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Hedge Your Hedges: Diversifying within Precious Metals

Hedge Your Hedges: A Beginner’s Guide to Diversifying Within Precious Metals

John-Rothans

Written by John Rothans

Aug 7, 2020

Imagine if you owned stocks in only the tech sector—or shares of just a pharmaceutical company. If something terrible happened in one of those sectors, your portfolio probably wouldn’t fare very well. That’s why you typically own different types of stocks in various sectors. Ever considered protecting your precious metals portfolio using the same concept? Learn more about diversifying your portfolio with precious metals to carry out a strategy known as “hedging.”

What Is Hedging?

Before we dive into diversifying your portfolio, let’s explain what hedging is. Simply put, hedging involves buying assets in one class to offset potential losses in another asset class, thus diversifying your portfolio. For instance, you might purchase gold to balance out a portfolio containing stocks, mutual funds, ETFs, bonds, and real estate. This helps balance the highs and lows of the assets in your portfolio.

Hedging is a critical component of portfolio diversification; it helps manage your asset risks and ease asset volatility.

Diversifying Your Portfolio

Diversifying your portfolio—both by holding assets from different classes and holding different assets within specific classes—is designed to help minimize your risk and achieve your financial goals. For example, you might purchase stocks representing a variety of industries, or you might buy different property types within the real estate category.

“Diversification doesn’t guarantee profits or protect against loss, but it may help protect your portfolio,” Wells Fargo notes.

Diversifying Within Precious Metals

As part of portfolio diversification, many people purchase one or several of the four major precious metals: gold, silver, platinum, and palladium. Some portfolio holders might even buy all four metals to fully boost diversification within the precious metals class. Completely embracing all four precious metals can offer a shield against ups and downs within the metals category. It essentially allows you to “hedge your hedges.”

“Proponents of precious metals support [them] because they are tangible assets. They are commodities that can’t disappear into the negative. They keep their intrinsic [appeal], which helps keep your portfolio balanced,” the Wall Street Survivor blog explains.

Let’s look at each precious metal individually.

Gold

Gold is the original precious metal and embodies what it means to “hedge:” the price of gold tends to increase when paper assets struggle.

Gold has long been a prized metal and monetary asset, with a heritage dating back to 1223 B.C. Today, the World Gold Council views gold as a strategic asset thanks to its ability to act as:

  • A source of long-term returns
  • A diversifier that can mitigate losses during market stress
  • A liquid asset with no credit risk

Silver

If gold is considered “the original precious metal,” then silver is the affordable metal. Like gold, silver has a history of being a sought-after metal and monetary asset. However, its modern role as an industrial metal is nearly unparalleled. Silver is indispensable in the fields of renewable energy, health and hygiene, water purification, and many chemical processes. Why is this important? Because as demand for silver increases in these fields, so can silver’s strength within your precious metal portfolio.

Platinum

Platinum doesn’t have quite the legacy of gold and silver. It wasn’t designated as a separate element until the 18th century. Since then, however, platinum has emerged as a coveted choice for wedding and engagement rings. Platinum also plays important roles in automotive parts, dentistry, neurosurgery, glass manufacturing, and biomedical devices, thanks to the fact that it is the least reactive metal known to man. Unlike gold and silver, platinum supply can be incredibly unpredictable. There are no massive reserves or global stockpiles. Platinum has been in a supply deficit almost since its market inception. This combination of factors sets platinum up for stronger price moves and solid portfolio performance.

Palladium

Palladium is part of the platinum family and remains relatively new to the market. It doesn’t have a storied past like gold, silver, or platinum. Palladium’s appeal rests in its extreme rarity (it is reportedly 15 times rarer than platinum and 30 times rarer than gold) and its role in the dehydrogenation process in catalytic converters. The metal remains at a relatively constant level of high demand but hard-to-come-by supply, setting palladium up for continued price increases.

While gold, silver, platinum, and palladium share many similarities, each metal is quite unique.

“Owning them simultaneously is the only way to get exposure to the unique supply and demand drivers behind each of them in the context of the modern market,” Visual Capitalist notes.

Diversifying Beyond Precious Metals

While there are multiple ways to diversify your portfolio, many experts recommend that a certain share of your assets be allocated toward precious metals. Here’s an example of what a diversified portfolio might look like:

  • 25% in equities
  • 20% in cash
  • 20% in precious metals
  • 15% in fixed income
  • 10% in property
  • 10% in other asset types

How you diversify your portfolio depends on your financial goals and risk tolerance. This includes how you diversify your holdings within precious metals.

Now might be an excellent time to ensure that your portfolio includes all four precious metals. Why?

Given the economic uncertainty encompassing the United States and the world, a diversified allocation in precious metals offers a hedge against the potential descent of the U.S. dollar, the possible decline of another currency, or wild swings in the stock market. Including all four of the major precious metals in your asset bucket allows you to tap into the diversity of a popular asset class that might move up when a currency or stock moves down.

Barron’s notes that gold, in particular, tends to perform well when inflation-adjusted rates are low or negative, as they are currently.

“Long a haven, [gold] also offers portfolio diversification, although many [asset holders] have little or no exposure,” Barron’s adds.

Here’s another point to consider when diversifying across different asset classes. Stocks, ETFs, and mutual funds are equities that give you partial ownership of a company. On the other hand, precious metals are commodities, meaning you own a physical asset. A truly accurate comparison between the two isn’t possible since these asset types historically behave differently. As a matter of fact, precious metals have outperformed stocks over the long term in recent years, enhancing their role in portfolio diversification.

Investopedia found that “over a 15-year period, gold has outperformed stocks and bonds.”

Are you interested in learning more about how various precious metals can work alongside one another within your portfolio? We’re America’s Gold Authority®, but we carry more than just gold. Call U.S. Money Reserve for a one-on-one consultation with a knowledgeable precious metals Account Executive.

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