Precious metals are a hot commodity right now. How hot? A number of cities across the country have recently reported an uptick in catalytic converter heists by thieves who sell them to scrap yards to cash in on high prices for the platinum and palladium used to convert noxious fumes into less harmful effluvia.

A more conventional way to gauge interest in precious metals is to look at market prices for the four shiny metals that make up this group--gold, silver, platinum and palladium. All of them have gone up since the summer, but for different reasons.

Gold and silver prices swooned in the spring and languished during the first half of the summer. Then came European Central Bank president Mario Draghi's promise to do "whatever it takes" to save the euro currency, followed by a conditional bond buying program designed to take the heat off Italy and Spain. Not to be outdone, U.S. Federal Reserve Chairman Ben Bernanke in September launched the third round of quantitative easing by buying mortgage-backed securities to boost lending and spending.

These two monetary moments gave gold and silver a kick in the pants that lifted them higher. As of early October, the spot price for gold, the bellwether among precious metals, had reached its yearly high at nearly $1,800 an ounce. And silver was up to about $35 an ounce, close to the year's high. The largest exchange-traded funds that track these two metals--the SPDR Gold Shares Trust (GLD) and iShares Silver Trust (SLV)-had gained about 15% and 30%, respectively, from their midyear lows.

Meanwhile, platinum and palladium prices started to jump in August because of spreading labor unrest that disrupted platinum mine production in South Africa, home to about 80% of the world's platinum production. Given the slim gap between supply and demand for both metals, coupled with palladium's tendency to trade in sympathy with platinum, both prices spiked as a result.

The two largest pure-play platinum and palladium ETFs--ETFS Physical Platinum Shares (PPLT) and ETFS Physical Palladium Shares (PALL)--gained 22% and 16%, respectively, from August through mid-October.

Going forward, precious metals prices will depend on various factors ranging from a dysfunctional, do-nothing U.S. Congress to loose fiscal policies around the globe to car sales in China.

Hedging Risk
Gold dominates the precious metals trade. Last year it represented 80% of total demand value and 87% of net investment inflows in the market, according to the metals research firm Thomson Reuters GFMS. Silver accounted for 13% of the demand value and 11% of net investment inflows, while platinum and palladium were in the low single digits for both categories.

Gold traditionally is a proxy for investor attitudes about macro events. Nicholas Brooks, head of research at ETF Securities, sponsor of the PPLT, PALL and other metals-based exchange-traded products, says there has been massive global demand for physically backed gold ETPs as investors try to hedge against the debasement of the world's major reserve currencies caused by the actions of major central banks.

Along with the Fed and the ECB, central bankers in Great Britain, Japan and Switzerland have been aggressively buying assets and boosting liquidity to achieve specific economic and/or monetary goals.

"Investors are desperately looking for places to hide, and gold is one of the first places they go," Brooks says. "And that's been true historically."

He adds that silver often rides on gold's coattails, and then some. "When gold does well, you'll often see silver perform even better," Brooks says. "It tends to be a volatile performer, and it can have a lot more risk because silver can turn sharply."

Brooks says for the 10-year period ending September 2012, the average volatility of gold was about 17% versus an annualized volatility of 21% for the S&P 500. Silver's annualized volatility during that time frame was 35%.

Different Shades Of Precious
Whereas gold is seen as a currency hedge against inflation, platinum and palladium are viewed more as industrial metals tied to economic conditions.

"They're more driven by what's going on in the auto catalytic market than by the currency market," says Dan Denbow, portfolio manager at the USAA Precious Metals and Minerals fund (USAGX).

That means economic concerns could weigh on these two metals going forward, particularly in light of weak auto sales in Europe and potentially weak sales in China as that economy cools off. Plus, both metals have other industrial uses beyond automobiles. But, Denbow notes, economic concerns could be offset in the near term by diminished supply. "Production disruptions have turned a likely platinum surplus this year into a likely deficit."

Longer term, he believes that labor agreements in South Africa could make it more expensive to mine there, which could take some supply off the market and provide price support for platinum.

Silver is kind of a tweener in that it has the safe-haven and currency attributes of gold but is also widely used in industrial applications, which could make it vulnerable in a major economic downturn. And that makes it less of a defensive play than gold.

Gold's traditional role as an inflation hedge and source of tangible value bode well for the foreseeable future, thanks to QE3 (or, as it's derisively known with its open-ended mandate, "QE Forever") and other stimulus programs flooding the markets with liquidity. "The central banks will continue to run the printing presses to help their economies and help solve budget deficits," Denbow says.

But that doesn't mean gold is on the fast track to $2,000 an ounce by year's end (as some pundits have predicted), particularly as Congress bickers and dickers about the debt ceiling and the looming fiscal cliff involving expiring tax cuts and automatic spending cuts. "Past debt-ceiling discussions have been times of sharp volatility for gold," Denbow says.

Ways To Play
Kevin Mahn, president and chief investment officer of Hennion & Walsh Asset Management in Parsippany, N.J., allocates precious metals to some of his portfolios to hedge against inflation and market volatility. He also views the asset class as a source of good risk-adjusted returns. "They're not heavily correlated to the equity markets, and can provide returns when the equity markets don't," he says.

Mahn takes a basket approach to precious metals through ETFs, which provide low-cost, transparent access to that market. Specifically, he uses the PowerShares DB Precious Metals ETF (DBP), which has a base weighting of roughly 80% gold and 20% silver in futures contracts. He says the fund minimizes the potential impact of contango, which occurs when distant commodities futures prices are greater than near-term prices. This causes investors to lose money when ETFs roll expiring contracts into more expensive future contracts.

The DBP fund employs a strategy designed to minimize the potential impact of a market in contango and maximize the potential of a market in backwardation, which occurs when distant commodities futures prices are less than near-term prices.

Harry Clark, chairman and CEO of Clark Capital Management Group in Philadelphia, believes gold has much room to run in the current environment. "With Bernanke buying everything in sight, that will mean a devalued dollar and inflation, and gold is seen as a store of value," he says.

His firm's unified managed accounts use mostly ETFs, including an alternative sleeve employing gold and silver--especially the former. Clark says his main trading vehicle of choice is GLD, the popular bullion-tracking iShares ETF. And he'll sometimes use that in tandem with the Market Vectors Gold Miners Index ETF (GDX) and the Market Vectos Junior Gold Miners ETF (GDXJ).

Clark says he likes to trade these funds by following trends he deems fairly reliable. "We feel gold is more predictable and is much easier to trade [than silver or the other precious metals]," he notes. "I like to trade it because when it gets to a certain percentage of bullishness it almost always tops out, and when it goes down to the moving average it's usually a good support level."

In recent months, some investors have turned to mining stocks to take advantage of the steep discount that existed between miners and the metals they mine. "Miners were trading extremely cheap going into August, but they've had a good rally and the miners in our portfolio were up 21% in the third quarter," says Denbow, whose USAA Precious Metals and Minerals mutual fund invests primarily in gold miners.

Despite the run-up, he believes that miners still have upside potential. The better miners, such as one of the fund's top holdings, Yamana Gold Inc., have done a better job of controlling costs and spending capital more wisely. "That's necessary for gold mining stocks to outperform gold, because the lowest-cost providers win in the commodity business," Denbow says.

The Real Thing
Investors who want to own the actual precious metals can turn to online sites or late-night infomercials that sell coins, bars and bullion directly to the public.

Financial advisors with clients who want to own hard assets can turn to CAIS, a New York City-based financial technology company that provides an alternative investment platform to financial advisors, wealth managers and private bankers. Last year, CAIS added the precious metals trading platform of Gold Bullion International (GBI) to its own platform to provide its customers with a quick, affordable way to trade precious metals.

Rafay Farooqui, the co-founder and president of CAIS, says his company added GBI to its platform because financial advisors asked for it. "We've found that getting access to real assets like physical precious metals are very cumbersome for independent advisors and their clients," he says.

Farooqui adds that advisors have told him they want precious metals in time of financial duress but don't necessarily want ETFs and other products based on futures contracts and other derivatives that can be correlated to the market crisis du jour.

"If you're in the market to trade and speculate on gold, it's probably best to stick with financial products because they're easy to get in and out of," Farooqui says. He notes that's not a solution for ultra-high-net-worth clients who want security in owning a real asset with a buy-and-hold strategy.

"The most efficient way to do that is to own the physical gold, silver, platinum and palladium in your name," Farooqui says. CAIS's platform enables investors to buy and sell precious metal as easily as stocks and bonds and have it stored in a secure facility that's audited and insured.

The CAIS platform charges the same expenses for precious metals that GBI charges its customers--fees range from 0.25% to 2%, depending on the size of the transaction. Investment minimums can be as low as $5,000, but Farooqui says most orders have a $10,000 minimum and the average order is $25,000. He adds that roughly three-quarters of orders are for gold bullion, about 15% for silver and the remainder for platinum and palladium.

A Taxing Matter
Of course, investors need to consider the different tax implications for investing in precious metals. The IRS classifies physical metals as collectibles, and assets held less than a year are taxed at ordinary income rates while assets held more than one year are subject to the maximum 28% collectibles rate. The same rule applies to GLD, SLV and other ETFs that own and store physical metals when they're placed in taxable accounts.

Under the current tax code (which could expire at the end of 2012), short-term capital gains on shares of mining company stocks or funds that own mining stocks are taxed at regular income tax rates, while the long-term rate on shares held more than one year is capped at 15%.

There's a heap of uncertainty out there, particularly relating to the economy and to monetary policies that are flooding the world with liquidity. And that uncertainty is bound to keep precious metals in the spotlight for the foreseeable future.