity - Inflows into precious metal ETFs directly impact physical demand.
• Futures Market Speculation - High futures trading volumes and open interest signify investor interest.
• Geopolitical Events - Wars, trade tensions, and instability can trigger safe-haven buying of gold and silver.
• Mine Supply - Disruptions or production declines tighten supply dynamics for precious metals.

Staying up to date on macro drivers and market sentiment provides helpful context for navigating this volatility risk.

Liquidity Risk

The global precious metals market has decent liquidity but remains much smaller than assets like stocks and bonds. This can translate to wider bid-ask spreads and higher transaction costs when actively trading in and out of positions, especially for platinum and palladium bars. 

Market depth is lower compared to paper-traded futures and ETFs. Having realistic expectations around trade execution is essential to account for this liquidity risk.

Counterparty Risk

When owning exchange-traded products like ETFs, pooled accounts, or certificates representing investment-grade bars, traders are exposed to counterparty risks from the financial institution providing the product. The bar holdings are subject to claims by creditors in the event of a default. 

Holding bars directly or through allocated storage accounts helps mitigate this risk. Conducting due diligence is critical when selecting reputable precious metal dealers, mints, or storage providers to partner with.

Storage and Security Risk

Bars held in personal possession, at home, or in bank safe deposit boxes have inherent risks of loss due to theft, misplacement, natural disaster, or damage. Even secured vault storage carries risks, necessitating proper insurance coverage. 

Facilities with state-of-the-art security features and third-party auditing provide greater peace of mind but often have higher storage fees that impact net returns. Geographic diversification of stored bars helps mitigate localized risks.

Assaying Risk

With proper assaying (testing for purity and fineness), traders can avoid counterfeit bars and inferior quality. Mints like PAMP and Metalor provide certificates of authenticity, while established dealers test samples from each bar shipment. A precious metals verifier also enables traders to spot-check bar quality.

Evaluating Potential Returns

To evaluate the return potential when trading investment-grade bars, it’s helpful to consider factors such as:

• Supply and Demand Fundamentals - How are precious metal production, central bank buying, industrial demand, and investor activity likely to impact prices going forward?
• Macroeconomic Conditions - Factors like interest rates, currency moves, and economic growth influence precious metal performance.
• Market Volatility - Higher volatility indicates more significant potential price swings that skilled traders can exploit.
• Current Spot Price - Where are gold, silver, platinum, and palladium prices relative to historical price trends? Looking at multi-year charts provides context.
• Storage costs - Storing bars securely has fees that impact net returns, so factor these into profit projections.
• Taxes - Short-term capital gains tax rates on trading profits are higher than long-term rates, impacting net returns.

Numerous factors above the trader’s control influence returns, but following precious metal markets closely combined with sound trading strategies can put the odds of success in your favour.

Precious metals like gold and silver also have unique return drivers, as they provide portfolio diversification and inflation hedge value during periods of market turbulence. 

You might also like to read: Why Gold Investment Opportunities Shine in Bullish and Bearish Markets

Rounding Up

Investment-grade precious metal bars offer traders and investors an alternative asset class that can provide portfolio diversification, inflation hedging, and exposure to gold, silver, platinum, and palladium markets. 

However, the volatility, liquidity, storage, security, and counterparty credibility risks underscore the need for education and due diligence when allocating to physical bars. Carefully plan your portfolio before investing in investment-grade bars.

Traders interested in this market are encouraged to continue their research to determine if bars should occupy a place in their portfolio.

Learn and trade with markets.com: The ultimate trading community!

“When considering “CFDs” for trading and price predictions, remember that trading CFDs involves a significant risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”