Study Claims Portfolios Containing Precious Metals Equities Shine

Source:

A recent study by the Charted Financial Institute (CFA) found that adding a 25% allocation to the equities of precious metals firms improves portfolio performance substantially...that relative to platinum and silver, gold has better stand-alone performance and appears to provide a better hedge against the effects of inflationary pressures."

...The three finance professors who authored the study also determined that--when the Federal Reserve tightens monetary supply through raising interest rates--"the return to precious metals commodities is significantly higher than they are during expansion policy period (when interest rates decrease). This is in stark contrast to the U.S. equity market and the equities of precious metal companies."

Mitchell Conover, Associate Professor of Finance at the University of Richmond in Virginia, Gerald Jensen, Professor of Finance for Northern Illinois University and Jeffrey Mercer, Associate Professor of Finance for Texas Tech University, along with Robert Johnson, Deputy CFO and Managing Director, Education Division CFA Institute researched daily returns for the U.S. equity market and six alternative precious metals indices from January 17, 1973, through December 2006. Two indices represented indirect or precious metals equities investment, while four indices represented direct investment in commodities.

Their study uncovered five major findings. "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 effects of inflationary pressures."...

Their research determined that allocating 25% of a portfolio to precious metals stocks increases annual return by 1.65% and reduces the portfolio's standard deviation by 1.86%. "Smaller allocations to precious metals improve portfolio performance, but to a lesser degree," according to the authors.

Related Articles

Get Our Streetwise Reports Newsletter Free

A valid email address is required to subscribe