by Peter Schiff, Schiff Gold:
Do you have silver in your portfolio?
According to research by Oxford Economics, investors would benefit from an average of 4 to 6 percent silver allocation within a diversified portfolio. This is far below the average investor’s exposure to silver.
The study found that silver, along with gold, works as a powerful diversifier in a broader investment portfolio.
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To examine the potential long-run benefits of holding silver, Oxford Economics compared the metal’s historical performance with a range of traditional asset classes, including stocks, bonds, gold, and other commodities, from January 1999 to June 2022. The analysis found a relatively low historical correlation with asset classes other than gold. This suggests that silver offers a valuable diversification potential in investment portfolios.
Oxford economics also conducted a more rigorous test to determine whether silver should have a consistent allocation alongside gold in a multi-asset portfolio using “dynamic portfolio optimization simulations.” Analysts ran these simulations with the aim of maximizing the risk-adjusted returns of a mixed-asset portfolio under varying constraints designed to reflect differing investor risk preferences.
Across the historic sample period, the study found the average optimal allocation to silver was in the range of 4-5 percent within a portfolio with a 5›-year holding period.
You might think that because you own gold, you don’t need any silver. But the analysis suggests that silver’s return characteristics are sufficiently different from gold to make it a valuable diversification tool and that it deserves its own portfolio commitment.
With over half of global silver demand used in industrial applications, the price of silver tends to be more sensitive than gold to trends in the global industrial cycle, contributing to its higher volatility. Moreover, silver is likely to benefit from an increasingly positive structural demand outlook over the medium term, given its use in many green technologies, indicating that we may be entering a period where the gold-silver price ratio shifts back in favor of silver.”
You can read the full report here.
Now is a good time to consider adding silver to your portfolio.
The spot price of silver hasn’t been this low in over two years. But given silver’s fundamentals, the current economic dynamics, and the trajectory of the Fed, silver still appears very oversold.
One factor signaling silver is significantly undervalued is a silver-gold ratio of over 88-1. That means it takes over 88 ounces of silver to buy an ounce of gold. To put that into perspective, the average in the modern era has been between 40:1 and 50:1. Historically, the ratio has always returned to that mean. And when it does, it does it with a vengeance. The ratio fell to 30-1 in 2011 and below 20-1 in 1979.
Historically, when the spread gets this wide, silver doesn’t just outperform gold, it goes on a massive run in a short period of time. Since January 2000, this has happened four times. As this chart shows, the snapback is swift and strong.
The supply and demand dynamics also look good for silver even with a looming recession. Investment demand skyrocketed last year and supply is down. Industrial demand is rising driven by the growth of the green energy sector. Governments are likely to keep that gravy train running even during an economic downturn. Mine output was hit hard by shutdowns due to the coronavirus pandemic, but silver production was already on the decline with mine output dropping for four straight years.