If you have been investing for at least a few years, then you would have heard the term – diversification. But as simple as it sounds, many investors are often unable to implement this in practice.
So, what is portfolio diversification?
Simply put, portfolio diversification is the idea of spreading your investments across many different asset types. And it happens at two levels. Among different assets and within different instruments of a given asset.
And while most investors are busy investing assets like debt, equity, real estate, generally, precious metals are ignored. But eventually, if not immediately, the realization occurs that having some allocation to precious metals is always a good idea.
Precious metals are not just about gold. Though the yellow metal hogs the limelight and news time disproportionately, there are silver, platinum and palladium that also qualify as precious metals.
- Gold doesn’t need an introduction. Gold is, for lack of a better word, gold.
- Silver too is well-known in the jewellery space but not many know that it has a substantial use case in industries as well. So silver is not just a store of value (or inflation hedge) like gold. It also is linked to the global economy due to its industrial uses.
- Platinum too has demand from jewellery as well as industrial segments.
- Palladium is more of an industrial precious metal and has a very small ornamental demand.
But unlike equity or debt, precious metals have no intrinsic value or cash flows. As a result, you can’t put a valuation on them in a pure economic sense. Their prices are more about the demand-supply equation at any point in time and factors affecting this equation (like financial crisis, geo-political issues, etc.).
Also, each of these 4 metals is different and has a different price trajectory. So, you will generally not see all of them moving together at the same pace in a given direction.
Generally, most precious metal investors will only invest in gold. Or perhaps also in silver. In fact, many believe that investing in gold coins is the best way to get any precious metal exposure. Then there are many who specifically look for proof coins which are specifically manufactured for the collector’s market.
But is this the right thing to do from a portfolio diversification angle? Ideally, one should diversify more within the asset itself. But things might differ when you look at them from a practical lens.
So first let’s see how much allocation to precious metals should investors have in their investment portfolios.
Generally, 5% to 15% is what is recommended depending on investor requirements and profile. Do read how much to invest in gold to understand the reason for the suggested allocations.
But in practical terms, having 5% is too small an exposure to have any impact as it neither helps much in diversification nor anything else. So at least 10% is what should be considered. If not immediately then the investors should plan to scale it up to that extent over a short period of time.
For the sake of discussion, let’s say the allocation to precious metals is decided as a neat 10%. Then how should this be spread across different metals?
- Should you invest the entire 10% in gold only?
- Should you invest the entire 10% in gold and silver?
- Should you invest equally in all 4 metals gold, silver, platinum, and palladium?
There can be many such similar questions to deliberate how to spread your precious metal bets.
But ideally, here’s what to consider –
- If you are a small investor, then gold in itself is good enough as the only precious metal in your portfolio. So, if you decide to have a 10% allocation to precious metals, then the entire 10% can go to gold. Plain and simple.
- Once your portfolio size grows, then you can consider further adding silver to the mix. Between gold and silver, I would still suggest giving disproportionately high weightage to gold. So, if you want to have a 15% total allocation to precious metals, then go for 10% to gold and the remaining 5% to silver. You can have a higher allocation to silver if you are willing to digest the high volatility that silver is generally known for.
- Once you further climb up the wealth ladder, only then you should think about getting into platinum and palladium from an investment perspective. These are best left for large and sophisticated investors.
So that is how you should be looking to diversify your precious metal investments in 2022.