Big four still precious

June 29, 2015

Zoe Wolff

For more than a decade, institutional investors have been increasing their allocations to commodities, according to a 2014 report published by Cohen & Steers. Commodities help to diversify the portfolio and to hedge against inflation. “In periods of rising inflation from December 1970 through June 2014, commodities generally have demonstrated a far more meaningful record of outperformance, compared to equities,” says the report.

According to ETF Securities’ precious metals first quarter 2015 report, precious metals were the best performing commodity sector at the start of the year. Precious metals include gold, silver, platinum and palladium. While all four precious metals are attractive portfolio diversifiers, according to Mike McGlone, head of U.S. research for ETF Securities, they each have very different supply and demand source and cycles. Understanding the investment virtues of each metal will help overall investment performance.

According to the first quarter report, gold has remained resilient. In euro currency it has increased 12.7 percent, while it has remained essentially unchanged in the U.S. dollar. McGlone, who authored the report, says most of the demand for gold is coming from emerging markets such as India and China and that demand will only continue to increase with increasing per capita incomes in those countries. “Gold can be considered the quintessential currency, so it should benefit if there are any issues with the U.S. dollar or increasing inflation,” says McGlone. “It also has a history of providing a store of value and diversification in times of deflation as investors seek safety.”

Over 50 percent of demand for silver is industrial purposes. Silver is a great conductor of electricity and has reflective properties, also making it great for electronics. According to the report, silver inventories have been declining globally for years and are about one-third of what they were in 1990. “Unlike gold, where most of it ever mined still exists and only 10 percent of new production every year is used up, most silver produced is used in industry, resulting in favorable supply and demand trends,” says McGlone. Silver, however, has a history of moving about 1.4 times the price of gold in either direction, generally making it the most volatile of the precious metals.

The main sources of demand for platinum are for emission controls and jewelry. Europe is the largest diesel market in the world and the recession the past few years has impacted the price of platinum, says McGlone. The report notes that platinum is currently considered the cheapest of the precious metals due to its all-in cost of production being much higher than the current price. McGlone states, “Operating below the cost of production is not sustainable in the longer term, so it is quite likely the price of platinum will increase; it may be more just a question of time.”

Palladium has been the best-performing precious metal the past few years, and it has the lowest cost. Around 90 percent of its demand is for industrial purposes, as it has become a substitute for platinum in the production of catalytic converters. The Chinese auto market is one of the largest in the world, and as China continues to grow rapidly, the demand for palladium does as well. With most palladium coming from Russia and South Africa, the supplies are constrained, particularly with the labor unrest and potential sanctions on Russia, says McGlone.

“Given the steep discount most of the precious metals are at now from previous highs, somewhat elevated equity prices and brewing issues with currencies and excessive sovereign debt accumulation, the precious metals are looking rather attractive,” says McGlone. Like all commodities, precious metals are a great portfolio diversifier. McGlone suggests investing in all four rather than just one to see the best returns. Investment options include stocks and mutual funds that hold shares in mining companies, as well as exchange traded funds that hold bullion. 

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