Diversification within the Precious Metals

jmski52 · October 26, 2008 1:26AM

It didn't start out this way, but it seems that diversification amongst the precious metals makes me rest easier. It's an investment axiom that diversification of risk is the best way to go in uncertain investment terrain, and I am noticing that they don't always move together, since gold is primarily a "monetary metal" and silver & platinum are seen as "industrial metals".

Although the allocation percentages vary with the changes in price, I'm thinking that a 25% platinum/25% gold/25% silver/25% cash allocation is pretty good.

So - I have a couple of questions:

1) What do you think of this approach?

2) Would you see any benefit in adding paladium?

ttown · October 26, 2008 1:28AM

They never moved locked step. Silver would shoot up and Plat and gold would lag and then Plat would shoot up and the others lagged. They've always been somewhat out of phase.

mkman123 · October 26, 2008 1:45AM

jmski, I was thinking last night and I'm going to do something close to what your doing.

I've been only going after silver at the moment, but I'm going to start saving up and get a little bit of gold and save some cash too.

ttown · October 26, 2008 1:49AM

I got rid of most of my bullion type coins in favor of Saints and Libs in 2002. I don't have any repeat dates in either series so taking a lesson from 80 I don't want to be kicking around a bunch of bullion if/when the game is over. This way I've got the same upside as bullion and something I can live with as a collection and add to it if prices drop. Even when gold hit $260 a graded Saint/Lib still brought over $400 so it has more of a downside protection.

BTW I think the $10 libs and even the $5 libs offer the same protection to some extent for those not having the money for the $20 coins. If I were just investing a small amount in bullion I'd got with the mid 80's $5 coins since they are still cheap and can be purchased at or below spot.

mkman123 · October 26, 2008 1:56AM

ttown, something I will look into!

ttown · October 26, 2008 2:04AM

<< <i>ttown, something I will look into! >>

One thing I might mention I'd get them in PCGS,NGC,ANACS or even ICG holders. Don't buy raw coins off Ebay there's just too many fakes anymore. The modern $5 series in the OGP is a good way not to get taken but stay away from raw coins from sources like Ebay if your not into gold.

gecko109 · October 26, 2008 2:08AM

<< <i>It didn't start out this way, but it seems that diversification amongst the precious metals makes me rest easier. It's an investment axiom that diversification of risk is the best way to go in uncertain investment terrain, and I am noticing that they don't always move together, since gold is primarily a "monetary metal" and silver & platinum are seen as "industrial metals".

Although the allocation percentages vary with the changes in price, I'm thinking that a 25% platinum/25% gold/25% silver/25% cash allocation is pretty good.

So - I have a couple of questions:

1) What do you think of this approach?

2) Would you see any benefit in adding paladium? >>

Your 25/25/25/25 is based on metal value, not physical weight, correct?

Palladium is a bargain buy right now at $168....it was just about 6 months ago when it was very close to $600. It has fallen the most of the metals besides rhodium.

roadrunner · October 26, 2008 2:12AM

jmski52's approach sounds reasonable though I still have to admit I'm more partial to gold because it is more widely known and plays a currency role to boot. The metal's market seems to have a way of punishing people for trying to reduce risk.

I also follow the guidance that ttown put out about diversifying into PCGS/NGC graded high bullion content coins ($5's, $10's, $20's). Graded MS semi-bullion old gold coins have actually held up better than bullion and better than gold stocks during the current bloodbath. But I'd be the first to admit in previous downturns (or upturns) they tended to display a bit of leverage as well. There's more than one way to own gold while trying to hedge the risks.

roadrunner

Deadhorse · October 26, 2008 2:36AM

I've been doing that same sort of thing for years.

It's what I called diversification as I'm pretty much all in regading precious metals.

Sold most of the platinum when it got outrageous last December and January, I'll add back in slowly as I don't think it's going back to where it was in the time period that silver and gold will.

MoneyLA · October 26, 2008 2:39AM

I guess it doesnt hurt to diversify your precious metals, just as you would diversify your stocks.

But I think the major point of diversification applies to your overall portfolio, and that "rule" says that no more than five percent (5%) of your assets should be in the precious metals and collectibles. The limit of 5% is there because these assets pay no interest or dividends while you hold them.

I guess if you are "a pro" you could expand your holdings in this category to ten percent (10%) but Ive never heard of any portfolio for an investor with a recommendation to have more than 10% in metals and collectibles.

Now, this is for an individual investor. If you are a professional in the industry, the diversification rule does not apply.

So getting back to the original post... sure divide up your 5% among gold, silver, platinum and rare coins... and throw in a few Zeppelins if you got 'em.

storm888 · October 26, 2008 3:14AM

I would cutback a bit on the platinum.

I would have a bit more palladium than platinum; % risk/reward thing.

roadrunner · October 26, 2008 4:48AM

But I think the major point of diversification applies to your overall portfolio, and that "rule" says that no more than five percent (5%) of your assets should be in the precious metals and collectibles. The limit of 5% is there because these assets pay no interest or dividends while you hold them.

That "rule" was rederived from the 1980-2000 market and had been pretty much discredited in the 1970-1980 and tehn again in the 2000-2008 era. Assumptions work, until they no longer work. I'm sure there's a current thumbrule created from 1998-2006 that tells banks how much debt, weak mortgages, or derivatives they should be holding. Time to rethink those rules huh? Any "investment" that falls 20-30% relative to inflation over 5-10 years has to be relooked at regardless of the dividends it is providing. What good are dividends when the principle is withering away? The S&P is teaching us many new lessons these days with respect to dividends and earnings that have been long forgotten during the heady days from 1988-2007.

I guess if you are "a pro" you could expand your holdings in this category to ten percent (10%) but Ive never heard of any portfolio for an investor with a recommendation to have more than 10% in metals and collectibles.

I've read from a number of mainstream advisors that feel that 5-15% is now the "standard." A few years ago no one was talking about even 5% metals in one's accounts....except on metal sites. And one mentioned this in 1998-1999 you would have been hung out to dry. Now it's almost standard fare while some are pushing that to 15%. Frankly, 5% won't do squat for protecting your portfolio as even if metals double, you have a net 10%. So what happens to the other 90% in equity and bonds that is at risk? Schiff may not be the standard bearer but he's probably pushing the 30% figure. He was also a non-mainstream, doomsdayist "laughing stock" 5-10 years ago. No one's laughing at him now. I'd figure that most pro's have been invested in metals at up to 30-50% of their holdings at some point. Not much different than many coin dealers who at times might have 30-50% of their personal worth invested in coins. A pro in the stock market probably has 50-90% of his own money in stocks. Yet a coin dealer doing the same sort of thing with coins or bullion would be considered a nut job by WS standards. But then again, we all now where the bread is buttered and where the game is played. While J6P is told to go long and weather the downturns to reap the rewards coming out of the hole, his broker is personally shorting the market along with his bigger clients. In that respect everyone stays in stocks 90%!

I think Will Rogers said this during the tougher times in the first half of the 20th century: "I'm not looking for a return on my assets, I'm more interested in the return of my assets."

Like Deadhorse, count me in the >5% category.

roadrunner

jmski52 · October 26, 2008 11:02AM

Like Deadhorse, count me in the >5% category.

Well, I sold all of my stocks a few months ago, and then rode the precious metals down to here. I guess that puts me somewhere around 70% or so in pms.

Your 25/25/25/25 is based on metal value, not physical weight, correct?

Palladium is a bargain buy right now at $168....it was just about 6 months ago when it was very close to $600. It has fallen the most of the metals besides rhodium.

I was thinking in terms of metal value. Since I have no palladium at all, I would probably modify my ratios a bit. Maybe go 10% palladium and keep 15% cash with the others at 25%.

I've noticed that palladium is selling at a heckuva premium, just like the other metals. At some point, I'll probably start seeking out some Maple Leaves.

Cladiator · October 27, 2008 12:41AM

157oz silver
1.94oz gold
1.90oz platinum

works for me...

DoubleEagle59 · October 27, 2008 12:43AM

when I buy PM's, I look solely at the relative ratios between them all and buy which one is the best buy.

As an example, today, if I'm deciding between gold and silver, I'm buying 100% silver and 0% gold. I know that Gold is more readily 'acceptable' in a panic but look at the relative Ratio.

Today, for one ounce of gold you can buy instead 80 ounces of silver.

Six months ago, you could only buy about 50 ounces of silver.

Same thing applies if you're deciding whether or not to buy Gold or Platinum. I would definitely go for platinum. It's so much cheaper relative to Gold than it was a year ago.

Also, palladium is super cheap right now, but the market is so illiquid with this metal that you really have to know what you're doing before you go into it big time.

Diversification within the Precious Metals

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