Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

Generating Yield With Precious Metals

  by    0   1

Joel BaumanThis article was submitted by Joel Bauman, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

In my previous article, Being a Good Financial Steward: A Lesson from the Parable of Talents, I encouraged readers to follow the example of the good servants by finding a return on their precious metals. The good servants traded their talents (literally weights in gold and silver) in order to gain more talents.

And unto one he gave five talents, to another two, and to another one; to every man according to his several ability; and straightway took his journey. Then he that had received the five talents went and traded with the same, and made them other five talents. And likewise he that had received two, he also gained other two.” Matthew 25:15-17

While it’s not clear what activities were in involved in the trading of these talents, we are confident that the good servants were productive. (Matthew 25:20) Comparing this with the bad servant who simply dug his talent in the ground out of fear readers are given clear examples of both productive and unproductive financial stewardship.

Being Productive by Managing our Metals (Talents)

Today, we can follow the example of the good stewards by literally trading, or managing, our precious metals.

The four primary precious metals sold are gold, silver, platinum, and palladium. All of these metals trade independently from the US dollar, and more importantly they trade independent of each other, see below.

  • Gold (average nominal return of 6.4% since 1960) – $1,000.00 held in gold since 1960 would be worth approx. $31,500.00 in 2016
  • Silver (average nominal return of 5.3% since 1960) – $1,000.00 held in silver since 1960 would be worth approx. $18,000.00 in 2016
  • Platinum (average nominal return of 4.3% since 1960) – $1,000.00 held in platinum since 1960 would be worth approx. $10,000.00 in 2016
  • Palladium (average nominal return of 6.1% since 1960) – $1,000.00 held in palladium since 1960 would be worth approx. $27,000.00 in 2016

Notice how each of the four metals have their own nominal dollar return. This is because precious metals are not perfectly correlated. Thanks to this non-perfect correlation between gold, silver, platinum, and palladium, investors can generate a yield assuming they have a strategy.

The 5-Year Portfolio Rebalancing Strategy

I’ve developed a sample strategy to demonstrate how one can take advantage of these relative price swings. The objective is to generate yield by selling relatively overvalued metals while simultaneously buying relatively undervalued metals. The strategy achieves this by arbitrarily rebalancing the dollar allocation of a precious metals portfolio every five years. I call this sample strategy the ‘5-Year Portfolio Rebalancing Strategy.’

Example: Assume at the close of 1960 you ordered $500 worth of gold (13.7 oz) and $500 worth of silver (555.56 oz). As a result, you would have a portfolio of 50% gold and 50% silver.

Keep in mind, precious metals vary in their nominal returns, so the strategy calls for a rebalancing on the beginning of every fifth year. See the example below.

Look at the open of the fifth year (1965); the strategy rebalanced by selling silver (91.53oz) and purchasing gold (3.36oz). This resulted in a nominally rebalanced portfolio of 50% gold and 50% silver. The end results can be seen in the highlighted 1965 row. Again, this strategy calls for continuous rebalancing on every fifth year (1970, 1975, 1980 etc.).

How productive is this strategy?

At first glance, it may be difficult to understand how this strategy helps. What’s the difference between simply holding precious metals and managing them using a strategy such as the 5-Year Portfolio Rebalancing Strategy?

To help show the productively of the 5-Year Portfolio Rebalancing Strategy, below you will find the historical returns below from the year 1960 to the close of 2016. These returns are juxtaposed with the returns you’d get by simply holding a portfolio of two or more metals.

Historic returns of the ‘5 Year Portfolio Rebalancing Strategy’ versus buying and holding (1960-2016)

Note, the results below are not taking into account that bullion was not tradable prior to 1975, additionally for the sake simplicity I have ignored transaction costs and taxes. If you’re interested in the excel spreadsheets I used to historically backtest these sample portfolios you may reach me by email, [email protected], or phone, 888 465 3160 ext. 117.

Portfolio of Gold & Silver

Buy and hold WITHOUT using the strategy:

$1,000.00 ($500.00 held in gold and $500 held in silver) since 1960 without using the strategy would be worth approx. $25,000.00

The 5-Year Portfolio Rebalancing Strategy:

$1,000.00 ($500.00 held in gold and $500 held in silver) since 1960 while using the 5 Year Portfolio Rebalancing Strategy would be worth approx. $27,000.00*

*The total dollar return difference is $2,000.00. This is an average of 0.15% per year greater than perpetually holding the original 50% gold and 50% silver position in 1960 without using the strategy.

               

Portfolio of Silver & Platinum

Buy and hold WITHOUT using the strategy:

$1,000.00 ($500.00 held in silver and $500 held in platinum) since 1960 without using the strategy would be worth approx. $14,500.00

The 5-Year Portfolio Rebalancing Strategy:

$1,000.00 ($500.00 held in silver and $500 held in platinum) since 1960 while using the 5 Year Portfolio Rebalancing Strategy would be worth approx. $18,000.00*

*The total dollar return difference is $3,500.00.This is an average of 0.40% per year greater than perpetually holding the original 50% silver and 50% platinum position in 1960 without using the strategy.

 

Portfolio of Silver & Palladium

Buy and hold WITHOUT using the strategy:

$1,000.00 ($500.00 held in silver and $500 held in palladium) since 1960 without using the strategy would be worth approx. $23,000.00

The 5-Year Portfolio Rebalancing Strategy:

$1,000.00 ($500.00 held in silver and $500 held in palladium) since 1960 while using the 5 Year Portfolio Rebalancing Strategy would be worth approx.  $35,000.00*

*The total dollar return difference is $12,000.00. This is an average of 0.75% per year greater than perpetually holding the original 50% silver and 50% palladium position in 1960 without using the strategy.

 

Portfolio of Gold & Palladium

Buy and hold WITHOUT using the strategy:

$1,000.00 ($500.00 held in gold and $500 held in palladium) since 1960 without using the strategy would be worth approx. $29,000.00

The 5-Year Portfolio Rebalancing Strategy:

$1,000.00 ($500.00 held in gold and $500 held in palladium) since 1960 while using the 5 Year Portfolio Rebalancing Strategy would be worth approx.  $50,000.00*

*The total dollar return difference is $21,000.00. This is an average of 1.00% per year greater than perpetually holding the original 50% gold and 50% palladium position in 1960 without using the strategy.

 

Portfolio of Platinum & Palladium

Buy and hold WITHOUT using the strategy:

$1,000.00 ($500.00 held in platinum and $500 held in palladium) since 1960 without using the strategy would be worth approx. $21,000.00

The 5-Year Portfolio Rebalancing Strategy:

$1,000.00 ($500.00 held in platinum and $500 held in palladium) since while using the 5 Year Portfolio Rebalancing Strategy would be worth approx. $27,000.00*

*The total dollar return difference is $6,000.00. This is an average of 0.45% per year greater than perpetually holding the original 50% platinum and 50% palladium position in 1960 without using the strategy.

 

Portfolio of Gold, Silver, & Platinum

Buy and hold WITHOUT using the strategy:

$1,000.00 ($333.33 held in gold, $333.33 held in silver, and $333.33 held in platinum) since 1960 without using the strategy would be worth approx. $20,000.00

The 5-Year Portfolio Rebalancing Strategy:

$1,000.00 ($333.33 held in gold, $333.33 held in silver, and $333.33 held in platinum) since 1960 while using the 5 Year Portfolio Rebalancing Strategy would be worth approx.  $26,000.00*

*The total dollar return difference is $6,000.00. This is an average of 0.50% per year greater than perpetually holding the original 33.3% gold, 33.3% silver, and 33.3% platinum position in 1960 without using the strategy.

 

Portfolio of Gold, Silver, & Palladium

Buy and hold WITHOUT using the strategy:

$1,000.00 ($333.33 held in gold, $333.33 held in silver, and $333.33 held in palladium) since 1960 without using the strategy would be worth approx. $25,500.00

The 5-Year Portfolio Rebalancing Strategy:

$1,000.00 ($333.33 held in gold, $333.33 held in silver, and $333.33 held in palladium) since 1960 while using the 5 Year Portfolio Rebalancing Strategy would be worth approx. $41,000.00*

*The total dollar return difference is $15,500.00. This is an average of 0.85% per year greater than perpetually holding the original 33.3% gold, 33.3% silver, and 33.3% palladium position in 1960 without using the strategy.

 

Portfolio of Gold, Palladium, & Platinum

Buy and hold WITHOUT using the strategy:

$1,000.00 ($333.33 held in gold, $333.33 held in palladium, and $333.33 held in platinum) since 1960 without using the strategy would be worth approx. $23,000.00

The 5 Year Portfolio Rebalancing Strategy:

$1,000.00 ($333.33 held in gold, $333.33 held in palladium, and $333.33 held in platinum) since 1960 while using the 5 Year Portfolio Rebalancing Strategy would be worth approx. $47,000.00*

*The total dollar return difference is $24,000.00. This is an average of 1.30% better per year than perpetually holding the original 33.3% gold, 33.3% palladium, and 33.3% platinum position in 1960 without using the strategy.

 

 Portfolio of Silver, Palladium, & Platinum

Buy and hold WITHOUT using the strategy:

$1,000.00 ($333.33 held in silver, $333.33 held in palladium, and $333.33 held in platinum) since 1960 without using the strategy would be worth approx. $19,000.00

The 5-Year Portfolio Rebalancing Strategy:

$1,000.00 ($333.33 held in silver, $333.33 held in palladium, and $333.33 held in platinum) since 1960 while using the 5 Year Portfolio Rebalancing Strategy would be worth approx. $35,000.00*

*The total dollar return difference is $16,000.00. This is an average of 1.10% better per year than perpetually holding the original 33.3% silver, 33.3% palladium, and 33.3% platinum position in 1960 without using the strategy.

 

Portfolio of Gold, Silver, Platinum, & Palladium

Buy and hold WITHOUT using the strategy:

$1,000.00 ($250.00 held in gold, $250.00 held in silver, $250.00 held in platinum, and $250.00 held in palladium) since 1960 without using the strategy would be worth approx. $22,000.00

The 5-Year Portfolio Rebalancing Strategy:

$1,000.00 ($250.00 held in gold, $250.00 held in silver, $250.00 held in platinum, and $250.00 held in palladium) since 1960 while using the 5 Year Portfolio Rebalancing Strategy would be worth approx. $39,500.00*

*The total dollar return difference is $17,500.00. This is an average of 1.05% better per year than perpetually holding the original 25% gold, 25% silver, 25% palladium, and 25% platinum position in 1960 without using the strategy.

The results show the 5-Year Portfolio Rebalancing Strategy would have successfully added value to any portfolio combination of two or more precious metals.

In some instances, the historical difference would have been significant. This was the case for the sample portfolio of gold, palladium, and platinum. which generated an extra $24,000.00. All else equal, this is a decent yield for a strategy that only requires calling a broker once every five years.

Why use physical metals and not manage an electronic account with an online broker?

As mentioned earlier, I did not include the transaction costs of buying and selling physicals. It’s no secret that managing physical metals is more expensive than buying and selling through an online discount brokerage. Some might be tempted to buy and sell lower cost precious metal derivatives. These derivatives include OTC products, ETFs, and Futures Contracts. (We completed an analysis of physical versus ETFs in our research report ETFs vs. Physical Precious Metals: Company GLD to GOLD.) When faced with the temptation to buy derivatives, it’s important to remember the reason to own physical metals in the first place – to eliminate counterparty risk. Managing a personal portfolio of physical metals avoids the pitfalls of counterparty risk while still generating a yield.

Can you optimize or create your own strategy for a higher yield?

Yes!

There are limitless possibilities for optimization and customization. The ‘5-Year Portfolio Rebalancing Strategy’ is a basic strategy I put together to use as an example for this article. Most could easily construct a more profitable strategy.

I encourage anybody trying to generate a yield via managing their metals to back-test their strategy. It’s necessary for you to both understand and believe in the strategy you implements on you own wealth.

A final comment on strategy building – I recommend using simple parameters. As someone who has been doing this for years, I have noticed the most robust strategies are the simplest and seldom require action. For example, the 5-Year Portfolio Rebalancing Strategy requires management once every five years. There is a proverb that summarizes this concept,

“The plans of the diligent lead to profit as surely as haste leads to poverty.” – Proverbs 21:5

Is managing a portfolio of precious metals the only means of generating a yield?

Absolutely not. As precious metals are slowly being acknowledged as money again, direct investment opportunities are returning to the market. One area in particular that offers a yield is gold leasing. Individuals can lease their gold to jewelry companies and gold miners for an agreed upon term and fixed rate. This form of investing is new for many, including myself. But I expect precious metal financing options to grow in the near future as we approach a debt crisis.

Conclusion

Long term physical metal owners can practically follow the footsteps of the good proverbial servants mentioned in Matthew 25:15. This is possible with diligent planning and action. The sample strategy presented in this article is a great starting point. For some it may be better to find a fixed return or interest on their metal, as suggested in Matthew 25:27. Whichever road you may choose, wisely maximize your given talents to the best of your ability.

Get Peter Schiff’s latest gold market analysis click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

A Messed Up Economy: Jobs Edition

Government policies – from shutdowns, to stimulus, to vaccine mandates – in response to the coronavirus pandemic have thrown the US economy completely out of whack. Looking at employment reveals just how messed up the economy has become. The number of Americans quitting their jobs surged to a record high in August. According to the […]

READ MORE →

Peter Schiff: Gold Will Explode; The Dollar Will Implode When the Markets Figure This Out

Peter Schiff says gold will explode and the dollar will implode when the markets figure out the Fed is crying wolf when it comes to monetary tightening. The Federal Reserve wrapped up another meeting without making any changes to its current extraordinary, loose, inflationary monetary policy. But the central bank did hint that it may […]

READ MORE →

Does the Fed Really Want a “Bond Market Tantrum”?

A Reuters article by Stefano Rebaudo argued that the Federal Reserve might welcome a “bond market tantrum” that pushes bond yields higher. But does the Fed really want higher interest rates? And what would that mean for the economy? Despite the post-pandemic economic improvement and wide expectations that the Fed will begin tapering quantitative easing […]

READ MORE →

India Gold Imports Hit 5-Month High

India’s gold imports hit a 5-month high of 121 tons in August, a further sign of recovery in the world’s second-largest gold market.

READ MORE →

Peter Schiff: Biden’s Rent Gambit

The “transitory” inflation swamping the country has stubbornly persisted into July.  Producer prices posted a second straight 1% month-over-month increase, which brought the full-year number to a record 7.8%. Twelve-month US export prices rose 17.2%, and nearly 22% if the rate of the first seven months of 2021 were annualized. (I find it telling that […]

READ MORE →

Comments are closed.

Call Now