Basket Of Metals Always Better Than Gold

February 21, 2013

Gold’s slump is a good reminder that investors ought not to have all of their eggs in one shiny basket.

This week, gold fell to a new six-month low, down below $1,600 for the first time since July 2012, likely disappointing the scores of investors currently investing in gold.

In the rush into major gold funds like the SPDR Gold Trust (NYSEArca: GLD) and the iShares Gold Trust (NYSEArca: IAU), however, investors seem to have forgotten that gold isn’t the only precious metal out there that can be used as an inflation hedge.

Just as with any asset class, passive investors would do better to diversify their precious metals exposure than to put all of their eggs in one shiny basket. Single securities will sometimes beat the diversified basket, but active pickers have to contend with single-security risk—right now, that risk obviously being that GLD and IAU could fall 7 percent in three months.

Gold Performance

The precious metals baskets on the market all hold large amounts of gold, so they’re still very responsive to movements in gold, but they hold exposure to other precious metals as well.

There are two main types of precious metals basket ETFs. The first type is relatively narrow, holding strictly gold and silver, while the second type broadens its portfolio to include platinum and palladium as well. The precious metals baskets can be further differentiated by their method of exposure: Some use futures contracts, while others actually hold the physical metal.

There are six precious metals ETPs currently on the market, but the biggest are the PowerShares DB Precious Metals Fund (NYSEArca: DBP) and the ETFS Physical Precious Metals Basket (NYSEArca: GLTR). These two ETFs are as different as they can be: DBP uses futures contracts and only holds gold and silver, while GLTR holds a broad portfolio of all four physical precious metals.

Of the remaining four, two—the iPath Dow Jones-UBS Precious Metals ETN (NYSEArca: JJP) and the iPath Pure Beta Precious Metals ETN (NYSEArca: BLNG)—look much like DBP, solely holding futures contracts on gold and silver. The three funds all pick their futures contracts differently, but have generally performed nearly identically to each other.

The broader baskets are all fairly different. At the farthest extreme, the ETFS Physical White Metals Basket (NYSEArca: WITE) doesn’t hold gold at all—it merely holds physical silver, platinum and palladium—making it a great addition to a portfolio that already has exposure to gold, but obviously not a great vehicle for exposure to gold itself.

 

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