Market Beat: Investing in precious metals
Diversification is one of the best tools that investors have available to manage their risk level. In other words, “don’t put all of your eggs into one basket.”
By diversifying, the different types of risks that investors face can be spread out. Many people tend to think of risk only in terms of losing money if an individual stock or the stock market falls and they have a loss.
However, there are other types of risk as well. One is inflation or purchasing power risk. If you invest too conservatively your money may not keep up with the inflation rate and you’ll lose purchasing power over time. Money invested in bonds can be affected by interest rate risk, fixed income investments will drop in value as interest rates rise. Foreign investments are subject to currency risk.
Some very good research was done by Yale University for their endowment fund. They developed what is now known as the Endowment Model and one of the principals of the endowment model is diversification.
The endowment model calls for some exposure to natural resources. Precious metals, like gold and silver are a component of the natural resources’ allocation. Gold and silver are not highly correlated to the stock market and frequently move inversely to the direction of the stock market.
There are many different ways to invest in precious metals like gold and silver. If you have broad based index funds as a part of your investment strategy you will have some exposure to the mining industry which is in the Basic Materials Sector of the S&P 500.
There are several Exchange Traded Funds that represent gold and silver and they are highly liquid. There are also sector funds that focus on the mining companies and you can purchase individual stocks as well.
As I write this, the year is not quite over for stocks, but year to date the S&P 500 is down about 7 percent and we had an up day on New Year’s Eve. Gold and silver futures have already closed, and gold closed the year down about 2 percent, but it was up 4.6 percent in December and 7.2 percent over the last quarter.
Silver was also down for the year with a drop of 9.4 percent but had a gain for the month of 9.4 percent and rose 5.7 percent over the last three months. Hope you all have a happy new year.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.