Adding Precious Metal equities to help lower overall Portfolio Volatility

bee

Bill Bernstein M* interview talks breifly about adding precious metals equities to your help lower overall portfolio volatility and help long term returns. Most PM equity funds are now offering a free gift of Band aids and iodine with each set of falling knives that you purchase.

From their M* interview:
"Benz: On the flip side or in a similar vein, one deeply unloved asset class right now is precious metals, which was very much in vogue a few years ago. You think it's also a pretty interesting time to be looking at that asset class, too.

Bernstein: I do. It's a market that I've always been interested in. I've been following precious-metals equities for the past 25 or 30 years, and it's important to understand how this asset class behaves in the long term. It has very low long-term returns. If you look at Ken French's series, which goes back more than a half century, the return if you count the most recent declines probably comes out to be less than 5% per year nominal, which is 1% more than inflation over that period, which was 4%. So, it has gotten very low returns. It has bone-crushing volatility. Now, three times in the past 50 years, it's fallen in price by approximately 70%.

"Benz: So, why do we even want to own this asset class?

Bernstein:Well, it occasionally zigs. When the overall market sags, it does particularly well. When there is high inflation--and one of the reasons why it has done so poorly recently is that inflation hasn't turned up--it turns out that even with its high volatility and its crummy returns, adding several percent of it to your portfolio does improve its behavior. It improves its return and it improves its volatility as well; it lowers its volatility."

I must admit from a price stand point, these funds are grabbing my attention.

morningstar.com/cover/videocenter.aspx?id=670230

VintageFreak

You know, the traditional method of dampening volatility was to own stocks and bonds, under the assumption one yings when the other yangs. With precious metals can we reach such a conclusion? I think Precious metal shares performance is linked with inflation/falling dollar/whatever. Not sure if if there is direct co-relation. Early part of last decade stocks went up, gold went up more. That's not dampening volatility is it?

"Well, it occasionally zigs. When the overall market sags, it does particularly well. "

When I'm drunk, I sometimes fall. However I really fall when someone punches me in the face. However when I'm drunk and then someone punches me in the face, I fall down really hard.

If they are grabbing our attention because of price, they should. WHEN vs WHAT. Anything that goes down should warrant attention, IMO. Nothing to do with volatility right? I want things to be volatile UP after I buy, and volatile DOWN after I sell.

Ted

@MFO Board Members: Here's what a long-term sea of red looks like in regards to precious metals. Enough said !
Regards,
Ted
1Mo. YTD 3MO. 1Yr. 3YR. 5Yr.
Equity Precious Metals -16.99 -14.28 -31.24 -26.02 -29.70 -12.95

bee

@VintageFreak,

A correlation that seems to have changed recently is the performance of EM funds verses PM funds. Prior to 2011, there seems to be a fairly high correlation between Emerging Market and PM equity funds. Not sure what changed since 2011. My understanding of this correlation was based on the fact that many of the PM equity companies (their mines) are located geographically in the EM areas of the world.

VintageFreak

Very interesting chart! Yes I would have thunk lot of miners would be international. Or could it be they sucked up the place and the index gradually dropped them? That would explain things too no?

bee

VintageFreak said:

Very interesting chart! Yes I would have thunk lot of miners would be international. Or could it be they sucked up the place and the index gradually dropped them? That would explain things too no?

I follow your logic, but when I look at M*'s Region Breakdown data of GDX and GDXJ I get only 11% of GDX stock assiociated with Emerging Market regions. Even stranger only 5% of GDXJ stock is assiociated with EM regions. Something doesn't add up. Did the EM mines get bought up and put into moth balls by Canada, the UK and Austrilia PM companies?

VintageFreak

Hmmm...we would need to know the portfolio of GDX and GDXJ over the years. If you look at TGLDX portfolio 70% is International, but mostly developed markets. I do recall international exposure used to be 85%. If all of the 15% difference was EM, that could explain it.