Almost every investor knows that diversification is an important part of any strategy, and that it’s particularly important in current times. The economy has been in relative turmoil for the better part of the last five years, since a stock market crash in 2008. With a great deal of volatility and uncertainty, the importance of diversification has been highlighted.
That continues to be the case, as there is still a high risk of inflation moving forward. At the same time, there has been promising economic growth and promising movement in the Dow Jones Industrial Average. The question is whether that can be sustained, or whether the market is approaching a ceiling that it will not be able to break through.
Given the difficulty in predicting the movement of the markets, precious metals investments have been extremely popular in the last five years. As they continue to grow in popularity, could there be a new kind of diversification?
Diversification within Precious Metals Investments
In the past, diversification has been thought of as balance within an investing portfolio between stocks, bonds, precious metals and currency investments. There was further diversification within stock market investments, spreading out the portfolio between different types of companies and different market sectors.
The thought was that if tech companies struggled, perhaps manufacturing stocks would do well and so on. If the stock market were struggling overall, precious metals investments would likely do well.
In a time where there is an increasing level of uncertainty and the outlook for the stock market and economy looks a lot gloomier, perhaps diversification should be shaded more toward precious metals investments. Within those investments, it is possible to further diversify between gold, silver, platinum and palladium.
Gold and Silver
Gold and silver are more commonly thought of as precious metals investments, and their movements are more closely tied to the financial markets, currency values and inflation than other precious metals. As a result, they are a lot more reactionary in troubled economic times.
This is fine, as it creates a great hedge against the economy or inflation. As such, gold and silver are a key part of any portfolio and your holdings in these types of precious metals investments should be increased if there is a lot of economic uncertainty.
On the other hand, they can also drop rapidly when the economy turns around. That’s because everyone who ran to the safety of gold and silver during a recession or market crash is likely to run away again as soon as things turn around. That’s okay for those precious metals, as they have served their purpose. However, it can also leave the door open for better diversification opportunities.
Platinum and Palladium
Platinum and palladium draw a lot more of their value from the supply and demand that surrounds their usage in the industrial sector. As a result, their value tends to increase more rapidly during times of economic prosperity.
So if you think about it, gold and silver tend to see the biggest gains when things are going poorly in the economy and platinum and palladium tend to see their biggest gains when the economy is doing well. As a result, if you are lacking trust in the stock market in general, there are ways to diversify within precious metals investments.
By splitting your precious metals portfolio between gold and silver and platinum and palladium, you will be reasonably well diversified and can push your precious metals investments up to a higher percentage of your overall portfolio. It’s not a traditional strategy, but in ever-changing times, it does make some sense.