When It Comes to Investing In Commodities, Gold, and Silver, Timing Is Everything

February 15, 2023

Previously published in The Bulletin, Bend, Oregon on February 26, 2023

For most traditional investments likes stocks and bonds, one of the key tenets for a successful outcome over time is to ‘buy and hold.’ Of course, you are well-served to start with a low-cost mix that is diversified globally, having exposure to different sizes, styles, and sectors of the market, and suitable for your personal circumstances and situation. Along the way, you should make adjustments when you experience life changes, and rebalance as market movements shift your mix out of alignment from its original setting.

The longer you stay invested the greater the probability your return will be positive. When we evaluate the long-term results of other investments like commodities, gold, and silver, the case for buying and holding in a portfolio are not quite as convincing.

Some investors espouse the virtues of commodities and precious metals as portfolio diversifiers due to their low correlation with stocks. (Correlation measures how closely investments or asset groups perform relative to each other over a given time period.) Others tout their role as effective hedges against inflation or serving as safe havens in uncertain times. Now one can mine the data to find numbers that help make this case, but they are very dependent on the specific time periods being examined. And once you consider the increased risk these asset classes introduce to the portfolio, the potential benefits tend to erode.

Looking back over the last 30 years (2/1/1991-12/31/2022), stocks generated an average annual return of 10.20% with a standard deviation (which is a measure of volatility or risk) of 15.26. Bonds yielded a return of 5.05% per year with standard deviation of just 3.20. Over the same period, gold returned 5.15% per year with annualized standard deviation of 15.26, and silver fared even worse—returning 2.65% per year and 28.61 for its risk measurement. Commodities came in a little better than silver with a return of 3.03% and standard deviation of 14.74. If you think of this in dollar terms, $1,000 invested in stocks back in February 1991, would have grown to $22,190 by the end of 2022. The same amount invested in bonds would be worth $4,820 today, while gold, silver, and commodities would have gotten you $4,960, $2,300, and $2,590, respectively.

If you consider this from a portfolio allocation standpoint, does it really make sense to pull money away from stocks to invest in gold, which has roughly the same level of risk but returns on par with bonds? Or reduce your bond exposure to add silver where your returns are nearly cut in half, and your risk is magnified by a factor of 9? And which one would you trade for commodities exposure?
Certainly, there are times when gold, silver, and commodities provide positive results to those invested in them. The trick is being able to reliably predict when to buy and when to sell these speculative asset classes, and as students of finance we have come to learn that trying to time markets over and over is a loser’s game. We’ll take our chances buying and holding more productive asset classes for the long haul.

Stocks: CRSP Deciles 1-10 Index (market) Center for Research in Securities Prices, University of Chicago.
Bonds: Bloomberg Global Aggregate Bond Index (hedged to USD)
Gold: Spot Price
Silver: Bloomberg Silver Subindex Excess Return
Commodities: Bloomberg Commodity Total Return Index