Other, Performance Reports, Diamonds
Published: 20/07/2023

Invest in precious metals: Diversify your portfolio

Precious metals such as silver, platinum, and palladium have always been a rather safe investment in times of crisis

Diversification can be challenging to navigate. It involves either balancing risk and return to achieve desired financial goals or reducing risk while aiming for specific returns. Regardless of your expertise, the most effective way to achieve true diversification is by investing in a range of assets, including alternatives beyond conventional stocks and bonds.  

Interestingly, despite being among the oldest financial instruments, precious metals are largely under-utilised and overlooked as investment options. They create an opportunity for investors to further diversify their portfolios and potentially capitalise on the historically distinct investment characteristics offered by precious metals. Being physically scarce and chemically unique, precious metals hold considerable value. Consequently, they serve as excellent long-term stores of value. 

Like other alternative investments, precious metals are global assets driven by the fundamentals of supply and demand 

Unlike commodities, however, they also tend to act like currencies. Macroeconomic and monetary factors, such as interest rates, exchange rates and inflation, act as key drivers. A well-diversified mix of precious metals tends to exhibit more consistent performance compared to investing solely in a single metal. It provides exposure to both the cyclical and non-cyclical factors influencing the prices of gold, silver, platinum, and palladium as a collective group. By investing in a basket of these metals, investors can take advantage of the diversification benefits inherent in the asset class while still benefiting from the unique characteristics that each individual precious metal offers. 

Precious metals have also historically remained resilient during extreme events and market turmoil 

The chart below highlights precious metals’ relative performance against global equities during major events of market uncertainty over the decades. A precious metals basket has had positive returns while volatility took over other markets. During turmoil, global equities are exposed to large sell-offs, as investors try to reduce exposure to risk assets and seek more stable, defensive investments.   

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The investment community often categorises precious metals as commodities, leading to their inclusion in asset allocations. There is some validity to this classification as precious metals share similarities in global production and storage practices with broader commodity sectors like energy, agriculture, and base metals. Nevertheless, we firmly believe that precious metals possess distinctive properties that set them apart as a distinct asset class, separate from traditional commodities and more like alternative investments. 

While commodities show a correlation of 0.54 to global equities, precious metals' correlation stands at only 0.26 during the same period. This substantial difference in correlation contributes to the independence of precious metals. 

Since 2008, precious metals have returned 8.3% annualised, while commodities returned only 1.24% annualised. 

As a Splint Invest user, here’s why it’s worth adding precious metals to your portfolio:  

Hedge against inflation: Precious metals like gold and silver have historically acted as a hedge against inflation. When the purchasing power of fiat currencies declines due to inflation, the value of precious metals tends to rise. As a result, holding precious metals can help protect your portfolio's value during times of rising prices. 

Safe-haven asset: Precious metals are often considered safe-haven assets, especially during times of economic uncertainty or geopolitical turmoil. Investors tend to flock to these metals when they seek refuge from market volatility and riskier assets. This demand can lead to an increase in their prices, providing a buffer against losses in other parts of your portfolio. 

Diversification benefits: Adding precious metals to your investment mix can enhance portfolio diversification. Different asset classes tend to have varying degrees of correlation with each other. Precious metals can have a low or negative correlation with traditional financial assets like stocks and bonds. As a result, their inclusion can reduce overall portfolio risk and enhance stability. 

Long-term store of value: Throughout history, precious metals have maintained their value over the long term. While their prices can be subject to short-term fluctuations, they have generally retained their purchasing power over extended periods. This stability can offer reassurance to investors seeking to preserve wealth over time. 

Limited supply and industrial demand: precious metals, particularly gold and silver, have limited supply and are challenging and costly to extract. Additionally, they have significant industrial applications, making them valuable commodities in various industries. This combination of scarcity and demand can contribute to their long-term value. 

Storage and handling: Compared to most financial products investing in precious metals, our product is not synthetical but physical, and is stored in our bank vault while being fully insured.  

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