Precious metals may present an opportunity for investors to further diversify their portfolios and potentially benefit from the distinct investment characteristics precious metals have historically offered. In our view, investors can best realize these potential benefits by regarding precious metals as a distinct asset class, separate from other commodities and alternative investments.

Historically, a precious metals allocation increased efficiency in a diversified stock-bond portfolio. They can also act as core risk-management tools for investors by providing effective diversification against risk-facing assets. This may help reduce performance drawdowns during equity market volatility. Precious metals can also serve as a hedge against extreme events and market turmoil.

The rise of precious metals in modern markets

Precious metals, including gold, silver, platinum, and palladium, have grown in prominence over the years as viable investment alternatives to include in asset allocations. This was helped as the development of physical metals exchange-traded funds (ETFs), brought gold holdings out of the basement and onto the portfolio statement. Asset allocation seeks to increase risk-adjusted returns through diversification, based on the principle that different assets perform differently under varying market and economic conditions. For several decades, investors have achieved this through traditional asset classes, such as stocks, bonds, and cash.

This changed after the first decade of the 2000s saw two financial crises – first in 2001, then again in 2008. Since then, more investors have looked to include nontraditional asset classes (or alternative investments) into their portfolio mix to help manage risk exposures in portfolios.

Like other commodities, precious metals are global assets partly driven by fundamentals (i.e., supply and demand) over the long run. Unlike commodities, however, they also tend to act like currencies with valuations relative to another currency, typically the US dollar. Macroeconomic and monetary factors, such as interest rates, exchange rates, and inflation, act as key drivers.

Additionally, precious metals have diversified drivers of demand that differentiate price movements during different parts of the market cycle. Consequently, precious metals historically have had low correlations to other markets, particularly equities and commodities, which tend to be highly cyclical. These unique factors can set precious metals apart as a “true alternative” with distinct diversification, risk management, and investment qualities.

While gold was the strongest precious metals performer in 2023, no one metal has continuously led the pack over time (Chart 1). A diversified basket of precious metals tends to perform more consistently versus any single metal and creates exposure to both the cyclical and non-cyclical drivers of gold, silver, platinum, and palladium as a whole. A basket offers further opportunities to benefit from the diversification advantages of an asset class while maintaining the unique qualities inherent to individual precious metals.

Source: Bloomberg, abrdn. Precious metals in the above table and subsequent calculations, tables and charts within this document are evaluated using the abrdn Physical Precious Metals Basket Index which reflects the daily performance of an investment in a precious metals basket with the following fixed components: Gold, Silver, Platinum and Palladium. Table data from 12/31/2005–12/31/2023. Index Proxies: Gold = LBMA PM Gold Price (GOLDLNPM Index), Silver = LBMA Silver Price (SLVRLN Index), Platinum = LME PM fix for Platinum (PLTMLNPM Index), Palladium = LME PM fix for Palladium (PLDMLNPM Index), Precious Metals = abrdn Physical Precious Metals Index (GLTRI Index). See disclosures for further details. Past performance is not indicative of future results. Indexes are unmanaged and it is not possible to invest directly in an index. For illustrative purposes only.

A core risk-management tool?

An allocation to precious metals may be an attractive risk-management tool. Precious metals can be a dynamic and multi-faceted hedge against many forms of risk. They also have a track record of mitigating investor portfolios against severe market drawdowns. This is especially useful for long-term investors seeking to hedge against a broad spectrum of both known and unknown risks.

Precious metals have historically shown low correlations with most asset classes, particularly equities. Over the past two decades, precious metals have carried lower correlations to both US and global equities than other alternative investments (Chart 2).

Source: Bloomberg, abrdn. Index proxies: Global Equities = MSCI World Net Total Return USD Index (NDDUWI Index), US Equities = S&P 500 Total Return Index (SPXT Index), Private Equity = LPX50 Listed PE Index TR (LPX50TU Index), REITs (Real Estate Investment Trusts) = FTSE NAREIT All Equity REITS Total Return Index (FNERTR Index), Hedge Funds = HFRI Fund Weighted Composite Index (HFRIFWI Index), Commodities = Bloomberg Commodity Index Total Return (BCOMTR Index), Precious Metals = abrdn Physical Precious Metals Index (GLTRI Index). Chart data from 01/02/2003–12/31/2023. See disclosures for further details. Past performance is not indicative of future results. Indexes are unmanaged and it is not possible to invest directly in an index. For illustrative purposes only.

This low correlation is a result of the diverse sources of demand across gold, silver, platinum, and palladium. Pro-cyclical sources of demand (jewelry, consumer, and industrial applications) increase as growth and incomes increase along with the economy.

Counter-cyclical sources of demand, primarily investment demand, pick up during economic slowdowns and market pullbacks. This is because, during these times, interest in stores of value and defensive assets increases. These pro-cyclical and counter-cyclical sources occur at different times and result in low overall correlations to the broader market and economic cycle. As a result, precious metals can act as effective diversifiers against traditional risk assets, particularly equities. Holding precious metals can help investors diversify against their equity exposure.

Precious metals’ diversification benefits are critical today because effective diversification has become more difficult to achieve since 2008’s global financial crisis. Correlations across alternative investments rose dramatically in 2008 compared to the preceding period from 2003 to 2007 (Chart 3). Following 2008, however, several alternative investments’ correlations and exposure to global equities, particularly via commodities and real estate investment trusts (REITs), have remained elevated compared to their pre-crisis levels. Meanwhile, precious metals remain an exception – highlighting their effectiveness as a true alternative investment.

Source: Bloomberg, abrdn. Index proxies: Global Equities = MSCI World Net Total Return USD Index (NDDUWI Index), Private Equity = LPX50 Listed PE Index TR (LPX50TU Index), REITs (Real Estate Investment Trusts) = FTSE NAREIT All Equity REITS Total Return Index (FNERTR Index), Hedge Funds = HFRI Fund Weighted Composite Index (HFRIFWI Index), Commodities = Bloomberg Commodity Index Total Return (BCOMTR Index), Precious Metals = abrdn Physical Precious Metals Index (GLTRI Index). Chart data from 01/02/2003–12/31/2023. See disclosures for further details. Past performance is not indicative of future results. Indexes are unmanaged and it is not possible to invest directly in an index. For illustrative purposes only.

Precious metals have also historically remained resilient during extreme events and market turmoil (Chart 4). A precious metals basket has historically posted positive returns when volatility has spiked. This is a sharp contrast to global equities, which have shown negative returns and large drawdowns during those same periods.

Source: Bloomberg, abrdn. Index Proxies: Precious Metals = abrdn Physical Precious Metals Index (GLTRI Index), Global Equities = MSCI World Net Total Return USD Index (NDDUWI Index). Event date ranges evaluated from: LTCM & Ruble crisis (7/1/1998 – 9/30/1998), September 11th, 2001 (9/1/2001–9/30/2001), 2008 Global Financial Crisis (9/1/2008–2/28/2009), US Credit Downgrade (8/1/2011–8/31/2011), Yuan Devaluation (8/1/2015–8/31/2015), Brexit (6/1/2016–6/30/2016), Start of COVID Pandemic (2020) (2/20/20–04/03/20), 2022 Market Turmoil (1/1/22–12/31/22), US Banking Crisis (3/8/23–5/5/23), Start of Israel/Hamas Conflict (10/9/23–10/27/23). See disclosures for further details. Past performance is not indicative of future results. Indexes are unmanaged and it is not possible to invest directly in an index. For illustrative purposes only.

In an environment of market fear, global equities tend to experience large sell-offs as investors try to reduce exposure to risk assets and seek more stable, defensive investments. Precious metals’ track record of performing well in the face of market uncertainty showcases their potential strength as a risk-management tool.

The investment community often classifies precious metals as commodities, which informs how they’re used in asset allocations. This has some merit. Precious metals are global assets with similar physical production and storage treatment to broader commodity sectors, such as energy, agriculture, and base metals. However, we believe that precious metals’ distinctive properties make them an asset class apart from commodities.

Broad commodities, like other alternative investments, have a higher equity correlation than precious metals. Commodities have experienced a 0.53 correlation to global equities, whereas precious metals’ correlation of 0.27 has been half as much during the same period. This difference between precious metals and commodities becomes even more tangible when evaluating their performance.

Precious metals have returned 8.1% annualized, while commodities returned only 0.80% annualized, with a clear divergence beginning in 2008 as the global economy slowed (Chart 5). Since then, equities have recovered, but commodities have not and remain tied to their particular fundamental trials.

Source: Bloomberg, abrdn. Commodities = Bloomberg Commodity Index Total Return (BCOMTR Index), Total Return Global Equities = MSCI World Net Total Return USD Index (NDDUWI Index), Precious Metals = abrdn Physical Precious Metals Index (GLTRI Index). Exhibit data from 01/02/2003–12/31/2023. See disclosures for further details. Past performance is not indicative of future results. Indexes are unmanaged and it is not possible to invest directly in an index. For illustrative purposes only.

Upside and downside capture measures shine a light on perhaps the most attractive advantage precious metals hold over broad commodities (Table 1). These measures show how an investment relates to the movements of the stock market when it rises and falls. Historically, when global equities have experienced positive returns, precious metals have captured 49.5% of this upside and commodities have captured 47.3%. Conversely, when global equities have experienced negative returns, precious metals have captured only 19.9% of the downside. Commodities, on the other hand, have historically captured more than three times the equity downside (66.2%) than precious metals have.

Table 1. Precious metals capture more upside and less downside of equity markets compared to commodities

Source: Bloomberg, abrdn. Precious Metals = abrdn Physical Precious Metals Index (GLTRI Index), Commodities = Bloomberg Commodity Index Total return (BCOMTR Index), Global Equities = MSCI World Net Total Return USD Index (NDDUWI Index). Exhibit data from 01/02/2003–2/31/2023. See disclosures for further details. Past performance is not indicative of further results. Indexes are unmanaged and it is not possible to invest directly in an index. For illustrative purposes only.

This means that precious metals may be more efficient. Historically, they capture desired equity movements with roughly half of the positive equity returns and one-fifth of the downside returns (Table 2). The opposite is true for commodities, which capture more of the undesirable downside equity movements than are offset by the positive equity moves they capture.

Table 2. Historical performance

Source: Bloomberg, abrdn. Precious Metals = abrdn Physical Precious Metals Index (GLTRI Index), Commodities = Bloomberg Commodity Index Total Return (BCOMTR Index), Global Equities = MSCI World Net Total Return USD Index (NDDUWI Index). Exhibit data as of 12/31/2023. *Annualized returns **The inception date for the precious metals index is 01/02/2003. **The inception date for the Bloomberg Commodity Index is 01/02/1991. **The inception date for the MSCI World Index is 12/31/1969. Past performance is not an indication of future results. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

Another reason why investors need to consider precious metals as a distinct asset class versus commodities is their current weightings within broad commodity indices. The highest contributors to commodity index performance stem from the energy and agriculture sectors ranging from 66% to 85% (Chart 6), which tend to have higher equity sensitivities and exposures to equity risk than most realize.

Source: Bloomberg, abrdn, Standard & Poor's, Deutsche Bank, SummerHaven. Bloomberg Commodity Index (BCOM Index), S&P GSCI Index (SPGSCI Index), DBIQ Optimum Yield Diversified Commodity Index (DBLCIX Index), SummerHaven Dynamic Commodity Index (SDCIER Index). Benchmark weights reflect most readily available target weights as of January 2024. See disclosures for further details. Past performance is not indicative of future results. Indexes are unmanaged and it is not possible to invest directly in an index. For illustrative purposes only.

Investors may not realize that a broad commodities allocation may not provide sufficient exposure to precious metals. Most of the major commodity indices have precious metals as the smallest sector in their composition. When evaluating four major commodity indices, the sector weights for precious metals range from 4% to 19%. This means that a 5% portfolio holding in commodities translates to only 0.23% to 0.94% portfolio exposure to precious metals. This type of less than 1% allocation to precious metals at the portfolio level will prevent investors from receiving the unique potential portfolio benefits of precious metals.

Final thoughts

Precious metals may offer diversification benefits in both equity and fixed income portions of a portfolio because they have a low correlation to both of these asset classes. These benefits can occur across risk profiles and funding scenarios, including among more complex asset allocations.

Regardless of whether precious metals are funded by reducing the portfolio weighting of stocks or reducing both stocks and bonds, the result is a more efficient asset allocation. The risk and return levels of portfolios can be managed better by having an active allocation to precious metals. While the proper weighting will vary depending on investors’ different risk profiles and investment objectives, we believe a 0% allocation to precious metals remains less than optimal.

Precious metals are not the only asset class that can increase portfolio efficiency. Bonds and cash historically have provided similar properties and remain attractive from a diversification standpoint. However, precious metals are potentially less interest-rate-sensitive than bonds and can offer greater growth opportunities than cash. Overall, precious metals may offer an additional option to incorporate with other asset classes to effectively manage asset allocations and portfolio exposures.

Important Information

The statements and opinions expressed are those of the author and are as of the date of this report. All information is historical and not indicative of future results and subject to change. Reader should not assume that an investment in any securities and/or precious metals mentioned was or would be profitable in the future. This information is not a recommendation to buy or sell. Past performance is not a guide to future results.

The abrdn Silver ETF Trust, abrdn Gold ETF Trust, abrdn Platinum ETF Trust, abrdn Palladium ETF Trust and abrdn Precious Metals Basket ETF Trust are not investment companies registered under the Investment Company Act of 1940 or a commodity pool for purposes of the Commodity Exchange Act. Shares of the Trusts are not subject to the same regulatory requirements as mutual funds. These investments are not suitable for all investors. Trusts focusing on a single commodity generally experience greater volatility.

Commodities generally are volatile and are not suitable for all investors. Please refer to the prospectus for complete information regarding all risks associated with the Trusts.

The value of the Shares relates directly to the value of the precious metal held by the Trust and fluctuations in the price could materially adversely affect investment in the Shares. Several factors may affect the price of precious metals, including: A change in economic conditions, such as a recession, can adversely affect the price of the precious metal held by the Trust. Some metals are used in a wide range of industrial applications, and an economic downturn could have a negative impact on its demand and, consequently, its price and the price of the Shares; Investors’ expectations with respect to the rate of inflation; currency exchange rates; interest rates; Investment and trading activities of hedge funds and commodity funds; and global or regional political, economic or financial events and situations. Should there be an increase in the level of hedge activity of the precious metal held by the Trust or producing companies, it could cause a decline in world precious metal prices, adversely affecting the price of the shares. Should there be an increase in the level of hedge activity of the precious metal held by the Trust or producing companies, it could cause a decline in world precious metal prices, adversely affecting the price of the shares.

Also, should the speculative community take a negative view towards the precious metal held by the Trusts, it could cause a decline in prices, negatively impacting the price of the shares. There is a risk that part or all of the Trusts’ physical precious metal could be lost, damaged or stolen. Failure by the custodian or sub-Custodian to exercise due care in the safekeeping of the precious metal held by the Trusts could result in a loss to the Trusts.

The Trusts will not insure its precious metals and shareholders cannot be assured that the custodian will maintain adequate insurance or any insurance with respect to the precious metals held by the custodian on behalf of the Trust. Consequently, a loss may be suffered with respect to the precious metal that is not covered by insurance. Commodities generally are volatile and are not suitable for all investors.

Diversification does not eliminate the risk of experiencing investment losses.

Investors buy and sell shares on a secondary market (i.e., not directly from Trusts). Only market makers or “authorized participants” may trade directly with the Trusts, typically in blocks of 50k to 100k shares.

This material must be accompanied or preceded by the prospectus. Carefully consider each Trust’s investment objectives, risk factors, and fees and expenses before investing. To view the prospectus, please click here: abrdn Silver ETF Trust, abrdn Gold ETF Trust, abrdn Platinum ETF Trust, abrdn Palladium ETF Trust, and abrdn Precious Metals Basket ETF Trust.

ALPS Distributors, Inc. is the marketing agent for abrdn Silver ETF Trust, abrdn Gold ETF Trust, abrdn Platinum ETF Trust, abrdn Palladium ETF Trust and abrdn Precious Metals Basket ETF Trust.

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