The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Chapter 11. Precious Metals Equities

In Chapter 3, we discussed the three methods of investing in commodities: (1) direct investment in the commodities, (2) investment in collateralized commodity futures (CCFs), and (3) investment in the equities of commodities-related producers. Precious metals equities (PMEs) represent a narrower subset of the third alternative. Specifically, PMEs are the stock investments in companies that mine gold, silver, and platinum. The spectacular returns of 2001, 2002, and 2003, when PMEs returned 39.4 percent, 61.5 percent, and 62.9 percent, respectively, led many investors to ask whether they should consider including PMEs in their equity allocation.

To determine if the PME world merits consideration, we should revisit the same important questions we asked before about deciding on any investment:

• How risky is the asset class?

• What is the expected return of that asset class?

• What is the correlation of that asset class to the rest of the assets in the portfolio? (How does its inclusion affect the overall risk of the portfolio?)

Risk

PMEs are exposed to the risks of equity investing. Thus, we would naturally expect that PMEs would provide returns similar to those of other equities. Unfortunately, in the long run, they have provided returns below those of the overall equity market.

Returns

While the data are not as robust as they are for other asset classes, useful PME data are available. Based on a return series provided by Global Financial Data, author William ...