How Much to Invest, If Any, in Precious Metals? A 21st-Century Perspective

Abstract

Studies that support an investment in precious metals, whether as a defense against severe financial market downturns, as a hedge against inflation, or for price appreciation potential, do not offer guidance on the percentage allocation for “buy-and-hold” investors. As a response to this issue, this study applies the Black–Litterman model of modern portfolio theory to well-known index mutual funds—one guided by the classic 60%/40% stock/bond allocation and one based on an all-equity allocation. The period under study is from January 2000 to September 2020. Although statistical evidence supporting the efficacy of a precious metal allocation is elusive, the results suggest an average allocation of about 2% for “buy-and-hold” investors who seek one. <b>TOPICS:</b>Commodities, portfolio theory, portfolio construction, performance measurement <b>Key Findings</b> ▪ In the 21st century, the prices of precious metals, such as gold and silver, registered robust runs, recording strong double-digit growth rates from 2000 to 2012. The years following, however, saw a reversal of fortunes. Such volatility naturally leads to contention about the efficacy of a precious metal allocation in well-diversified balanced and equity portfolios, with views ranging from 0% to 40%. ▪ Applications of the Black–Litterman model of modern portfolio theory to index-based balanced and equity mutual funds to 1-, 3-, 5-, and 10-year forward-looking holding periods reveal, at times, a place for a precious metal allocation. From 2003 to 2010 and from 2016 to 3Q2020, for example, the allocations are in the range of 5%–10%. Other periods, however, register little more than 0%. ▪ The statistical evidence supporting a precious metal allocation is elusive. Nonetheless, there is enough evidence supporting the holding of precious metals at times that an allocation of about 2% appears appropriate for buy-and-hold investors who prefer one.