There are three major types of Perth Mint Depository investor:
- Those that only buy gold
- Those that only buy silver
- Those that buy 50% gold and 50% silver
There are others who include platinum, or have different percentages, but
the above three types are a significant majority of our clients. I find it
interesting that most investors who weren’t strong goldbugs or silverbugs and
couldn’t decide between them went with a simple 50/50 strategy. This begs
the question: is this a good strategy and what is the ideal percentage
allocation one should make between gold and silver?
To answer this I have assumed an investor saving regularly for retirement,
for simplicity $100 a month, including rebalancing each month to bring
the value of gold and silver held back to the target percentages. I also
assume an investing period of 25 years, on the basis that one does not start
saving serious money until 40 (see this post for the investor lifecycle logic behind this)
and retires at 65.
I then ran through every combination of gold and silver percentages to
come up with a total value at the end of the 25 year investing period (which
is 300 months, or $30,000 in total cash invested). As an example, the chart
below shows the portfolio value for an investor who started in 1985 and
retired in 2010, across various percentage mixes.
If this person only invested in gold then 25 years later their portfolio
would be worth just under $89,000. A silver only investor would have just shy
of $93,000. However if this 1985 investor had perfect forecasting ability
they would know that investing 37% into gold and 63% into silver would
maximise their return at $94,932, over three times the total cash they put
in.
However, given the varying performance of gold and silver over time, the
year a person starts and finishes investing affects their return. To compare
different years I divided the total portfolio value by the dollars invested,
to give a simple “times” figure (eg 3 means you’ve tripled your money). The
chart below shows this calculation for three selected years, each
demonstrating that a different strategy maximised the return.
The year 1985 is shown here again, but as a “times invested money” figure.
While a gold/silver mix was the best return when starting in 1985, if you
started in 1988 you would have been better off just investing in silver as
you would have increased your $30,000 by over 5 times, compared to a gold
only strategy of quadrupling your money. Starting in 2002 (which only covers
13 years) a gold only would have been the best strategy, increasing your
$16,300 investment by 1.67 times to $27,181.
Of course the above is all very handy if you have hindsight, but what if
you are starting to invest in precious metals in 2015? In 25 years will
starting in 2015 end up like 1985, 1988 or 2002 in terms of what is the best
strategy given the relative performances of gold and silver? One way of
answering this question is to look at the strategy that gave the best performance
for each year and see if there is a strategy that performs best across all
different time periods.
The chart below looks at each year starting from 1975 up to today and
shows the gold/silver percentages that gave the best return for a person starting
to invest in precious metals in that year over the following 25 years. From
1990 onwards it is not for a full 25 year investment period, but I’ve
included it for comparison purposes. Note, the chart is not showing the best
strategy for that year, but the best strategy for an investor starting
in that year).
The chart shows that there isn’t any consistency across time in which
gold/silver proportions are best. A skew towards silver seems to be best
during the 1980s with 100% gold being best at other times. This is reflecting
the relative outperformance of gold or silver over the various 25 year
timeframes. I didn’t find this very helpful in terms of identifying an
all-weather strategy.
I then noticed that some years, like 1985, don’t have a big difference
between the best and worst strategy – in the case of 1985, between $89,000
and $95,000, a gap of less than 7% on an increase of around 200%. To get some
sense of the variability of returns, I’ve charted the “times
increase” of the 100% gold, 100% silver and 50%/50% strategies below.
This chart is similar to the one above, showing that a silver only
strategy performed best in the 1980s and gold better than silver for most of
the other investment time periods. The reason for the high performance in the
late 1980s is because an investor starting then is averaging in during gold’s
bear market, lowering their cost of purchase, and then exiting at gold’s
relative highs in 2011-13.
What is interesting is how close the 50/50 strategy is to gold or silver
when they are the best strategy and indeed there are times when the 50/50
strategy outperforms a gold or silver only strategy. The key for me is that
over time the 50/50 is closer to the best strategy than the worst – for
example, if you picked a gold only strategy and the next 25 years turned out
like those for an investor starting in 1985 and retiring in 2010, then
you would see an increase of 4 times when a 50/50 would have given you a 4.7
times increase, not far off 5 times for a silver only. A silver only approach
however, would have underperformed a lot if the future turned out like the
1990s, when a 50/50 was very close to a gold only strategy anyway.
My conclusion is that a 50/50 strategy is a very good all-weather approach
to take. You will not give up too much return if gold only or silver only
turns out to be the best strategy but a 50/50 will protect you from
underperformance if your choice of metal does not turn out to be the
best.
Tomorrow I’ll have a look at the situation for Australian investors to see
if the advice is any different, and also look at the effect of not
rebalancing (just buying on a 50/50 basis each month).