Sep 022015

Reuters reported last week that “South Africa’s mining industry, unions and the government have committed to a broad plan to stem job losses, including boosting platinum by promoting the metal as a central bank reserve asset”. This is apparently an idea put forward by the World Platinum Investment Council in late 2014.

The idea got me thinking about the role of platinum and palladium in a precious metal portfolio. Generally I shy away from recommending them due to their lower liquidity compared to gold and silver and more volatile and industrial nature. As a theoretical exercise I thought I would extend the work done in this and this post to include platinum and palladium.

In those previous posts I was only dealing with two metals, which with 1% incremental changes only involves 101 different percentage allocations to run through. With four metals and a 5% increment, I was looking at over 1,771 different portfolios (assuming my macro was working correctly!)

Also, because I only had pricing data for the platinum group metals from mid 1990, I have just run the simulation from July 1990 to July 2015 with $100 being bought each month (total cash invested $30,000). The result in the chart below.


Across the X axis are each of the 1771 different percentage combinations of the four metals, sorted roughly by the resulting end portfolio value/return. The colours show the general weightings of each metal.

In general terms, the worst performing portfolios are those with a lot of platinum and the best those with more palladium. Gold takes a big role but is somewhat interchangeable with silver within a particular allocation to gold/silver.

I think the result is skewed by a higher average monthly return on palladium (0.86% per month) compared to platinum (0.38%). I would also note that palladium returns have a low correlation of  0.31 to gold and 0.42 to silver, coupled with higher volatility, probably giving better diversification benefits than platinum, which has a higher correlation to gold and silver (0.559 and 0.561 respectively).

Using a single 25 year time period with a flat $100 monthly investment also skews the result towards the performance of the four metal during the 1990s. For the record, the best performing portfolio combination was 30% gold and 70% palladium at $90,046 and the worst 100% platinum at $49,449.

I would be careful reading to much into this brief analysis, but it does indicate that there is some role for platinum and palladium in a precious metal portfolio (unless you are Australian, because palladium attracts a 10% Goods and Services Tax).