Adding precious metals to a risk avert Investor's portfolio – Is gold alone?

Abstract

Risk-avert investors generally take gold to act as a hedge against the market during crises. However, literature suggest that the safe haven property of gold is short-lived. We therefore look at other precious metals that could protect investors at least as effectively as gold, especially during periods of market stress. We consider five precious metals, namely, gold, silver, platinum, palladium, and copper to analyse the unique and market risks associated with each as well as construct optimum weighted portfolios using them in different combinations. We find that including a safe haven in a portfolio is a necessary condition to minimize risk but is in no way sufficient. Both gold and silver exhibit safe haven property but an optimum portfolio containing gold and copper offers a higher hedging effectiveness than that offered by an optimum portfolio containing either gold or silver. In fact, copper when combined in an optimal ratio with other precious metals, offers way better hedging effectiveness than other metal-market portfolio combinations. Our study finds copper as a rapidly emerging hedging instrument, driven by its manyfold uses in both the industrial and non-industrial sectors. Thus, a gold-copper-market portfolio would undoubtedly be the optimum choice for a risk-avert investor.