How to Increase Portfolio Performance With Precious Metals During Inflation
Precious metals have long been considered a play against inflationary investment periods, and a new study is now confirming their value as a hedge. Precious metals are rare, natural metals used for industrial processes or metals that hold significant economic value — and they’re a crucial part of a balanced portfolio when prices start to surge.
Precious metals include most notably include gold and silver but also include platinum, palladium, rhodium, lead, zinc and copper among others. Gold in particular is used as an international store of value.
“As gold carries no credit or counterparty risks, it serves as a source of trust in a country, and in all economic environments, making it one of the most crucial reserve assets worldwide, alongside government bonds,” Reuters says.
Given their widely accepted value, precious metals can toggle the volatility of a portfolio back to center during the big equity swings markets have endured in the past few weeks.
Economists from Pusan National University in Korea and Rennes School of Business in France analyzed the spillovers and resource allocation qualities of nine precious metals and equity markets in a 2021 study. The team of researchers analyzed the relationship between gold, silver, palladium, platinum, nickel, lead, zinc, copper and aluminum. They found that nickel and lead were the least desirable to mitigate risk, with gold and aluminum being the most desirable metals for investment.
Another study — “Volatility Spillover Among Equity and Commodity Markets,” published in 2020 — also found that there is no spillover among gold and equity markets, meaning investors can invest in equities and gold to diversify the risks within their portfolios.
Not all precious metals are created equal. The research out of Pusan University also found that the largest spillovers among precious metals occur between gold and silver and between zinc and lead, PR Newswire reports. The largest spillovers of the world, the Americas, Europe, and Asia Pacific equity indices are on palladium and copper, the report adds.
It’s important for investors to remember that the prices of precious metals do not always follow the prices of equities. For the purposes of hedging against inflation, this aligns with the objective — but if prices come off, this could make for a skittish investor. Precious metals can be bought on their own, or through funds like ETFs. It is important to note that if you ever physically hold precious metals, the IRS will tax any capital gains made upon their profitable sale at 28%.
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