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Do Precious Metals Shine? An Investment Perspective (2006)

by on October 29, 2013

This paper examines gold, silver and platinum’s role in the capital markets and aims to answer the following three questions: what role does gold play in today’s financial markets? Are the markets for precious metals efficient? Do precious metals provide valuable diversifying qualities beyond those achievable in a portfolio devoted solely to financial assets?

The paper concludes that all three precious metals provided considerable diversifying benefits in volatile markets when held in a portfolio of U.S. or global stocks, while the diversifying role of precious metals is limited during poor market return periods.

The authors then consider two strategies to examine the portfolio efficiency: a buy-and-hold strategy and a “switching” strategy. The portfolio efficiency is measured as the relative reward-to-risk ratio. Their results suggest that in a passive buy-and-hold strategy, the optimal weight of gold in broad-based international equity portfolios is approximately 9.5%, significantly higher than in most funds’ equity portfolios at that time. The switching strategy for gold, silver and platinum do not provide significant efficiency gains.


The paper firstly applies the GARCH (1 1) to each series to analyze its conditional variance properties, which fit the three precious metals return series well.

Next, market model-type regression is used to examine the diversification properties of precious metals. The daily return on the precious metal at time t is regressed on the daily return on the S&P 500 market index and EAFE market index for the corresponding period plus an intercept and an error term at t. The regression slop coefficient represents the elasticity of a precious metal and the more negative a metal’s elasticity, the greater the diversification benefits achievable from including that metal in a portfolio.

The market model type regression is then modified by including dummy variables to account for the different effects during periods of high and low volatility in the market return, as well as during periods of good and poor market returns. (High volatility here is defined as market volatility of more than 2 standard deviations above mean volatility. Poor market return is defined as when the market return is more than 2 standard deviations lower than the mean market return. )

Finally, the authors used a bootstrapped mean-variance optimized portfolio algorithm (BMVP) to estimate the optimal portfolio asset weights on monthly data from January 1987 to July 2002.


Daily, continuously compounded returns from the Long gold bullion price in US$/kilogram. S&P 500, MSCI Europe/Australasia/Far East (EAFE) index from January 1976 to 1 April 2004.


The investment role of precious metals in financial markets is investigated by analysis of daily data for gold, platinum, and silver from 1976 to 2004. All three precious metals have low correlations with stock index returns, which suggests that these metals may provide diversification within broad investment portfolios. Moreover, the data reveal that all three precious metals have some hedging capability, particularly during periods of “abnormal” stock market volatility. Financial portfolios that contain precious metals perform significantly better than standard equity portfolios.

Full Citation

David Hillier, Paul Draper, and Robert Faff, 2006, Do precious metals shine? An investment perspective, Financial Analysts Journal 62, 98-106

You can find the paper here:


From → Empirical, Gold, PGMs, Silver

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