Is Precious Metals Stock Volatility Worth The Diversification Benefit To Your Portfolio?

Written by Ben Carlson

While there are definite diversification benefits to holding precious metals stocks in a portfolio [it begs the question: “Can you handle the boom-bust nature of these highly volatile stocks?”]

…GMO’s Jeremy Grantham and Lucas White came out with a report entitled An Investment Only a Mother Could Love this past week laying out the prospects for natural resource equities. Here’s the executive summary of their findings and thoughts:

We believe the prices of many commodities will rise in the decades to come due to growing demand and the finite supply of cheap resources.

Public equities are a great way to invest in commodities and allow investors to:

Gain commodity exposure in a cheap, liquid manner
Harvest the equity risk premium
Avoid negative yields associated with rolling some futures contracts

Resource equities provide diversification relative to the broad equity market, and the diversification benefits increase over longer time horizons.

Resource equities have not only protected against inflation historically, but have actually significantly increased purchasing power in most inflationary periods.

Due to the uncertainty surrounding, and the volatility of, commodity prices, many investors avoid resource equities. Hence, commodity producers tend to trade at a discount, and they have outperformed the broad market historically.

The team from GMO makes some good points here. If you’re looking to gain long-term exposure to commodities, ?it rarely makes sense to invest directly in the commodities themselves. You’ll get cash-like returns with stock-like volatility.?

I wanted to look back at the performance history of these stocks to check out their other claims. The longest running fund I could find is the Vanguard Precious Metals & Mining Fund (VGPMX). It may not be a perfect match with what GMO is doing but it has a performance history going back to 1985.