5 Investing Myths about Precious Metals - ETF Securities

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Mar 3, 2017 - Exhibit 2: Gold & silver are sensitive to real interest rates. Sour ce: Bl oomberg, ETF Securities. Se
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 com m unity, with both supportive and skeptical viewpoints. As these perspectives evolved several key misconceptions have been echoed about precious m etals among investors. We v iew precious m etals as a distinct asset class and see the m erits of including them as a core risk m anagement tool in portfolios. In this effort we’ve addressed five common investing myths about precious m etals:

Myth #1: Gold is a commodity Gold is com m only treated as a commodity, which given its physical properties m akes intuitive sense. When evaluating gold’s behavior, however, is tends to m ove more in line with currencies than other com m odities. Part of this relationship lies in gold’s heritage as a currency during historical global gold standards, its use as a m edium of exchange for centuries (being of uniform quality) , and as a reserve m onetary asset among today’s central banks (lacking credit r isk). Exhibit 1: Gold behaves more in line with currencies. 10.0% 5.0%

Annualized Return

0.0% -5.0%

Gold USD JPY EUR GBP CHF

CopperSilver Pa lladium Br ent Crude Nickel Soy beans Pla tinum Zin c W T I Crude Cot ton

Coffee

Corn

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Rea l US in t er est r a t es

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 ) Gold

Silv er

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In du st r ia l Met a ls*

# of Mon t h s

+2 %

-0 .1 %

-0 .1 %

0 .5 %

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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

Historically, there have been four similar periods to today’s rate env ironment whereby rising policy interest rates followed either falling or relatively low interest rates for sustained periods ( 1976, 1 987, 1994, and 2 004). In 1976, 1986 and 2 004, gold prices rose 2 2 %, 2 5% and 11% respectively, while prices fell in 1994 by 2 .6% one y ear after the first hike. Unlike prior periods, 1994 saw real interest rates rise by 3 %, while in other years it remained flat or negative. This highlights the negative relationship between rising real interest rates and gold. This negative relationship between real

Su gar

A luminum

Exhibit 2: Gold & silver are sensitive t o real interest rates.

45.0%

50.0%

Annualized Volatility Source: Bloomberg, ETF Securities. Chart data from 11/05/93 to 03/03/17.

As shown in Exhibit 1, gold’s risk/return profile falls into the currency camp m ore closely than its precious m etal peers or other com m odity sectors. When gold is com pared to G10 currencies, it has the highest correlation for 7 out of 1 0 of these currencies versus silv er, platinum or palladium which exhibit characteristics m ore akin to traditional risk adjusted commodity performance.

Myth #2: Rising interest rates spell doom for metal prices 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 been 1 0 major rate tightening cycles by the Federal Reserve (Fed) during which the performance among metals during these periods, however, is m ixed.

interest rates and other metals can be seen m ore clearly when ev aluating different real interest rates periods. As shown in Exhibit 2 , precious metals historically perform very well when real US interest rates are negative. Gold (+4.0%) and silver (+4.4%) experience the most benefit when real interest rates are at extreme negatives (-2 % or less) as they are sought as a store of v alue by inv estors as the opportunity cost of holding physical metals is lower than other financial assets with negative real yields such as bonds and cash. Further even when real interest rates are positive up to 2 %, gold and silver still post positive gains.

Myth#3: Gold is an inflation hedge In actuality, gold’s ability to hedge inflation is questionable. This com m on claim of gold being an inflation hedge stems from its historically fixed price under gold standard systems. Additionally gold has exhibited an ability to preserve purchasing power over long periods by protecting against currency or m onetary another form of inflation. But as a hedge against pure price inflation m easures, gold is the weakest among the precious m etals com plex. Unlike gold, the

Past per f or manc e i s no guar antee of f utur e r esul ts.

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m ajority of annual demand in silver (~50%), platinum (~65%), and palladium (~95%) is tied to industrial applications through usage in products and processes. As industrial activity rises along with dem and for inputs, these industrial precious metals tend to serve as m ore effective hedges against demand driven price increases. Exhibit 3: Indust rial-precious metals like palladium, plat inum, and silver tend to be more sensit ive t o inflation. Natural gas Palladium Gathering & Processing Energy Platinum Natural gas pipelines US Energy infrastructure Oil & Gas stocks Crude oil pipelines Soft Commodities Silver Crude oil Soybeans All commodities REITs Health Care Utilities 10%

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Precious m etals are distinct and effective diversifiers, but the true 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 div ersified stock-bond portfolio, the portfolio efficiency can increase – whereby the portfolio risk is lowered while the portfolio return remains the same or increases – com pared to diversified portfolio without an allocation to precious metals. Giv en that precious m etals dem onstrate a low correlation t o equities, the diversification benefits m ay be enhanced by sourcing precious m etals in a portfolio from the stock allocation. The increase in efficiency, however, occurs across risk profile and

Top performers when US CPI rose by 0.5%

0%

Myth #5: Precious metals are only suitable for aggressive investors

60%

Return Source: Bloomberg, ETF Securities. Chart data from 3/31/91 t o 02/28/17.

Ev aluating 50 real assets, traditionally considered to be reliable inflation hedges, shows that commodities and infrastructure m ake up m ost of the top 2 0 performers during m onths when US consum er price index (CPI) rises by 0.5% annually (see Exhibit 3 ). Gold doesn’t rank among the top real assets; however, palladium, platinum, and silver tend to perform well during periods of rising inflation given their industrial dem and as more traditional com m odities.

Myth #4: Dollar strength is bad for gold

funding scenarios because precious metals also carry a low correlation historically to bonds. While the proper weighting will v ary depending on investors’ different risk profiles and investment objects, a zero percent allocation to precious m etals remains suboptim al. Exhibit 5: There is a higher benefit by including gold in more conservative allocations t han aggressive ones. Bal anc ed Ri sk Pr of i l e (60/40)

Conser v ati v e Ri sk Pr of i l e (40/60)

A ggr essi v e Ri sk Pr of i l e (80/20)

S toc k s (MS CI World)

60%

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7 0%

Bonds (Barc lays Agg)

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Prec ious Metals (PM)

0%

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Portfolio allocation

Portfolio Return

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Portfolio Volatility

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S h arpe Ratio

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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,

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

however, suggests that there are potential environments in which gold and the USD can both m ove higher (see Exhibit 4 ).

Starting with the example of a 60/40 allocation without any precious m etals in the portfolio, it is observed that the total

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 Gold (US$/ounce) Gold/US Dollar Correlation Average Correlation

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Correlation (trailing 12M)

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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 conservative allocations ov er the past two decades (see Exhibit 5). Also as m ore com plex asset allocations with m ore asset classes apply this principle, further portfolio efficiencies can be captured since the largest contributor to volatility is equity risk and m any risk assets have high factor sensitivities to equity m arkets. Bonds and cash historically have provided sim ilar properties and remain attractive from a diversification standpoint. Given the outlook of rising interest rates putting downward pressure on bond v aluations, precious m etals m ay offer an additional option to incorporate with other asset classes to effectively manage asset allocations and portfolio exposures.

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

Past per f or manc e i s no guar antee of f utur e r esul ts.

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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 ust’s 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 broadba 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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