Money Advice

Complete guide to trading Precious Metals in South Africa 2021

Published by
Parddon Khumalo

The term “precious metals” refers to the metals gold, silver, platinum and the other platinum-group metals (PGMs), namely: palladium, rhodium, iridium, ruthenium and osmium. They are noble metals; in that, they resist attacks of acids and other reagents and do not corrode easily (although silver does tarnish).

Since the beginning of time gold, silver, copper, platinum and palladium have been well known as valuable, the reason for their high value is due to their rarity. They are expensive, difficult to mine, and used in industrial processes and heavily traded by investors.

In most if not all economies, precious metals are kept with intentions to store or lock up value. Gold in particular is known as a wealth storehouse. It has the ability to preserve wealth, especially in times of economic depressions.

Banks, investors and other players in the financial market are always looking on how to make profitable exchanges with gold, thus making its price to highly fluctuate. The fact that there is always a willing buyer and willing seller in the gold market makes trading it more interesting.

In this article, we discuss some avenues you can take to trade precious metals in South Africa. Considering that the South African economy is said to be founded on gold, Johannesburg as a matter of fact is also known as ‘the city of Gold’. We are going to be referring to gold in most of our examples and illustrations.

Which precious metal is the best to trade?

precious metals

Looking at the famous four: gold, silver, platinum and palladium, you might ask yourself, which metal is more ideal to trade? Well, they each have their advantages. Of course, gold is the most popular of the precious metals, but its sister metal silver is close in popularity and often performs better than gold thanks to its dual nature as a store of value and an industrial metal. 

Platinum isn’t considered to be in the same class as gold and silver for investing, but it can be a good choice for traders, especially when it begins to trend. Finally, there is palladium, which proximate platinum prices quite well, so traders can simply choose one or the other in most cases.

Traditionally, precious metals are traded as refined bars or bullion bars. The bars are sold to bullion dealers, although direct marketing by mining companies does occur. The bullion dealers trade these metals with jewellers or electronics manufacturers, who fabricate final consumer goods.

However, today traders can actually buy and sell precious metals without the need for physical handling of a coin or bullions. There are a number of trading platforms that facilitate the trading process, connecting buyers to sellers through the click of a button.

What factors influence precious metal prices?

There are two factors that are the primary drivers in the prices of all precious metals. Those two factors are supply and demand. In many cases, new traders only consider the demand side of this equation, but that can definitely lead to some unexpected price moves when supplies are either cut short suddenly or increased rapidly.

In the case of silver, platinum, and palladium there can also be changes in industrial demand which can impact the prices of the metals. Any change in automobile production is likely to see all three of these industrial precious metals change price dramatically.

As global economies improve, precious metal prices seem to have taken a hit since fewer investors feel the need to look for a safe haven.  The South African GDP used to largely depend on the export of gold, but economic development has shrunk that dependency and tertiary economic activities have taken larger claims of the GDP.

However, during economic panics like the one induced by the effects of Covid-19, trading of precious metals begins to rally as more people and organisations seek safe havens for their investments.

For a clear understanding, you should check out the gold trend from the start of the Covid-19 induced lockdown to date. Observation shows that gold prices went up as panic over coronavirus spread worldwide.

But since the announcement by scientists on the breakthrough on the coronavirus vaccine a few days ago, the gold prices have significantly dropped. The discovery of the vaccine means the economy is at lesser risk now hence there is no need to buy more gold as a means of locking wealth which has led to the downturn of gold prices.

Factors Influencing Precious Metal Trading

Several distinct factors come into play when analyzing the prices of precious metals:

Supply – can be affected by a decline in production and political instability. If the scale of precious metal injection into the market declines, the metal prices tend to go high as demand starts to overwhelm supply.

Political instability, tight industry restrictions and policies tend to affect the level of production hence affecting the prices.

Demand – mainly comes from jewellery, use in everyday technological products, and for investment purposes.

It should be noted that each metal is different and so their prices are affected by different factors. For example, gold and silver prices can be affected by increased or decreased demand for jewellery and by changes in the demand for a store of value.

During economic uncertainty, demand for gold or gold-related investments can increase as a means for investors to protect their wealth. It is therefore critical that you conduct a thorough analysis before deciding to trade commodities.

Market Volatility – Precious metals have often been used as a safe haven investment when markets are unpredictable. Thus, hedging a position taken in the market in order to mitigate the risk of loss.

A highly volatile market poses danger for traders, especially if you are also trading other commodities like oil or even currencies. If you do not come up with a risk-mitigating strategy you stand to lose a lot from your positions. In such instances, traders are influenced to trade precious metals as a measure to mitigate the risk of losing everything (hedging).

Therefore if the financial markets become too volatile, traders tend to start moving to precious metal positions and thus influencing metal trades.

Investing in precious metals is a popular way of portfolio diversification. There are several options when looking to invest, starting with coins and bullions. These usually have a very low margin and trade close to the metal’s current market price.

Mining stocks belonging to publicly traded companies give an investor the opportunity to buy them at the production level.

How are Precious metals traded?

Precious Metals are traded through brokers as both direct assets and as CFDs. Major banking platforms like FNB and Standard Bank allow investment account holders to buy and sell the metals through their platforms. However, most people prefer to trade metals as CFDs through international Brokers like XM.

So it basically depends on your prefered way of trading. If you want to buy directly into the asset, you can use banks but if you need to speculate and make fast profits then trading through broker platforms like XM will be most ideal for you.

What are the advantages of trading precious metals?

One of the top advantages is the easy liquidity provided by precious metals. This keeps the market healthy. Another reason is the ever-increasing demand for precious metals. As demand continues to increase it supports gains in price as well. Of course, trading in precious metals is a good way to diversify if you typically trade in stocks or currencies. Perhaps the greatest advantage of trading in precious metals t is the profit potential they offer traders of all experience levels.

Parddon Khumalo

Published by
Parddon Khumalo