Should I Invest In More Than One Precious Metal?

After 12 years of gains in the gold price, investors are now facing the true reality of unlucky number 13. Gold is set to end the year down for the first time in over a decade. Having hit an all-time in September 2011, gold has failed to return to that to spot. Silver has had a similar experience, touching $50 in 2011 but it is currently floundering below $20.

Meanwhile there are repeated calls for 2014 to be the year for both platinum and palladium, the industrial metals of the precious metals sector.

Which is the right metal to invest in and should you invest in more than one?

How would your portfolio perform if it included an equal measure of all four precious metals, rather than just gold or just silver, or perhaps both? We take a look below and find some interesting results.

If you had $10,000, how should you spend it? Eric Sprott has famously advised on the equal allocation of both gold and silver to portfolios. Investors appear keen to hold both, comforted by the belief that gold is more stable whilst silver offers bigger returns.

How does an equally allocated gold/silver portfolio compare to a platinum/palladium portfolio, allocated equally?

Unsurprisingly, the gold/silver portfolio has significantly outperformed the platinum/palladium. Whilst both saw similar returns in the years prior to the financial crisis, they swiftly diverged in the autumn of 2008.

But what if you decided to invest $2,500 into each metal at the beginning of the millennium, starting with a portfolio value of $10,000 in January 2000? How would it have performed over the years in contrast to investing $10,000 in an individual metal?

In the mishmash of lines above we can see that all five precious metals investment options tracked each other fairly closely in terms of performance in the first five years or so of the millennium.

Interestingly however, we do not see as significant a divergence as we did when we looked at selecting just two metals per portfolio. Unsurprisingly over the past 13 years, palladium has been the most disappointing, which is no doubt the reason why the portfolio with all four precious metals has only just outperformed platinum during the same period.

One ounce, four metal portfolio

The other day we were considering a one ounce precious metal portfolio, mentioned to us by Jim Rickards.

How would your portfolio perform if you bought just one-quarter of an ounce of each of the four precious metals? How would this varied, one ounce portfolio— purchased in January 2000—perform compared to if you had bought just one ounce of just one of the metals at the same time?

This time, the mixed portfolio has just underperformed platinum, a contrast to the $10,000 experiment. Once again, both gold and silver have significantly outperformed the mixed portfolio over the last 13 years, but only dramatically so between 2010 and 2012. Now, of course we see platinum, gold and silver returning to similar levels of performance that we are seeing from the mixed portfolio.

Would you be disappointed?

Would you be disappointed if you had invested either equal amounts of cash into each metal, or bought equal amounts of each one?

We don’t think so. You would have certainly enjoyed a calmer ride for the last 13 years, particularly if you compare the mixed portfolio’s performance to palladium or even silver.

The majority of individuals investing in physical precious metals do so with a long-term view. Few will have sold during the gold and silver peaks of 2011. If you did, then the mixed portfolio would have certainly disappointed you.

However, when we are now in a funny place where the global economy is perceived to be on the mend, it might not seem such a bad idea to diversify your portfolio into those precious metals that are generally perceived to be better performers in healthy economies – i.e. platinum and palladium.

Most who invest in gold or physical silver refuse to have the wool pulled over their eyes when it comes to claims that the worst of the financial crisis is over, however in the period of time that it will take for easy monetary policy to work its way through the system it looks like it wouldn’t be a bad bet to take on some platinum and palladium as well.