Choosing the Right Precious Metal ETF for the Right Job

Precious metals exchange traded funds have been used to hedge against a number of unknown risks, but the various market risks may warrant specific hedges to get the job done.

Maxwell Gold, director of investment strategy at ETF Securities, argued that specific precious metals should be used to address volatility in different markets, like equities, oil and currencies.

For instance, heightened equity volatility historically benefits gold and platinum, but equity drawdowns favor gold and silver.

“When evaluating the VIX Index, there have been 59 trading weeks since its inception in 1990 where it experienced elevated levels (weekly moves exceeding 2 standard deviations),” Gold said in a research note. “These periods of elevated volatility on average have favored gold and platinum, with median weekly returns of 0.5% and 0.2% respectively and broadly even performance distributions. Silver’s track record to extreme VIX moves, on the other hand appears to be negatively skewed.”

All precious metals tend to do well during periods of positive oil shocks, but when oil prices rapidly decline, gold and platinum have provided a better hedge to oil price volatility over silver.

“When the oil price drops rapidly, gold and platinum have provided a better hedge to oil price volatility than silver,” Gold said. “Platinum, however, significantly outperforms both gold and silver during the largest weekly oil price drops on average. This may stem from the fact that a large part of platinum demand is tied to auto sales and with a fall of 15% or more in oil prices, this may boost market expectations of future auto sales spurred by a lower oil price environment.”

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Lastly, while shifts in reserve currencies may weigh on precious metals, shocks from emerging market currencies may be relatively limited.

“For emerging market (EM) currencies, the sensitivity is broadly negatively correlated but more limited compared to reserve currencies,” Gold added. “Therefore shocks to these currencies may be more limited to metals prices.”

Consequently, investors who want to use precious metals as a short-term hedge may consider a number of physically backed metals-related ETFs as a way to diversify a traditional stock and portfolio, including ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), ETFS Physical Silver Shares (NYSEArca: SIVR), ETFS Physical Platinum Shares (NYSEArca: PPLT) and ETFS Physical Palladium Shares (NYSEArca: PALL).

For more information on the metals market, visit our precious metals category.

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