Risk diversification in precious metals

Investment in alternative assets requires deep market knowledge where one should be able to analyse the efficiency of metals, rate of return and dependency of rate on political and economic factors. Precious metals are value storage investment assets which can provide holding value during economic crisis.  Reports state even during crash in 2008, the price of gold had 5 per cent gain in the year end. The risk and returns in precious metals are dependent on varying factors.

There is no fundamental value of the paper money. During recession economies printed more money and this reduces its value. Economic researchers believe the massive build-up of global debt and reckless deficit spending without a proper political support may lead to another recession. Gold can offset stocks during recession and it is highly recommended in proper diversified portfolio.

Risk in precious metal investment

Gold investment has many risks. Gold boom can turn anytime into a bust and it does not produce a cash flow.

Gold and silver investments require storage and transportation costs. 

High risks are associated with high price in gold, in comparison, other precious metal such as silver has industrial utility and it is inexpensive as compared to gold. 

Most precious metals are driven by their own supply and demand characteristics. 

Why to invest in precious metals?

Precious metals lower currency risk and gold investment has negative correlation to currency US dollar index. The World Gold Council report state - Gold can be used to meet short term cash needs. Several Central Banks use gold holdings to raise short-term dollar. It is used as a key currency for settlement of trade.  In the past 17 years, S&P500 underwent many unpredictable changes, which raised the appeal for gold diversification.

Gold works even when the local currency is not working and it trades more than other financial assets.  Gold can be used as a key currency which provides liquidity during crisis and can be used for the settlement of trade. It mitigates US dollar currency risks.

Collectively, the Central Banks hold world’s largest above ground gold and some Central Banks are largest holders of gold bullion. Most Central Banks hold gold for asset diversification and financial insurance.

Germany’s Deutsche Bundesbank stated the reason for holding gold is that Gold has a high liquidity and a powerful role during crisis. Gold can be sold at storage site, without transportation and it works as an emergency reserve in crisis situations.

UK treasury sees gold as an ultimate asset which has negative correlation to other assets, at the same time as, it provides the needed diversification. It is less volatile as compared to several other options.

Oil producing companies are vulnerable to phases of depletion during low global growth and gold provides hedge in such conditions.

Gold and other precious metals continue to play a major role and outperform other asset class in an investment portfolio. A transparent, fair, low-risk, robust and reliable business conduct is required to invest in precious metals.  

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