Steven Dunn, executive director and head of U.S. for ETF Securities, makes a compelling case for precious metals like gold, silver, platinum and palladium to be a core holding in investors’ portfolios.
“There’s a good case for [precious metals] being a core holding of your portfolio,” Dunn told ThinkAdvisor. “It may not be 20% of your portfolio, but maybe a core 5% of your portfolio.”
ETF Securities, an asset manager focused on exchange-traded funds, exchange-traded commodities and exchange-traded currencies, has approximately $2.5 billion assets under management in the U.S. and $22 billion worldwide. ETF Securities’ current U.S. precious metals offerings include: ETFS Precious Metals Basket Trust (GLTR), which was the first in the U.S. to offer a physically backed precious metals basket ETP that holds gold, silver, platinum and palladium in fixed weights; ETFS Gold Trust (SGOL); ETFS Silver Trust (SIVR); ETFS Platinum Trust (PPLT); and ETFS Palladium Trust (PALL).
Recent research from ETF Securities shows that adding a precious metals allocation to a diversified stock-bond portfolio has historically increased portfolio efficiency – lowering risk while increasing return.
“In 2016 we’ve been spending a lot more time talking to advisors about the role [of precious metals] within a portfolio, the percentage they should play within a portfolio,” Dunn said. “We’re trying to make the case that commodities should never be zero, because they do some really great things in your portfolios. Typically they lower your overall risk portfolio, they bring you diversification through low correlation, and they provide you with a little bit of a performance boost.”
Dunn said the diversification aspect is the most important thing he tries to reinforce to financial advisors.
Diversification, ETF Securities says, has become more challenging to achieve following the 2008 financial crisis.
“Correlations across alternative investments rose dramatically in 2008 compared to the preceding period from 1996 to 2007,” the firm says in a July report. “Following 2008, however, several alternative investments’ correlations and equity exposure to global equities remain elevated compared to their pre-crisis levels, particularly commodities and REITs. Meanwhile, precious metals remain an exception — further highlighting their effectiveness as a true alternative investment.”
Along with their diversification abilities, precious metals also have performed well during event risks and equity volatility.
This can be seen in their relative performance against global equities during several key events of market uncertainty in recent decades, the report says. For example, following the 2008 global financial crisis, the cumulative return for global equities was -43.8% while precious metals had a cumulative return rate of 1.3%. More recently, following Brexit, the cumulative return rate for global equities was -1.2% while precious metals saw a cumulative return of 9.8%.
“Gold and other metals have historically performed well during these event risk type of issues,” Dunn said “I think people are a little more concerned about those types of things: How do I protect a portfolio against these types of [events]? How do I buy a little insurance? … A good way to do that, historically, has been this way.”
According to the report, this role as a risk management tool is especially useful for long-term investors seeking to continually hedge against a broad spectrum of both known and unknown risks.
“In most situations you don’t know what the event is,” Dunn said. “We know that we’re going to have them, we just don’t know what they’re going to be or what the timing is going to be. I think that’s the case that we’re trying to make specifically to the financial advisor community.”
Dunn said that in the past advisors have gone to products like master limited partnerships or managed futures rather than precious metals.
“I think every time we see those products [MLPs or managed futures] fall down at the time that we need them, sometimes their correlation ends up being as high as owning an equity, “ Dunn said.
This is another benefit that ETF Securities points out in it report: Precious metals have historically shown low correlations with most asset classes, particularly equities.
According to ETF Securities research, precious metals have carried lower correlations to both U.S. and global equities than other alternative investments over the past 20 years.
“The source of this low correlation lies within the diverse sources of demand across gold, silver, platinum, and palladium,” the research states. “Pro-cyclical sources of demand (jewelry, consumer, and industrial applications) increase as growth and incomes increase along with the economy.”
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