Precious metals a good diversifier but timing crucial: CMC

Precious metals such as gold, silver and platinum will remain useful 'safe haven' portfolio diversifiers in ongoing volatile markets in 2012 but the timing of entry will be crucial, according to CMC Markets chief market analyst Ric Spooner.

Factors supporting precious metals markets over the medium term include low international interest rates , which reduce the opportunity cost of owning gold; the ongoing potential for central banks to buy gold as countries such as China buy gold to diversify their US dollar exposure; and growing wealth in gold-owning nations such as India and China, according to Spooner. 

But the timing will be crucial for several reasons, he said. Silver and platinum are likely to outperform when the outlook for industrial production and economic growth is improving because of their higher usage in industry including in electronic conductors (silver) and catalytic converters (platinum), while the reverse is true of gold, he said.

Also, the international debt deleveraging cycle that has now been embarked on means that business cycles may be shorter and shallower than in the past, leading to more frequent turning points in the price relationship between gold and the other two metals, he said.

This may benefit active management of precious metals, and traders can benefit via pairs trades in which they buy one precious metal contract for difference and simultaneously go short in another, Spooner said.

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Precious metals are also quoted in US dollars, so Australian investors should also consider the impact of exchange rates because gold's value as a hedge can be eroded by a rising Australian dollar, Spooner added.