Precious Metals ETFs Augment Portfolio Efficiency

After the recent bout of market volatility, investors may want to consider alternative assets like precious metals exchange traded funds that zig as traditional assets zag.

“Adding a precious metals allocation to a diversified stock-bond portfolio has historically increased portfolio efficiency by helping to reduce performance drawdowns during equity market volatility,” Maxwell Gold, director of investment strategy at ETF Securities, said in a recent note.

For example, many would turn to gold as a go-to alternative precious metal hard asset to improve diversification in a traditional stock and bond portfolio.

While some may be wary of adding gold in a rising rate environment, gold prices have actually increased 26% since the start of the current Federal Reserve tightening cycle started December 2015.

“The perception that rising rates spell doom and gloom for metals is not as clear cut as many presume,” Gold said.

Over the past four decades, there have been 10 major rate tightening cycles by the Fed. While some periods saw pullbacks in gold prices, as many periods still exhibited strong positive returns, notably in the 1977 to 1980 and 2004 to 2006 periods. The strength in gold may be attributed to factors like rising inflation expectations and rising rate-induced volatility in equities that pushed investors to safe haven assets.

Other precious metals may also be a good play in the environment ahead. For instance, silver prices could see support from cutbacks in mining and a supply deficit. Only 25% of silver is mined directly while the rest comes from a by-product of other mining operations. The decline in mining investment will also likely remain a persistent headwind as reductions in investment tend to have a lagged impact on silver supply by typically one to two years.