For many investors, a traditional safe haven, portfolio diversifier and protector against inflation has been gold. However, gold is by no means a risk-free asset and can prove to be highly volatile, so advisers suggest you don't have overexposure to it. "Over the long term, gold has enjoyed some extended periods of exceptional growth, but also sustained periods where it has performed incredibly badly," says Patrick Connolly, a certified financial planner at wealth manager AWD Chase de Vere.
More recently, gold prices have broken through key support levels and are seemingly heading back to major support areas around $1,520 (£955) an ounce, reports the Investors Chronicle's mining correspondent Matthew Allan (read the full article).
So, if you are concerned, you could diversify into other precious metals via exchange traded commodities (ETCs) which physically invest in them. Investors less concerned on the economic outlook are rotating their holdings into more cyclical areas, including platinum and palladium. ETF Securities reports that physical palladium funds saw $24m of inflows as automobile industry demand in China and the US favours the metal.
Palladium is used in the manufacture of gasoline autocatalysts, which dominate the US and Chinese markets. Platinum's primary demand comes from diesel autocatalysts, which dominate the European markets. The lacklustre sales of vehicles in Europe has made palladium a relatively more attractive investment, although Martin Arnold, research director at ETF Securities, points out that there is also jewellery demand for platinum in China.
The fundamentals for platinum and palladium remain strong: mine disruptions in South Africa and Zimbabwe and dwindling state stockpiles in Russia have constrained supply, while robust car sales in the US and China are increasing demand. The market is expecting supply shortfalls in the order of 5 per cent and 10 per cent in 2013 for platinum and palladium, respectively.
"Supply/demand fundamentals are very supportive of platinum group metals, so this is a good reason to have an allocation to them," says Mr Arnold.
Allocating to platinum and palladium provides diversification to gold as a substantial proportion of the demand for these is for industrial use, as opposed to only around 10 per cent for gold.
Platinum and palladium prices have recently reached multi-month highs on reports of potential supply disruptions in Zimbabwe. But Mr Arnold does not think they are too expensive if we continue to see a recovery, in which case there will be some upside to go, and especially if supply continues to be constrained. This is especially the case over a longer-term time horizon of three to five years.
While both platinum and palladium are forecast to be in deficit this year, the fact that palladium is mined as a byproduct of platinum and nickel operations means that it is vulnerable to supply shocks from either metal. And if the nascent recovery does not continue, this could lead to a reduction in demand for them and fall in their prices.
Although private bank Coutts reduced its allocation to gold recently in favour of more economically sensitive assets, it favoured equities over alternative precious metals as equities are cheaper. Henry Lancaster, senior investment analyst at the company, says that, as platinum and palladium are industrial as well as precious metals, they are not underpinned by safe-haven demand in difficult times. Industrial demand also means they are more volatile - what's more, the markets for non-gold precious metals are smaller than those for gold.
Coutts also expects loose monetary policy to continue and central bank quantitative easing (QE) should undermine western currencies in favour of emerging market currencies. Gold is likely to retain support in such an environment, given its attractions as a hedge against the devaluation of major currencies and inflation risks brought about by QE.
Some investors also see lower gold prices as a buying opportunity, with ETF Securities reporting that the fall in the gold price has attracted buyers, prompting a gradual rebound in gold positions. Others believe the long-term case for gold remains intact, and bullish precious metals speculators think gold's recent fall is only because the market is less concerned about systemic global financial risk, not because the risks themselves have diminished.
But you could hold both gold and metals such as platinum and palladium, according to Mr Arnold, as gold is generally better when there is uncertainty, with investors piling in and as an inflation hedge, while there remains a good investment case for platinum and palladium.
ETF Securities, db X-trackers, Source and iShares all offer ETCs which physically invest in platinum and palladium.
Source's Physical Palladium P-ETC (SPAL) and Physical Platinum P-ETC (SPPT) both have a very reasonable expense ratio of 0.39 per cent. These ETCs aim to provide the performance of the spot palladium price via certificates collateralised with the physical metal.
The funds can be held in individual savings accounts (Isas) and self-invested personal pensions (Sipps) and have UK reporting status, which means they are treated like UK-domiciled funds for tax purposes. However, these funds are relatively small, which means they could be less liquid, with Source Physical Platinum $24.65m in size and Physical Palladium $77.6m.
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