Golden Opportunities: Why precious metals thrive in a crisis

Investors can either purchase physical gold or gold ETFs when dabbling in precious metals.
Physical gold is seen as a safe haven investment in times of economic uncertainty.
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Gold rose to three-week highs on Friday, amid fears of a slowdown in the US economy. But why do precious metals perform well in a crisis?

"The (gold) markets will be more prudent ahead of the non-farm payrolls data due on Friday." - Jiang Shu, chief analyst at Shandong Gold Group.

Gold is often described as a 'safe haven' investment in financial markets, but what does this mean? And why do precious metals - such as gold and silver - tend to succeed when everything else around them is losing value?

That will be the focus of this week's Monday morning report, and the answers should help spread bettors better predict which way prices will move for these commodities. So let's take a closer look at gold and other metals, as well as some of the economic events that could affect them over the coming days.

How is gold traded?

You can invest in precious metals in a couple of ways. Perhaps the most obvious - and arguably the coolest - is buying gold or silver as physical bars and coins. Gold prices started today at roughly $1,351 per ounce, or £1,020, so even a one-ounce coin doesn't come cheap.

Silver, on the other hand, opened the day at just over $20.50 or approximately £11.75 per ounce, which tends to make the commodity more suitable for smaller-scale investors. Either way, possessing physical gold and silver tends to accrue additional costs, such as storage, transportation and insurance.

The alternative to buying actual bars and coins is to invest in gold or silver exchange-traded funds (ETFs). This is where units are used to represent physical precious metals, which can then be traded on the exchange in a similar way to company stocks. ETFs are sometimes referred to as 'paper' gold or silver because the investor doesn't actually physically own the commodities.

Why are precious metals 'safe havens'?

Gold and silver have several qualities that make them different to other types of investment. First, they have limited supply, which means they are inherently more valuable than stocks or fiat currencies that can essentially be multiplied or created on demand.

Precious metals are also good at retaining purchasing power over time. There is a well-known adage that people have been able to use an ounce of gold to pay for a good-quality suit at any point in recent history. This is debatable, but gold's purchasing power is definitely more stable than most currencies if you compare the price of a house now and the same property in the 1950s, for example.

Lastly, owning physical precious metals can be seen as a way of protecting wealth should financial markets or a currency completely collapse. Of course, Armageddon scenarios are unlikely, but possessing gold or silver - which are universally trade-able - could provide some comfort to investors.

The week ahead

So what does this all mean? Well, precious metals often rise in value when the global economic or political landscape looks bleak. Investors tend to move away from riskier equities and financial instruments towards safer assets such as gold and silver.

The recent furore surrounding Brexit provided a lift for precious metals, and there could be more price rises to come for these commodities this week. The UK and Australia are making interest rate decisions over the next few days, and both countries are widely expected to announce reductions in the key case rate.

Meanwhile, US GDP data last week was poorer than expected. Investors are therefore likely to be eyeing the country's labour market data due out on Friday, as well as today's Institute of Supply Management manufacturing report, for more economic health clues.

"The (gold) markets will be more prudent ahead of the non-farm payrolls data due on Friday," Jiang Shu, chief analyst at Shandong Gold Group, told Reuters. "If it is going to be weak, then people will change their expectations about the US economic prospects drastically."

With several countries potential experiencing a slowdown in their productivity, will we see gold and silver prices benefit over the coming week?

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