My initial reaction was to simply say ?yes? because gold and silver possess very different investment characteristics:
Clearly, they are quite different so there is an intuitive case for holding both ? but is there an empirical case?
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To evaluate the intuitive hypothesis, I back tested the performance of SPDR Gold Trust (GLD) and?iShares?Silver Trust (SLV) using the April 2006 inception date of SLV. (I could have conducted a similar evaluation using?ETFS?Physical Swiss Gold Trust (SGOL) and?Sprott?Physical Silver Trust (PSLV)?or using actual silver and gold bullion prices dating back much further which, by the way,?I will do in a follow-up article.) Below I show the graphic results of my back test based on a number of different bases:
1. Rolling 36 Month Correlation
[Looking at the correlation between gold and silver over a rolling 36 month period one can see in the chart below] that the correlation is high and fairly constant across time, suggesting that the diversification benefit of holding both gold and silver is limited.
2. Rolling 12 Month Correlation
While gold?s rolling?12 month?returns have remained somewhat steady during the analysis period, silver?s returns have ranged considerably [as can be seen in the chart below].
3. Rolling 12 Month Return Differential
The?graph below?displays the difference between the two returns in the previous graph. This simply highlights the huge differences in returns experienced by gold and silver [which is anything but]?consistent and?predictable.
4. Average, Best, Worst?12 Month?Returns
Again, the following chart displays the returns differential in another way. Clearly,?SLV introduces a lot of volatility (upside and downside) to a portfolio.
5. Annualized Pair-Trade Returns
The next two graphs look at the actual results of a back-tested pair trade.
The first graph shows the annualized returns of multiple weightings?ranging from 0%?GLD?to 20% GLD?to 30% GLD?and so on. There doesn?t appear to be a dramatic shift in returns, but the highest returns range around the 60% GLD/40% SLV weighting. (Note: the annualized return for the 100% silver portfolio is lower than the average 12 month return for silver. This difference occurs because of the effects of compounding.)
6. Volatility-Adjusted Pair-Trade Returns
The final graph really sums up the story. There is a distinct indication that, since?SLV?s inception, investors have not been compensated for adding silver to a gold portfolio.
Conclusion
Based on the limited back test using?SLV?and GLD, in my opinion investors have been better compensated for risk by investing in 100% gold.
*http://seekingalpha.com/article/404861-the-gold-silver-pair-trade?source=email_macro_view&ifp=0
Editor?s Note: The above article has been has edited ([ ]), abridged, and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article?s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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