Precious metals may diversify investment portfolios

In a highly volatile global market, precious metals such as gold, silver and platinum may continue to provide investors with a number of advantages. Although the market for precious metals has weakened in recent years, prices have generally appreciated over time, driven largely by investor and consumer demand.

Below is a breakdown of three advantages of trading precious metals.

1. Precious metals hedge against risks

Long considered safe haven assets, precious metals such as gold and silver may be an important part of a well-balanced portfolio. Although precious metals also face price fluctuation, when leveraged properly they may be used to hedge against inflation and curb against economic uncertainty.

Inflation and inflation expectations are a major driver of the global financial markets. Each day, investors monitor economic data and central bank press releases to determine the current and projected path of inflation. When inflation is too low or too high, central banks can intervene in the economy by adjusting interest rates. This has a significant impact on financial assets. However, according to a 2007 study by Conover et al. investing directly or indirectly in precious metals may hedge against tighter central bank policies.

Commenting on the US federal reserve, Conover et al. note that, “During periods of Federal Reserve tightening, the returns to precious metals commodities are significantly higher than they are during expansive policy periods. This result is in stark contrast to the U.S. equity market and the equities of precious metals companies.”

2. Precious metals may diversify investment portfolios

Diversification is a tool used by investors to minimise risk exposure, increase stability and maximise returns. In this sense, precious metals may be an important aspect of any diversified portfolio. They may provide gains in periods of market instability and may be used as a buffer against economic uncertainty.