Why Diversification Makes A Precious Metal Portfolio Stronger

From the office of Ali Rickards:

Original Source: http://www.visualcapitalist.com/diversification-precious-metals-portfolio/

Precious metals like gold, silver, and platinum have many things in common.

They tend to be heavy, durable, ductile, and malleable – all desirable traits for monetary metals. They also tend to be quite rare, which is part of the reason that investors have put trust in these assets as stores of value for hundreds of years.

Despite all these commonalities, the story of each individual metal is actually quite unique. Each metal is driven by its own set of supply and demand characteristics that are unique from the group. As a result, there is a significant amount of variance in the price patterns between each individual precious metal.

PRECIOUS METALS DIVERSIFICATION

Today’s infographic comes to us from Neptune-GBX and it showcases the story of each precious metal.

More importantly, it shows why owning them simultaneously is the only way to get exposure to the unique supply and demand drivers behind each of them in the context of the modern market.

Why Diversification Makes a Precious Metals Portfolio Stronger

The story of each individual precious metal is quite unique:

Gold
Investors and people buy gold bullion or jewelry as a store of value, and the gold price is sensitive to events in financial markets. Its main use is investment, and supply is diversified and global.

Silver
Silver is unique “hybrid” metal that is simultaneously driven by its investment and industrial uses. Its main uses are investment and industrial, and supply is diversified and global.

Platinum
Used in catalytic converters and for other industrial uses. Platinum demand also comes from jewelry and investment sectors. Platinum supply only comes from South Africa, Russia and Zimbabwe, giving it a unique set of supply characteristics.

Palladium
Palladium is a purer industrial metal than platinum, with 80% of demand coming from catalytic converters. It has similar supply issues to platinum.

Because each metal is different, when one increases in price, the others may or may not follow suit. This creates a problem and an opportunity for investors.

WHY DIVERSIFICATION MATTERS

How do investors minimize the volatility of precious metals investments, while still maximizing returns?

It’s a risk management problem that portfolio managers have been dealing with for decades – and they’ve come up with a proven solution: diversification.

Diversification benefits:

  • Reduces risk: All eggs aren’t in one basket
  • Preserves capital: Protects against major declines in one asset
  • Generates returns: Portfolio can grow in boom or bust

Since the four major precious metals are driven by individual demand and supply factors, diversification can allow you get exposure to the unique drivers behind each metal at the same time.

 

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