LONDON (Sept 28) If the price of metals gets too high, markets contract or users find substitutes—aluminum for steel, PVC for copper piping. But some metals are rare enough, and their applications specific enough, that substitution is difficult.

Gold and silver are the quintessential hard-to-replace commodities. Platinum and palladium, though used industrially, are increasingly regarded as precious metals. Rare earths—which aren’t all that rare, just hard to mine economically—make up components for iPhones and plasma TVs, and are plays on the future.

Gold, out of favour through most of the 1990s, grew in popularity in the early 2000s as the Bush administration pursued a weak-dollar strategy for the U.S.

Mark Serdan, portfolio manager of the BMO Precious Metals Fund, says other factors included “the debt crisis in Europe and inflation concerns. Investment demand was also strong during that period, driven by a lot of those factors. There was a lot of central bank buying, especially out of India, China, Sri Lanka, Venezuela and other smaller countries.”

Supplies also were in decline at that time. “And then,” Serdan says, “you saw that parabolic move in gold in the summer of 2011 when you had the blowout of the European debt crisis.”

While gold’s been prized more as a safe-haven asset than an industrial commodity, investors have traditionally gained exposure through mining companies rather than buying the metal outright. That’s changing as more gold and silver ETFs come to market; even the Royal Canadian Mint has jumped into the fray (see “Royal ETRs,” this page).

Still, the advantages to owning mining companies should be that the cost of extraction and refining must be lower than the metal’s price, says Serdan. But “the biggest, large-cap gold miners haven’t proven that through the cycle. They’ve shown poor returns and you haven’t seen that leverage in margins. You should see with the rising gold price,” he says. “Unfortunately over the past three years, miners have shown poor decision-making in imposing capital discipline, and that’s worked against them.”

He does have some bullion-like holdings: gold certificates. His top holding is Bank of Nova Scotia certificates. Like gold receipts, they permit the owner to accept physical delivery of bullion. But they are bank obligations, just like GICs. Unlike GICs, however, they’re not easily cashable. Investors must accept delivery at 400 ounces per bar, or face additional charges.

“But certificates themselves remain easily tradeable, and avoid the assay, shipping, insurance and storage costs associated with bullion,” Serdan says. “They can be bought in denominations as low as 10 ounces.”

He’ll choose certificates over mining stocks because “sometimes you’re not seeing the [performance] out of the companies that you want to see, so you’re adding a bit of safety,” he says. “And I’ve always viewed it as an alternative source of cash [that allows me to gain] exposure to the gold price.”