What Investors Should Know About the Precious Metals Market

When people think of precious metals, gold is likely the first one to come to mind. But the word ‘metals’ is plural for a reason: the category also includes silver, platinum and palladium. It may be tempting to group all these commodities together, but their performance often diverges because each is used differently and therefore serves a distinct role in the global economy. While gold often acts as a monetary asset, other metals face unique dynamics – from industrial applications to access to mines – that shape their investment case.

“Gold is really the precious metal safe-haven investment vehicle,” says Jeffrey Schok, a Senior Portfolio Manager with RBC Global Asset Management who oversees RBC’s Global Precious Metals Fund. “The others are more industrial metals than anything else.”

Read on for more about the factors influencing silver, platinum and palladium and how you could potentially gain exposure to each.

Why silver doesn’t behave like gold
Silver occupies an unusual space in the world of precious metals. Unlike gold, it pulls double duty as both an investment vehicle and an industrial commodity. The metal is used in everything from electronics to solar panels, which means it has a different set of price drivers and is considerably more volatile than gold.

That volatility shows up in how silver reacts to gold’s movements, Schok says. When gold rallies, silver usually follows, but not always right away. Investors tend to wait until they’re convinced the gold trend has legs, or until they feel gold has climbed too far, before moving into silver, he explains. But once silver gets going, the gains may be sharper and more dramatic than what gold delivers.

What makes silver particularly tricky for equity investors to value is its production profile. Most silver is produced as a byproduct of non-precious metal or gold mining. This means companies that mine silver often generate only 30% to 50% of their revenue from the metal, while the rest typically comes from gold and other metals.

“There aren’t that many pure silver mines,” Schok says. “It’s actually quite difficult to invest in silver from an equity perspective.”

Outside of trying to invest directly in silver producers, you could gain exposure through silver-tracking ETFs or even physical coins and bars, although you’d have to consider how to securely store the physical metal. Silver certificates and diversified funds that hold both gold and silver are some other ways into the sector.

Why platinum and palladium face an uncertain future
While gold and silver benefit from diverse demand sources, platinum and palladium rely heavily on an industry undergoing a massive transformation. The automotive industry uses both metals in catalytic converters – platinum for diesel engines and palladium for gasoline vehicles – but battery electric vehicles have no use for either.

Every EV that replaces a traditional car erodes their core market, explains Schok. “The more bullish you are on the adoption of battery electric vehicles, the more bearish you have to be on the outlook for platinum and palladium,” he says.

The situation is complicated by limited production locations. Russia and South Africa are major producers of the metals, but both countries are currently facing significant obstacles (Russia is contending with sanctions¹; South Africa’s mining sector is struggling with infrastructure and labor challenges²).

“There hasn’t been a lot of investment in mining these metals over the past few years,” Schok says. “We’re currently in a deficit where demand is higher than supply; that’s been eating down inventories and stockpiles.” Still, while there might be lower demand in the future, there could still be pressure on prices due to the lack of new supply coming on, he adds.

In this environment, he says, investment opportunities are limited. There are a handful of ETFs that track platinum and palladium prices (and a small market for physical coins and bars), but few sizeable mining companies. Even diversified precious-metals funds often skip the metals. “There just aren’t that many equities, or they’re not really large enough that we would consider putting them in our fund,” Schok says.

Mining for precious metal investments
When it comes to evaluating companies in the precious metals sector, Schok uses a four-pillar methodology that considers asset quality, management, environmental impact and market factors.

The most important factor is asset quality: How large is the deposit? What’s the mineral grade? Is the asset available in a stable jurisdiction with good infrastructure? Next comes management expertise and whether the team’s skills match the project stage. The third pillar considers Environmental, Social and Governance (ESG) factors, such as an operation’s environmental impact and water usage. Finally, there’s valuation and how sensitive the company is to commodity price swings.

The goal, Schok says, is finding companies that have real staying power. “We look for stocks that aren’t just well positioned in the current market, but that can endure price declines and remain appealing for mergers and acquisitions in the future.”