Precious Metals ETFs Augment Portfolio Efficiency

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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.

"The continued downturn in mining capital expenditure, currently the deepest since 1997, may keep silver in a supply deficit," Gold said.

Furthermore, the rising industrial demand may help keep the market in deficit despite lower investment demand.

Platinum and palladium may also experience greater demand among a auto manufacturers as auto sales gain momentum.

Investors who want access to precious metals 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). ETF investors can also use the ETFS Physical Precious Metals Basket Shares (NYSEArca: GLTR) as a catch-all of all four precious metals.

"A diversified basket of precious metals tends to perform more consistently versus any single metal and creates an exposure to both the cyclical and non-cyclical drivers of gold, silver, platinum and palladium as a whole," Gold added.

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

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