To any Olympic athlete, gold is the goal; however, that may not be the case for an investor. Let’s take a look at the statistics to see how the metals stack up. Below is a cumulative return chart of gold, silver and copper. Notice over the period that gold has the highest performance with a total of 593% followed by copper and then silver, gaining 452% and 283%.
Source: S&P Dow Jones Indices. Data from Jan 1978 to Jan 2014. Past performance is not an indication of future results. This chart reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with backtested performance.
However, few look at returns without considering risk. Over the time frame, risk as measured by annualized volatility was 47.6% for silver, 27.3% for gold and 26.3% for copper. Although silver had both the highest volatility and lowest cumulative return, it had the highest average monthly return, up 112 basis points. This is compared with only 73 bps for gold and 68 bps for copper in an average month. Further, in the average up month, silver had the highest gain of 8.9% versus only 6.0% for copper and 5.2% for gold. One might conclude taking the highest risk can pay off but looking at the downside counts as well. The reason gold had the highest cumulative return was since the average loss in a down month of -3.7% was smaller than for either copper’s or silver’s average monthly loss of -5.0% and -6.6%, respectively.
One major difference between copper and both silver and gold is that copper is an industrial metal though gold and silver are precious metals. This makes copper more sensitive than gold to inflation. Another key difference from the fact that copper is industrial is that the supply/demand model is dramatically different. As Blu mentioned in the video, the gold is mined whether or not the miners shut down, but this is not the case for copper. Copper supply has been stifled by declining ore grades, equipment failures and shortages, and labor disputes. The impact can be observed and capitalized on by the roll return in the term structure of the futures curve. See the chart below of historical backwardation and contango in copper, gold, and silver and notice the high backwardation at times for copper that are missing from gold and silver.