The role of precious metals in the portfolio
Precious metals are metals that are characterised by low market supply due to the fact that their resources are limited in nature. These include metals such as gold, silver, platinum and palladium. These metals have a wide range of industrial uses or are used as bank reserves (gold), so they are in high demand. This, combined with limited resources, puts upward pressure on their price and therefore these metals have a place in the portfolio. However, this growth needs to be understood in the long term, which can extend over several decades.
As for the relationship between the performance of gold and the DJ30 index over the last 30 years, this is illustrated in the next figure:
Comparison of the DJ30 index (blue) and gold (orange). Source: www.macrotrends.net
It can be seen that in periods when the index has fallen significantly, the value of gold has risen. Gold therefore acted as a cushion during these periods. This can be seen especially in 2001 (dot com bubble), 2008 (financial crisis) and then 2020 (covid-19). Conversely, in times of a strong bull market in equities, we see a decline in the value of gold, as in the period from 2012 to 2016.
We also see that the total appreciation of the stock index has been almost 900% over the last 30 years, whereas gold has appreciated 400%. In short, stock indices can deliver higher returns, but they are also much riskier than, say, gold.