The past several blogs have been devoted to a thoughtful analysis of the inclusion of gold along with financial assets. Using partial moments analysis, it is clear that gold exposure over longer periods of time can be reward enhancing and risk reducing. Gold is but one of several precious metals that commodity trading advisors (CTA’s) incorporate in their managed futures accounts. We take a look at two other precious metals in this blog, namely, silver and platinum.
Gold and silver play a major role in the Dow Jones UBS Commodity Index. The exposures to the various commodities in the index are reset annually. For 2011, the exposure to gold is 10.45% and the exposure to silver is 3.29%. A precious metals sub-index is computed by Dow Jones UBS for gold, silver and platinum. In addition, there is a sub-index for gold and silver. Each of these indices are based on a fully margined commodity futures contract position for the precious metals.
Let us begin by looking at return statistics for the three commodities. Table 1 summarizes the return statistics for gold, silver and platinum. We provide the traditional statistical measures for the monthly total return of these commodities as well as the upper and lower partial moments defined in our recent blog, Partial Moments – the Up and Down of Performance and Risk. We consider four, five-year time periods as we have been doing in the past several blogs, namely, 1991 to 1995, 1996 to 2000, 2001 to 2005, and 2006 to 2010. Silver has had a higher mean return when compared to gold in each of these time periods. It has also experienced more volatility than gold or platinum. Platinum has outperformed gold in three of four time periods. Using a zero return target, platinum has the highest upside probability and lowest downside probability of the three commodities.
In general, precious metal prices tend to move in comparable directions. Table 2 presents the correlations between pairs of commodities for each of the time periods. From a statistical point of view, these numbers are meaningful and substantially positive. These correlations are dynamic and change over time.
While the mean return statistics are interesting, an investor is also interested in seeing the financial rewards from investments in each of the precious metals. Figures 1 through 4 present the cumulative wealth indices for each commodity and each time period. Each curve assumes that the investor allocates 100 domestic currency units (e.g. U.S. dollars) in a commodity. At the end of each month, the entire value determined by that month’s return is reinvested for the next month. Except for 2001 to 2005, the investor would have greater wealth at the end of the five year period by an investment in silver than a similar investment in gold. Platinum is a dominant investment relative to gold except in the 2006 to 2010. With a worst case monthly return of -31.24% in 2008 along with three other significant negative months in 2008 and one in 2010, platinum underperformed both gold and silver.
The commodity trading advisor would combine multiple commodities in a managed futures account to gain the benefits of diversification. Table 3 provides comparable summary return statistics for three portfolios. The first portfolio is the Dow Jones UBS Precious Metals index which combines gold and silver with weights derived from the weights for the individual commodities from the entire index. The second portfolio equally weights gold and silver in each month of a time period. The third portfolio equally weights gold, silver and platinum in each month. Except for the 2006 to 2010 time period, the third portfolio has the highest upside probability and lowest downside probability. Equal weighted portfolios tend to outperform the Dow Jones UBS Index. Figures 5 through 8 show the cumulative wealth indices for the portfolio in each of the time periods and Table 4 summarizes the cumulative results including annualized returns and volatilities. The poor results in 2006 to 2010 for the equal weighted portfolio of three precious metals are due to the adverse performance in 2008 and 2010 for platinum highlighted above. All of these portfolios have volatilities that are normally associated with equity portfolios.
The long term investor can benefit from a strategic exposure to gold and other precious metals in their portfolio. Platinum has potentially attractive benefits. Unfortunately, open interest in the futures market is highest for gold and silver. This limits the potential for using platinum making it one of highest fruits in the market apple tree.
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