Aug 262015
 

Following on from yesterday’s post, below is the chart of the best gold and silver percentage allocations for Australian investors by the year one starts investing.

beststrategyau

This is not too much different to the chart for US investors, with a slight skew towards gold in the late 1970s. This is to be expected as we are affecting both USD gold and USD silver by the same AUD/USD exchange rate, which would only magnify the variability in gold and silver by a small amount. The chart comparing the “times increase” of the 100% gold, 100% silver and 50%/50% strategies can be found below.

3strategyau

I have left the scale the same as the one for US investors, so it can be compared directly. Note that Australian investors experience a much lower variability in returns, which is driven by the fact that often US precious metal prices are affected by US dollar strength/weakness, which also affects the value of the Australian dollar, helping to mute changes in AUD gold and silver prices. The advice for Australian investors is the same as that for US – the 50/50 strategy appears to be a good all weather approach to take.

The results above, and for yesterday’s post for US investors, were based on a constant rebalancing. For example, every month the investor would adjust their purchases (and sell one metal if necessary) to bring the portfolio back to 50% gold and 50% silver by value and not just spend their monthly $100 savings as $50 on gold and $50 on silver.

The chart below shows the percentage difference between the two total ending USD values of a rebalance versus a simpler no rebalance/buy in the same proportions each month. It is a busy chart but the key takeaway is that not rebalancing theoretically produces a lower overall return.

norebal

However, it is not a big difference considering that we are in most cases talking about increases on the cash invested of 100% to 300%. If we included transaction fees and the tax consequences of rebalancing (having to pay tax on any profits from selling whatever metal is overweight), then I think this negative difference would disappear. The difference could also be reduced by adjusting how much gold or silver one buys so as to move the overall portfolio split as close to 50/50 as possible, although this would only have an effect early on as later in ones savings the $100 a month is minor compared to the value of the portfolio.

While the analysis above and in the previous post is simplistic in that it does not consider one’s rising income, inflation, taxes and transaction fees, it does indicate that there is merit in buying 50% gold and 50% silver as a conservative precious metals investing strategy.

  • Shavi Tupyraz

    OK, I have pulled together some rough & ready portfolio estimates based on a “Investing in proportion to the Gold:Silver Ratio” strategy, and the short of it is that it doesn’t work, roughly as follows:

    1. As a baseline, investing US$100 only in Gold, every month from August 1975 to August 2015 would see me holding a total of 129.18 oz of Gold currently worth $141,894 ~ 2.95 times the amount I invested. Averaged over the period, the return would be 1.86x with a Standard Deviation of 1.04 and a maximum of 5.26x

    2. In comparison, a Silver-only strategy would see me now holding 7,144 oz of metal currently worth $106,735 (before today’s crash) ~ 1.62x my investment, with a Standard Deviation of 1.25 and a maximum of 7.85x

    If you are lucky, therefore, and get in and out at the right time, Silver could sometimes give you a significantly better return, but overall its neither as reliable nor as good over the long run as Gold

    3. Taking the 50:50 approach (simple version) where I purchase $50 of each metal each month, I would now be holding 3,753 oz of Silver and 64.6 oz Gold, worth a total of US$124,315 or 2.58x my investment. This is almost as good as “100% Gold” and has an average outcome of 1.74 with a standard deviation of 1.12 and a maximum of 6.03x

    4. Finally, if I invested US$ 100 every month in proportion to the then-current Gold:Silver ratio (i.e. at 75:1 I would put $75 in Silver and $25 in Gold), I would now be holding 4,402 oz of Silver and 57.74 oz of Gold, worth US$129,190 and therefore 2.69x my initial investment. The average outcome is 1.84x, the Standard Deviation 1.18 and the best outcome was 6.72x

    Overall, therefore, the “Gold Only” strategy produces the least volatile return, the highest overall portfolio value, and the highest average return; however, the GSR strategy only slightly underperforms it overall (US$129,190 vs $141,894), it has a similar average return and a Standard Deviation which is only slightly higher, and a maximum return better than the 50:50 strategy and only slightly worse than the Silver-only approach)

    Ignore Silver, stick it all in Gold and forget it

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