If there’s been a worse place to be as an investor over the past few years than gold & silver stocks then I haven’t found it. Over the past three years a diversified basket of these metals and mining companies is down over 65%. In that same time the S&P 500 is up nearly 75%, an enormous difference in performance. Here’s a look at the historical numbers to get a better sense of how they tend to act.
The above introductory comments are edited excerpts from an article* by Ben Carlson (awealthofcommonsense.com) entitled An Opportunity in Precious Metals Stocks?.
Carlson goes on to say in further edited excerpts:
…[Below is] a look at how cyclical gold & silver stocks are based on the Vanguard Precious Metals Fund since 1985:
Volatility is roughly double that of the S&P 500 over this same time frame while the S&P 500 gained almost exactly double the annual returns, 11.20% per year to be exact so gold & silver stocks gave you half the return at double the volatility.
You can get a sense of this volatility by looking at the 5 largest annual gains and losses in the fund:
It’s basically feast or famine.
I looked at two portfolios
- a simple 60/40 portfolio of the total U.S. stock market and the total U.S. bond market and
- a portfolio made up of 50% in stocks, 40% in bonds and 10% in gold & silver stocks (so the same 60/40 overall stock/bond ratio)
to see if gold & silver stocks…decrease volatility and increase returns and found that, while this has been true in the past, that the differences are minimal…Here are the results from 1985-2013:
Adding a 10% allocation to gold & silver stocks did slightly increase the performance and lead to a decrease in volatility. This is most likely a rebalancing and diversification bonus (I assumed an annual rebalance). The correlation between the S&P 500 and the Vanguard Precious Metals Fund was only 0.14, signaling a weak relationship between the two asset classes.
The question investors have to ask themselves is this: Is the ridiculous volatility worth it for the chance to potentially outperform by a slim margin and barely reduce the volatility characteristics of a portfolio?
…For many investors, the higher the volatility, the higher the chance for making dumb mistakes plus there’s the possibility that these stocks could continue to drop. To go from a 65% loss to a 75% loss would mean another 25% fall from here. Things can always get cheaper before they finally turn around and there’s nothing that says these stocks have to follow the same path they’ve taken in the past. The 2001-2007 period made up the majority of the gains in these stocks. Who knows if we’ll ever see that kind of outperformance in the commodities space again. You have to be a very brave investor to add precious metals stocks as a long-term allocation to a portfolio because you could be waiting a long time for them to prove their worth.
Precious metals stocks are sure to test your patience yet I’m sure they also look extremely tempting to many investors after such a huge fall. Decisions, decisions.
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
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