Gold, silver and platinum have singularly outperformed several major widely accepted investment indexes over the last 10 years, yet many client portfolios completely ignore this asset category, says a new report from Toronto-based Catalyst Equity Research Inc.
“The traditional view of portfolio management is that three asset classes, stocks, bonds and cash, are sufficient to achieve diversification. This traditional view is quite simply incorrect, and it has cost investors and pensioners dearly over the last decade alone,” says Robin Cornwell, the founder and principal shareholder of Catalyst, an independent equity research company.
“Post-modern, efficient frontier portfolios are optimal in both the sense that they offer maximum expected return for some given level of risk and minimal risk for some given level of expected return. Typically, portfolios that comprise the efficient frontier are the ones most highly diversified,” Cornwell explains.
The report notes that many investment professionals do not recognize precious metals as an asset class. It argues that direct physical allocation in precious metals provides an unencumbered investment with no counterparty risk, sufficient liquidity for large investors, and no dependence on management for performance.
The report says that only 0.30% of pension fund holdings are in gold, and half of that amount is invested in gold mining stocks, not physical bullion. Including physical precious metals improves the efficient frontier, the reports says.
The allocation to precious metals does not come at the expense of any single asset class, but rather from a reduction in several asset classes. Catalyst suggests that the unique risk and reward profile of precious metals may make them a useful diversification tool in strategic asset allocations.
The report goes on to state that bullion provides insurance against failure of all other investments, offers improved liquidity and is the only asset class (excluding cash) with a positive correlation coefficient with inflation.
The report concludes that bullion is the only asset class that can provide protection from a systemic crisis.