Thinking Critically about Gold and Silver in an Investment Portfolio

Precious metals including gold and silver have experienced significant gains over the last two years, drawing considerable investor interest. With gold recently crossing $4,700 per ounce and silver trading above $90 per ounce, both metals have reached historic price levels and now is a good time to think critically about their position in an investment portfolio. These impressive returns may prompt some investors to consider adding these assets to their portfolios. However, as with any investment decision, it's essential to consider the broader context, including historical patterns and how these assets align with a comprehensive portfolio strategy. As we proceed through the analysis, please keep in mind that all data discussed is subject to change and may not reflect current market prices.

Although precious metals are frequently sought as "safe haven" investments, commodities like these typically experience cyclical patterns of expansion and contraction. Currently, gold and silver are advancing alongside numerous other asset classes amid elevated uncertainty regarding monetary policy, fiscal policy, and geopolitical tensions. These assets should be evaluated as elements of a comprehensive investment approach that supports long-term financial objectives, rather than vehicles for speculative trading.

Uncertainty often drives precious metals demand

Multiple factors have contributed to rising gold and silver prices. A significant driver has been recent friction between the White House and the Federal Reserve, which has created questions about central bank independence and future monetary policy direction, particularly with Jerome Powell's Fed chair term concluding in May 2026. Since lower interest rates and inflation expectations tend to weaken the dollar, investors naturally seek assets that can function as a "store of value."

Another key factor is the sustained gold purchases by central banks worldwide as they reduce their dollar-denominated reserve holdings. To effectively manage monetary policy and preserve currency value, central banks must maintain adequate reserves. These acquisitions of gold and similar assets have intensified amid rising geopolitical tensions and currency stability concerns.

Additionally, both metals benefit from industrial demand, particularly in electric vehicles, solar panels, and artificial intelligence hardware. Therefore, they function simultaneously as precious metals, safe haven assets, and industrial commodities.

Timing precious metal rallies presents significant challenges

Historically, episodes of monetary policy uncertainty have aligned with robust precious metals performance. During the 1970s, for example, both gold and silver experienced dramatic price increases during stagflation, reaching peaks around 1980. Similarly, prices rose from 2008 to 2011 amid the global financial crisis, and again during the 2020 pandemic.

In these instances, investors gravitated toward precious metals when uncertainty about monetary policy and economic conditions reached elevated levels. Yet in each case, gold and silver prices subsequently reversed course once conditions stabilized.

This pattern creates at least two difficulties for investors attracted to these investments based on recent gains. First, forecasting gold and silver prices essentially requires predicting interest rate movements, inflation trends, and factors like terms of trade. Recent years have demonstrated the challenge of making such predictions with confidence. Numerous concerns among investors and economists regarding the inflation surge in 2021 and 2022 did not unfold as anticipated.

Second, while investors naturally gravitate toward well-performing assets, history reveals that precious metal rallies are notoriously difficult to time effectively. The gold rally of the 1970s, for example, was succeeded by two decades of price declines. Gold peaked above $800 in 1980, a level not reached again until 2007.

The accompanying chart illustrates gold's performance relative to the S&P 500 since the 2007 market peak. Although gold has experienced periods of strong gains, the stock market has also delivered solid performance over these timeframes. For investors focused on recent precious metals rallies, this longer-term view may be unexpected. However, it reflects the historical tendency of the stock market to appreciate over extended periods.

This dynamic applies to silver as well. Despite compelling industrial demand drivers, silver has undergone extended periods of weak performance between rallies. For example, silver rallied strongly in the late 1970s. During this period of stagflation, the Hunt brothers attempted to corner the market through accumulating physical stockpiles and purchasing futures contracts. Although they temporarily drove prices higher, prices ultimately collapsed as additional supply entered the market and regulators imposed restrictions on leveraged commodity purchases.

Other precious metals display similar characteristics. Between 2016 and early 2022, palladium surged over 500%. This rally reflected constrained global supply and increased usage in applications like catalytic converters for automobiles. However, following its peak, prices fell sharply over a two-year span.

Aligning precious metals exposure with financial objectives

These examples illustrate that when precious metals exposure is appropriate for investors, gold and silver are best incorporated as elements of a broader commodities allocation or within alternative investments. The Bloomberg Commodity Index, for example, currently allocates 14.9% to gold and 3.9% to silver, alongside other commodities including industrial metals, energy, and agricultural products. This diversified commodities approach helps manage the volatility characteristic of individual commodities.

The rationale for including precious metals in portfolios stems from their distinct behavior relative to stocks and bonds. Their value is determined by scarcity, their function as stores of value, and industrial applications. Consequently, they often respond to market and economic developments differently than traditional asset classes, potentially providing portfolio stability. This is what we look for when we think of created diverse and uncorrelated return streams.

Nevertheless, precious metals have notable limitations. Critically, they produce no income, unlike bonds or dividend-paying stocks. This absence of income also makes valuation challenging, contributing to their susceptibility to boom-and-bust cycles. A portfolio with excessive concentration in gold and silver may forgo the long-term growth potential of equities and the income production of fixed income. Therefore, even though precious metals may prove beneficial in certain market conditions, they may not support long-term objectives.

The accompanying chart demonstrates that numerous asset classes have contributed to portfolio returns recently, not only precious metals. While gold and silver have certainly delivered strong results, particular investments will always excel during specific periods. The objective is building portfolios that can capitalize on various market conditions rather than concentrating holdings in recent outperformers.

The bottom line is that gold and silver have rallied over the past two years, creating a lot of media attention and hype, but long-term investors should evaluate them within a portfolio framework. Their value stems not from recent performance, but from their contribution to portfolio diversification across different market environments.

Disclosure:

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