Maxwell Gold

Director Investment Strategy

Investment Insights March 2017

5 Investing Myths about Precious Metals

Summary
Precious m etals are a polarizing topic among the investment Exhibit 2: Gold & silver are sensitive t o real interest rates.
com m unity, with both supportive and skeptical viewpoints. As Rea l US A v er a g e m on t h ly r et u r n (0 6 /3 0 /7 6 0 1 /3 1 /1 7 )
these perspectives evolved several key misconceptions have been in t er est In du st r ia l # of
r a t es Gold Silv er Pla t in u m
echoed about precious m etals among investors. We v iew precious Met a ls* Mon t h s
m etals as a distinct asset class and see the m erits of including them <-2 % 4 .0 % 4 .4 % 1 .1 % -2 .5 % 28
as a core risk m anagement tool in portfolios. In this effort weve -2 % t o -1 % 0 .7 % 1 .1 % 0 .9 % 0 .1 % 48
addressed five common investing myths about precious m etals: -1 % t o 0 % 1 .1 % 1 .8 % 0 .5 % 2 .4 % 62

Myth #1: Gold is a commodity 0 % t o +1 %

+1 % t o +2 %
1 .3 %
0 .2 %
0 .9 %
0 .4 %
1 .7 %
-0 .5 %
-0 .2 %
0 .5 %
72
52
Gold is com m only treated as a commodity, which given its physical >+2 % -0 .1 % -0 .1 % 0 .5 % 0 .3 % 226
properties m akes intuitive sense. When evaluating golds behavior, Sour c e: Bl oomb erg, ETF Securities. See important information for further
detai ls.*Industrial metals data from 05/31 /81 to 01/31 /17
however, is tends to m ove more in line with currencies than other
com m odities. Part of this relationship lies in golds heritage as a
Historically, there have been four similar periods to todays rate
currency during historical global gold standards, its use as a env ironment whereby rising policy interest rates followed either
m edium of exchange for centuries (being of uniform quality) , and
falling or relatively low interest rates for sustained periods ( 1976,
as a reserve m onetary asset among todays central banks (lacking 1 987, 1994, and 2 004). In 1976, 1986 and 2 004, gold prices rose
credit r isk).
2 2 %, 2 5% and 11% respectively, while prices fell in 1994 by 2 .6%
Exhibit 1: Gold behaves more in line with currencies. one y ear after the first hike. Unlike prior periods, 1994 saw real
10.0% interest rates rise by 3 %, while in other years it remained flat or
CopperSilver Pa lladium
5.0%
Gold
Br ent Crude negative.
Soy beans Nickel
USD Pla tinum Zin c
W T I Crude
0.0% JPY
Su gar
This highlights the negative relationship between rising real
EUR
Annualized Return

A luminum
-5.0%
GBP
CHF
Cot ton Coffee
interest rates and gold. This negative relationship between real
Corn interest rates and other metals can be seen m ore clearly when
-10.0%
W h eat ev aluating different real interest rates periods. As shown in Exhibit
-15.0% Liv estock
2 , precious metals historically perform very well when real US
-20.0% Na tural Gas interest rates are negative. Gold (+4.0%) and silver (+4.4%)
-25.0% experience the most benefit when real interest rates are at extreme
10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
negatives (-2 % or less) as they are sought as a store of v alue by
Annualized Volatility
Source: Bloomberg, ETF Securities. Chart data from 11/05/93 to 03/03/17. inv estors as the opportunity cost of holding physical metals is lower
As shown in Exhibit 1, golds risk/return profile falls into the than other financial assets with negative real yields such as bonds
currency camp m ore closely than its precious m etal peers or other and cash. Further even when real interest rates are positive up to
com m odity sectors. When gold is com pared to G10 currencies, it 2 %, gold and silver still post positive gains.
has the highest correlation for 7 out of 1 0 of these currencies versus
silv er, platinum or palladium which exhibit characteristics m ore Myth#3: Gold is an inflation hedge
akin to traditional risk adjusted commodity performance. In actuality, golds ability to hedge inflation is questionable. This
com m on claim of gold being an inflation hedge stems from its
Myth #2: Rising interest rates spell historically fixed price under gold standard systems. Additionally
doom for metal prices gold has exhibited an ability to preserve purchasing power over
long periods by protecting against currency or m onetary another
The perception that rising rates spell doom and gloom for m etals is
not as clear cut as many presume. Over the last 40 years, there have form of inflation.
been 1 0 major rate tightening cycles by the Federal Reserve (Fed) But as a hedge against pure price inflation m easures, gold is the
during which the performance among metals during these periods, weakest among the precious m etals com plex. Unlike gold, the
however, is m ixed.
1
Past per f or manc e i s no guar antee of f utur e r esul ts.
m ajority of annual demand in silver (~50%), platinum (~65%), and Myth #5: Precious metals are only
palladium (~95%) is tied to industrial applications through usage in
products and processes. As industrial activity rises along with
suitable for aggressive investors
dem and for inputs, these industrial precious metals tend to serve as Precious m etals are distinct and effective diversifiers, but the true
m ore effective hedges against demand driven price increases. benefit of a precious m etal allocation emerges when they are added
to a div ersified portfolio allocation. By a dding precious metals to a
Exhibit 3: Indust rial-precious metals like palladium,
div ersified stock-bond portfolio, the portfolio efficiency can
plat inum, and silver tend to be more sensit ive t o inflation.
Natural gas
increase whereby the portfolio risk is lowered while the portfolio
Palladium return remains the same or increases com pared to diversified
Gathering & Processing
Energy portfolio without an allocation to precious metals.
Platinum
Natural gas pipelines
US Energy infrastructure Giv en that precious m etals dem onstrate a low correlation t o
Oil & Gas stocks Top performers when
Crude oil pipelines
US CPI rose by 0.5% equities, the diversification benefits m ay be enhanced by sourcing
Soft Commodities
Silver precious m etals in a portfolio from the stock allocation. The
Crude oil
Soybeans increase in efficiency, however, occurs across risk profile and
All commodities
REITs funding scenarios because precious metals also carry a low
Health Care
Utilities correlation historically to bonds. While the proper weighting will
0% 10% 20% 30% 40% 50% 60% v ary depending on investors different risk profiles and investment
Return
Source: Bloomberg, ETF Securities. Chart data from 3/31/91 t o 02/28/17.
objects, a zero percent allocation to precious m etals remains sub-
optim al.
Ev aluating 50 real assets, traditionally considered to be reliable
Exhibit 5: There is a higher benefit by including gold in
inflation hedges, shows that commodities and infrastructure m ake more conservative allocations t han aggressive ones.
up m ost of the top 2 0 performers during m onths when US Bal anc ed Conser v ati v e A ggr essi v e
Portfolio
Ri sk Pr of i l e Ri sk Pr of i l e Ri sk Pr of i l e
consum er price index (CPI) rises by 0.5% annually (see Exhibit 3 ). allocation
(60/40) (40/60) (80/20)
Gold doesnt rank among the top real assets; however, palladium, S toc k s (MS CI World) 60% 50% 40% 30% 80% 7 0%
platinum, and silver tend to perform well during periods of rising Bonds (Barc lays Agg) 40% 40% 60% 60% 20% 20%
inflation given their industrial dem and as more traditional
Prec ious Metals (PM) 0% 1 0% 0% 1 0% 0% 1 0%
com m odities.
Portfolio Return 6.5% 6.4% 6.2% 6.1 % 6.8% 6.7 %

Myth #4: Dollar strength is bad for gold Portfolio Volatility 9.0% 8.2% 6.3% 5.8% 1 1 .8% 1 1 .0%

S h arpe Ratio 0.43 0.45 0.56 0.59 0.35 0.37

Gold and the US dollar (USD) historically exhibit a persistently
negative correlation since 1976 (-0.37), but this relationship is
neither perfect nor permanent. Looking at shorter time frames,
however, suggests that there are potential environments in which
gold and the USD can both m ove higher (see Exhibit 4 ).
Most notably this occurs in periods of heightened turmoil and flight
to quality increases demand for defensive assets including gold and
USD, as was the case in 2008. Further, during periods of cy clical
US upswings, such as during the 1990s, the correlation w as
positiv e. The period of US Fed tightening from 2 004-2006
coincided with a decoupling of the inverse gold-US relationship.
Exhibit 4: Gold and t he dollar can actually move t ogether
0.4
0.2
Correlation (trailing 12M)
Sour c e: Bl oomb erg, ETF Securities. Portfolio returns and volatilities are calculated on
an annualized b asis. Table data from 12/31 /92-1 2/31 /1 6. For illustrative purposes
onl y . See disclosures for further details
Starting with the example of a 60/40 allocation without any
precious m etals in the portfolio, it is observed that the total
portfolio return since 1993 is 6.5% annualized and the total
portfolio v olatility is 9.0%. Subtracting the return on the 3 Month
US Treasury Bill from the portfolio return and dividing by volatility
y ields a risk-adjusted return m etric (the Sharpe ratio) for the 60/40
portfolio of 0.4 3. As the allocation to stocks was lowered in the
portfolio and replaced with precious m etals, the portfolio became
m ore efficient over the long run. This holds true for varying risk
profiles and has been m ost pronounced among balanced and
Gold (US$/ounce) conservative allocations ov er the past two decades (see Exhibit 5).
Gold/US Dollar Correlation $2,000
Average Correlation
$1,800 Also as m ore com plex asset allocations with m ore asset classes
$1,600 apply this principle, further portfolio efficiencies can be captured

0
Gold price per ounce

$1,400
since the largest contributor to volatility is equity risk and m any
$1,200
-0.2 risk assets have high factor sensitivities to equity m arkets. Bonds
$1,000
-0.4 and cash historically have provided sim ilar properties and remain
$800
$600
attractive from a diversification standpoint. Given the outlook of
-0.6
$400
rising interest rates putting downward pressure on bond
-0.8
$200 v aluations, precious m etals m ay offer an additional option to
-1 $- incorporate with other asset classes to effectively manage asset
1990

1996
1994

1998
1992
1980
1976
1978

1984

1988

2002
2004

2008
1982

1986

2006

2012
2014
2000

2016
2010

allocations and portfolio exposures.

Source: Bloomberg, ETF Securities. Chart data from 12/31/75 to 02/28/17

2
Past per f or manc e i s no guar antee of f utur e r esul ts.
Im por tant In formation

The statem ents and opinion s ex pressed are th ose of the author and are a s of the dat e of this report. All inform ation is hist orical and n ot in dicativ e of
future results and subject t o change. Rea der sh ould n ot assum e that an inv estm ent in any securities and/or preciou s m etals m e ntioned was or w ould
be pr ofitable in t he future. This information is not a recom mendation to buy or sell. Past performance does n ot guarantee fut ure results.
The ETFS Silver Trust, ET FS Gol d Trust, ET FS Platinum Tru st, ETFS Palla dium Trust an d Preciou s Metals Ba sket Trust are not
investment companies registered un der the Investment Company A ct of 1940 or a comm odity pool for purposes of the
Comm odity Exchange A ct . Shares of the Tru sts are n ot subject to the same regulat ory r equirements a s mutual funds. These
i n vestments a re n ot suitable for a ll investors. T rusts focusing on a single commodity generally experience greater volatility.
Comm odities gen erally are v olatile and ar e n ot suitable for all invest ors . Trust s focu sing on a single comm odity generally experien ce
greater v olatility . Please refer t o the prospectu s for com plete information regarding all risks a ssociated with the Trust s. S hares in the Trust s are n ot
FDIC in sured and m ay lose value and have n o bank guarantee.
The v alue of the Shares relates dir ectly t o the v alue of the pr eciou s m etal held by the Trust and fluctuation s in the price could m aterially adv ersely
a ffect investment in the Shares. Sev eral factors may affect the price of pr ecious m etals, including:
A ch ange in econom ic conditions, such as a r ecession, can a dversely a ffect the price of t he precious metal held by the Trust. Som e m etals
a r e used in a wide range of industrial applications, and an econom ic downturn could have a n egative im pact on its demand and,
con sequently, its price and the pric e of t he Shares;
In v estors expectations with respect to t he rate of inflation;
Cu rrency exchange rates;
in t erest rates;
In v estment and trading a ctivities of hedge funds and com modity funds; and
Globa l or r egional political, econom ic or financial ev ents and situations. Should there be an increase in the level of hedge activity of t he
pr ecious metal held by the trust or producing com panies, it could cause a decline in world precious m etal prices, adversely a ffecting the
pr ice of t he Shares. Should there b e an increase in the level of h edge activity of t he precious metal held by the Trusts or producing
com panies, it could cause a decline in w orld precious m etal prices, a dversely a ffecting t he price of t he shares.

Also, sh ould the speculativ e community take a negativ e v iew t owards the pr eciou s m etal held by the Trust s, it could cause a decline in prices,
negativ ely im pacting the price of the shares. Th ere is a risk that part or all of the Trusts phy sical pr eciou s m etal could b e lost, dam aged or st olen.
Failure by the Cust odian or Sub -Cust odian t o exercise due care in the safekeeping of the precious m etal held by the Trust s could r esult in a loss t o
t h e Trusts.
T h e Trusts will not insure its precious metals and shareholders cannot be a ssured that the custodian will m aintain adequate insurance or any
in surance with respect to t he precious metals held by the custodian on behalf of the Trust. Consequently, a loss m ay be suffe red with r espect to t he
T r usts precious m etal that is not cov ered by insurance.

Com m odities generally are volatile and are not suitable for all investors.
Plea se refer t o the prospectus for com plete information regarding a ll r isks associated with the Trust.
Investor s buy and sell shares on a secon dary market (i.e., n ot directly fr om T rusts). Only market maker s or authori zed
pa r ticipants may t rade directly with the Trusts, typically in bl ocks of 50k to 100k shares .
Defin itions: Y ear ov er year = t he percent change ov er a full calendar year. An industrial or base m etal is a com mon a nd inexpensive m etal, as
opposed t o a precious metal such as gold or silver . The Federal Reserve (Fed) is the central banking system of the United States of America . Consumer
Pr ice Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and
m edical care. Annual return is the return ov er a full calendar year. Annualized volatility is v olatility is a statistical measure of the dispersion of returns for a
g iv en security or market index. Correlation is a mutual relationship or connection between two or more variables. Sharpe ratio is a measure that indicates the
a v erage return minus the risk-free return divided by the standard deviation of return on an investment. The MSCI World Index is a free-float weighted equity
in dex developed to track developed world markets, and does not include em erging markets. The Barclays US Aggregate Bond Index (Barclays Agg) is a broad-
ba sed flagship benchmark that measures the investment grade, US dollar-denom inated, fixed-rate taxable bond market. Euro (EUR): the official currency of
t h e European Union. British Pound (GBP): the official currency of the United Kingdom. Japanese Yen (JPY): the official currency of Japan. Swiss Franc
(CHF): the official currency of Switzerland. G10 refers to the group of countries that agreed to participate in the General Arrangements to Borrow (GAB), an
a greement to provide the International Monetary Fund with additional funds to increase its lending ability .

Div ersification does not eliminate the risk of experiencing investment losses.
Comm odities generally are volatile and are n ot suitable for all invest ors. This material must be accom panied or preceded by
the pr ospectus. Car efully con sider ea ch Trust s inv estment objectives, risk fa ctor s, and fees and expenses before investing.
Pl ea se cl ick h ere to v iew the prospectus.

ALPS Di stributors, In c. is the marketing agent for ETFS Silver Trust, ET FS Gol d Trust , ET FS Platinum Trust, ETFS Palladium
T r ust and ETFS Pr ecious Met als Ba sket T rust.
Ma x well Gold is a registered r epresentative of A LPS Distributors, In c.
ET F0 01 126 03/31/1 8

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