Great Reason to Own Precious Metals, Even If You’re Not a Gold Bug

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

Most people who buy physical gold and silver these days tend to be those who are worried about our financial system.

They see unbacked, untrustworthy fiat currencies as an intrinsically flawed foundation for an economy. They see skyrocketing debt that doesn’t stop rising. They see an overvalued stock market, inflated by repeated rounds of quantitative easing. And they see world governments that cannot be trusted to act economically responsible – especially in light of how things have played out recently in Cyprus and in Greece. These are all good reasons to distrust and opt-out of the banking system and put one’s wealth in physical gold and silver instead.

Of course, not everyone is onboard with these ideas. Many do not see the sky falling so quickly and are still hopeful that our financial system is going to pull through okay.

Regardless of whether you are a gold bug or maintain faith in the “system,” there is still a very strong argument for holding up to 5-10% of your portfolio in precious metals — something that Peter Schiff has always recommended. And that is simply the argument of diversification.

Bron Sucheki of Perth Mint Research explains in a recent post how even if an investor who derides the yellow metal can actually decrease overall portfolio volatility by a significant amount simply by keeping just keeping 5% of his investments in metals. Not only does gold decrease volatility, it helps increase one’s overall return in the long run.

The reason gold is able to accomplish this is that it is highly uncorrelated with the other asset classes that typically make up portfolios – namely stocks and bonds. As a result, during years in which those asset classes are down, gold tends to be up, smoothing out volatility. And as any savvy investor knows, volatility can be very detrimental to portfolio growth over time.

See the chart below, put together by Sucheki, which clearly illustrates three different asset allocation strategies for portfolios starting in 1972 and ending in 2014. As you can see, holding 5% in gold results in lower volatility and a higher return. Sucheki writes:

You can see here that the inclusion of 5% gold in a traditional 60/40 stocks/bonds portfolio increases returns and reduces the risk and worst year. The Permanent Portfolio produces a much lower overall portfolio balance, but note the massive risk reduction, particularly in terms of worst year. For those with high risk aversion who can’t afford a bad year (for example, those in retirement who don’t have an investment timeframe over which to recover the loss), that performance hit may be worth it to avoid the pain of years where there are massive losses.”

If you happen to have a friend or family member who is skeptical about your opinions on fiat currency and doesn’t seem to get why he or she should own metals, try presenting them with this argument. Of course, if you yourself have been sitting on the fence when it comes to diversifying your portfolio, perhaps this will convince you, even if all the other macroeconomic factors do not.

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