Last year was one of the worst on record for a conventional stock and bond portfolio. The major stock and bond market indexes both fell by double digits.
Investors who were diversified into physical precious metals fared much better. While it wasn't a banner year for gold and silver markets, they eked out slight gains – which translated into a massive outperformance versus conventional financial assets.
Unfortunately, conventional financial advice continues to keep most investors 100% allocated to financial assets with zero diversification into hard assets.
Wall Street's shunning of gold and silver serves the interests of brokers and investment bankers – not clients who would stand to benefit from exposure to precious metals.
Prominent precious metals analyst Jeff Christian, who often positions himself in opposition to gold and silver bugs, nevertheless provides some valuable insights into Wall Street's institutional bias against metals.
In a recent interview with the Korelin Economics Report, Christian spilled the beans on the little-acknowledged conflict of interest that exists:
There are a lot of sell-side institutions that know... if I sell an investor a stock or a bond or an ETF or a note indexed to the stocks, the turn on that is probably somewhere between three quarters and five quarters.
So, I'm going to see that money come out of that asset and get redeployed, reinvested in another asset and I'm going to get a sales commission.
But if I sell that investor physical precious metals, I'm not going to have another commission on that money until he's dead. Because people tend to buy, especially gold, they tend to buy gold and not sell it.
So, you have an institutional bias on the part of mainstream sell-side financial corporations against selling precious metals – physical precious metals.
Conventional asset allocation models are based on Modern Portfolio Theory. It tells investors that the greater their allocation to bonds and cash, the less risk.
That mostly held true when interest rates were on the decline and inflation was low. But it failed spectacularly when interest rates and inflation both surged last year.
That's where precious metals come in. Gold and silver are uncorrelated to conventional financial assets. The metals can gain (or at least retain) value during times when other asset classes are in bear markets.
In fact, gold prices tend to move inversely to investor confidence. During the late 1970s stagflation, the 2000-2002 tech wreck, and the 2008 financial crisis, gold performed far better than portfolios containing only conventional financial assets.
Despite the obvious advantages of including gold in a diversified portfolio, the financial industry is institutionally biased against precious metals. Bankers, stockbrokers, insurance agents, and financial planners don't benefit when investors diversify into hard assets.
The interests of the financial establishment aren't aligned with those of individual investors.
If they were, then financial advisors everywhere would advocate a sizeable allocation to physical precious metals.
How much you allocate to precious metals is ultimately an individual decision that depends on your own life circumstances, goals, risk tolerance, and expectations for the future.
Academic studies suggest a 10% or higher allocation to bullion boosts the risk-adjusted performance of a conventional investment portfolio. Higher overall return with less volatility along the way.
If you expect a currency crisis within your lifetime, then you might want to boost your metals allocation to a larger weighting.
Your current allocation to bullion may not be as big as you think. Consider all your financial assets, from brokerage and bank accounts to savings bonds and life insurance policies. In the event of a currency collapse they could all be at risk. Do you own enough hard money in the form of bullion to offset that risk?
Consider also the importance of diversifying within your bullion holdings.
If all you have are large bars stored in a third-party vault, your practical ability to access and spend your bullion during a crisis will be limited.
You should have at least something of an emergency stash hidden away at home where you can get your hands on it anytime, day or night. It should consist of several different sizes and forms of gold and silver for maximum flexibility and barterability.
One-ounce gold coins or larger bars are useful for storing more significant amounts of wealth. But adding half-ounce, quarter-ounce, and tenth-ounce gold pieces will give you greater flexibility for bartering, trading, and gifting.
Consider diversifying beyond gold and silver and into the platinum group metals (PGMs). Though platinum and palladium bullion products aren't as widely recognized or as liquid as gold and silver, there are advantages to having exposure to the PGMs.
As scarce industrial metals that are used primarily by the automotive industry, they have their own unique supply/demand fundamentals.
Even during times when gold and silver are slumping, the PGMs can be appreciating.
From a portfolio diversification standpoint, that's an advantage. It means you can own precious metals that have the privacy and portability attributes of gold but with the price-performance attributes of a separate asset class.
Even if you are among the minority of investors who holds a sizeable allocation to physical precious metals, you can probably take steps to become a more fully diversified precious metals investor.
Whether it's acquiring tenth-ounce gold coins or one-ounce palladium bullion bars, by becoming more broadly diversified within the precious metals space, you are likely to be financially more resilient.