Skip to content

Can Precious Metals Make Your Portfolio Shine? (2007)

by on October 30, 2013

This paper extends earlier studies of Hillier, Draper and Faff (2006) in the following ways:

First, it compares and contrasts the benefits of direct and indirect investments in gold, silver and platinum, along with combinations of these three metals.

The results show that both provide significant return and risk benefits to U.S. equity portfolios only when the Fed monetary policy is tightening. And indirect investment such as investing in precious metals firms actually provides considerably larger benefits.

Second, it examines whether the diversification benefits by including precious metals in the equity portfolio varies with the Fed’s monetary policy stance, since monetary policy responds to the expected increasing inflation.

Then it investigates whether an ex ante indicator of changes in the Federal Reserve’s broad monetary policy stance can be used to improve precious metal allocation strategies ex ante.

It finds that the returns to precious metals are significantly higher during periods when Federal Reserve has a tightening monetary policy.

The fourth extension is through examining the benefits of adding varying degrees of precious metals exposure to a portfolio ranging from minimal (5%) to prominent (25%).

The results show that a prominent portion of the precious metals in the portfolio improves the performance substantially (25% allocation increases annual returns by 1.65% and reduces the standard deviation by 1.86%)

Finally it examines the temporal consistency of the benefits over a lengthy and current time period (1973 to 2006).

They find that the benefits of adding precious metals to an equity portfolio varied over time that the reduction in risk is considerably larger during restrictive policy periods. The benefits are quite pronounced in recent years and are more pronounced for the tactical allocation strategy relative to the strategic portfolio (2.75% versus 2.08%)


Correlation coefficient analysis

Following Jensen, Mercer and Johnson (1996), this paper uses turning points in the Fed discount rate as an indicator of the Fed’s monetary policy shift.


Daily returns of the U.S. equity market and six alternative precious metals indices from January 17, 1973 to December 2006.

Six indexes are:

Precious Metals Equities: equally-weighted average of the total return to the equities of global firms in the gold;

Gold Equities: total return to equities in the global gold mining sector;

Precious Metal Commodities: equally weighted average total return on gold, silver, and platinum;

Commodity returns on London gold bullion price in U.S. dollars per troy ounce, the London Bullion Market silver price in U.S. cents per troy ounce, and the London Free Market platinum price in U.S. dollars per troy ounce.


We extend earlier studies and present new evidence on the benefits of adding precious metals to U.S. equity portfolios. We report five major findings related to the potential benefits of investing in precious metals either directly via the commodity or indirectly via equities. First, we find that adding a 25% allocation to the equities of precious metals firms improves portfolio performance substantially. Second, our evidence indicates that an indirect investment dominates a direct investment in precious metals. Third, relative to platinum and silver, gold has better stand-alone performance and appears to provide a better hedge against the negative effects of inflationary pressures. Fourth, the benefits of precious metals are strongly tied to monetary conditions. Finally, while the benefits of adding precious metals to an investment portfolio varied somewhat over time, they prevailed throughout much of the 34-year period. Overall, our evidence suggests that investors could improve portfolio performance considerably by adding a significant exposure to the equities of precious metals firms.

Full Citation

Conover C. Mitchell, Gerald R Jensen, Robert R Johnson, and Jeffrey M Mercer, 2009, Can precious metals make your portfolio shine?, The Journal of Investing 18, 75–86.

You can find the paper here:


From → Empirical, Gold, PGMs, Silver

Leave a Comment

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: