Silver, Platinum and Palladium as Investments – Research Shows Diversification Benefits
Silver, Platinum and Palladium as Investments – Research Shows Diversification Benefits by Mark O’Byrne – Gold Core
– Silver, platinum and palladium see increased role as investment vehicles
– Increase in academic output on the white precious metals is in line with this
– Silver and particularly gold are safe haven assets
– Silver was a safe haven at times during which gold failed to be
– Platinum and palladium less so but have diversification benefits
– Silver manipulation is possible and indications of, if not legal proof
– Benefits platinum and palladium could provide as money not been fully addressed
– Main focus in investment drivers is price – not on drivers of physical demand
– Platinum, palladium and silver have different relationships with other assets and divergent abilities in hedging risk
– White precious metal investors should employ a buy-and-hold strategy
– Silver markets have become more efficient since 1977
– White precious metals are increasing in investment importance
– Research shows hedging role and diversification benefits of precious metals
by Jan Skoyles, Editor Mark O’Byrne
A review of the academic literature on the financial economics of silver, platinum and palladium has recently been conducted by Vigne, Lucey, O’Connor and Yarovaya.
The review surveys and covers the findings on a wide variety of topics in relation to the White Precious Metals including Market Efficiency, Forecast-ability, Behavioral Findings, Diversification Benefits, Volatility Drivers, Macroeconomic Determinants, and their relationships with other assets.
For those asking whether or not they should invest in precious metals or to increase their allocation, it can be of use to read some academic research into the role the white metals can play in hedging risk in their investment and pension portfolios. There are many strongly held opinions regarding gold and silver and precious metals and some mathematical and economic analysis can go a long way in helping us to understand how and why we should consider investing in these less popular precious metals.
How efficient are the white metal markets?
Given that silver is traded 24 hours a day, across the globe one would, argue the authors, expect to find a market that is ‘constantly involved in price discovery and adhere closely to the Efficient Markets Hypothesis’. This expectation has lead to a number of studies seeking to address this question.
Below we summarise the authors’ findings. The papers featured look at not only the efficiencies of the markets but the effectiveness of futures markets at predicting spot prices and also market manipulation.
Key findings across the literature, relevant for investors include:
- Speculation in silver
Solt and Swanson’s (1981) research – soon after silver’s massive bull market in the 1970s which propelled prices from below $1.50/oz to nearly $50/oz – led them to conclude that silver markets are more speculative than other investment markets
- What role do futures markets play in making predictions?
Varela’s (1999) regression model finds closest to delivery silver futures are a good predictor of the future cash price, showing efficient links between these markets
- Mutafoglu et al.’s (2012) work looks at whether open futures positions can predict platinum and silver spot prices movements. They find that white precious metal market returns explain trader’s positions