Precious metals are a superb store of wealth, a proven hedge against inflation, economic uncertainty and the risk of political instability. Each metal has its own appeal, as well as commercial and industrial uses. But does one shine brighter than the others as a long-term investment?
Recently, we discussed academic research that proves allocations to gold can substantially improve the performance of portfolios invested primarily in stocks. The same researchers compared gold against silver and platinum over the course of more than three decades. The study found that gold delivered an average annual return of 6.64 percent, slightly outpacing platinum which rose 6.51 percent. During the period studied, 1973-2006, silver trailed, with an average annual return of 5.39 percent. The price of gold also proved to be less volatile than the other precious metals. “Relative to platinum and silver, gold has better stand-alone performance and appears to provide a better hedge against the negative effects of inflationary pressures,” argue the authors, professors from Texas Tech University, The University of Richmond, Northern Illinois University, and the managing director of education at the CFA Institute.
It was during periods of Federal Reserve monetary policy tightening that precious metals truly excelled. Gold rose at an annualized pace of 14 percent, platinum climbed an annualized 9.6 percent and silver rose at a pace of 5.6 percent-a-year, as the central bank raised interest rates.
That’s the environment in which we currently find ourselves. The Federal Reserve is gradually tightening policy, having lifted interest rates four consecutive times since December of 2015. The bank’s Open Market Policy Committee has indicated it intends to continue raising interest rates as it pulls back from the historically expansive policies it implemented in response to the financial crisis of 2007-2008 and the ensuing great recession.
“Precious metals, and particularly gold, have been an effective hedge against the increasing inflationary concerns that tend to coincide with periods of restrictive Fed policy,” the study concludes.