Highest Returns: Gold, Silver, Platinum or Aluminum?

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Includes: GLD, IAU, SLV, SPY, TIP, VNQ, VTI, WIP
by: Living4Dividends

The primary reason investors purchase precious metals (PM) is: PMs hold their value, while fiat currencies do not. This article will study the long term returns of the most widely traded precious metals: gold, aluminum, platinum and silver.

Gold

The beige and gold chart above shows the price of gold in constant 1998 dollars. Gold, while volatile, has kept its value for the past 400 years.

Above: aluminum and gold brooch

Aluminum

Readers will take exception to my characterization of aluminum as a precious metal. Au contraire, as the French say. After all, it was two Frenchmen: Henri Deville and Paul Héroult who feature prominently in the story of aluminum.

Pure aluminum metal was first produced in 1827. For several decades, aluminum was expensive because it was exceedingly difficult to extract from ore. In 1855, pure aluminum was more valuable than gold. Fashionable and wealthy women wore aluminum jewelry. Bars of aluminum were exhibited alongside the French crown jewels at the Exposition Universelle of 1855, and Napoleon III reserved a set of aluminum dinner plates for his most honored guests, while those less worthy dined with mere silver. Aluminum was indeed a precious metal.

Henri Deville developed a process for isolating the precious metal in 1846. Deville made a large sum of money over the next decade. For some strange reason, Deville delayed publishing a book describing the details of his process until 1859. Deville produced ever larger quantities of aluminum and by 1884 an ounce of aluminum cost the same as an ounce of silver.

In 1888, Hall opened the first large-scale aluminum production plant, the predecessor of Alcoa. The mass-production of aluminum caused the high price of the precious metal to permanently collapse. 1998 marked a high for aluminum at $3.35/kg or 9.5 cents/ounce.

Platinum

Like other industrial commodities, the price of platinum is more volatile than gold. In 2008, platinum ranged from $774 to $2,252 per oz. I am unable to obtain an 1854 price for platinum, however platinum was $4/oz in 1880. (Source: Mining and Engineering World, 1910 Volume 32).

Silver

Geologically, silver is 17 times more common than gold. The blue and gold chart above from Charts'R'Us (click to enlarge) shows 600 year silver prices from 1344 to 1998 in constant 1998 dollars. As the chart shows, the silver price has declined each time there was a major new discovery of silver ore. There has been a 600 year bear market in silver.

Chart: silver (non-inflation adjusted)

According to both Mining and Engineering World and Kitco’s historical database, the price of silver was a constant $1.29 from 1792-1861 in nominal dollars and $23.23 in 1998 dollars.

While suspect, the Charts'R'Us chart still proves the general point: silver has significantly fallen in inflation-adjusted terms since the 1300’s.

The Diversified Precious Metals Investor

A hypothetical investor in 1854, having no idea which precious metal would keep its value and which would lose its luster, purchases one ounce each of the most common precious metals of the time, and sells them in 1998.

Per Ounce Prices

1854 Price (1854 Dollars)

1854 Price (1998 Dollars)

1998 Price (1998 Dollars)

2008 Price (2008 Dollars)

Silver

$ 1.29

$ 23.23

$ 5.55

$ 14.00

Platinum

$ 4.00

$ 72.02

$ 384.73

$ 1500.00

Aluminum

$ 20.65

$ 371.81

$ 0.10

$ 0.06

Gold

$ 20.65

$ 371.81

$ 294.24

$ 900.00

Our investor paid the equivalent of $ 838.87 in constant 1998 dollars,144 years later, her investment is worth $756.89 in 1998, with an -0.07% annualized return, after inflation. Surprisingly, had she waited 10 more years, she could have netted $2414 with a %0.69 annualized return. If we jump into a time machine and tell the investor not to buy aluminum, her $467.06 investment grows to $2414, with a 1.07% annualized return over 154 years.

Survivorship Bias

Excluding aluminum from our study is an example of survivorship bias. Survivorship bias occurs whenever researchers study the assets that have survived and ignore the assets that haven't survived, even when the non-survivors were considered perfectly viable in the time of the study's begin date. Favoring the survivors leads to studies showing returns that are higher than reasonable.

Furthermore, cherry picking the start and end dates as I have (choosing to move the sell date from 1998 to 2008) is an example of hindsight bias. Investors never know in advance the best times to buy or sell.

In our hypothetical example above, our investor was justified in her decision to diversify across a wide range of assets, since she did not know that aluminum and silver would be poor choices. The best studies eliminate survivorship and hindsight bias.

Warren Buffet on gold:

It gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.

Conclusion

Warren’s quip about gold applies equally to all PMs, when used for wealth preservation they are merely stored. Centuries ago, investors had no idea which precious metals would be winners and which would be losers. All precious metals seemed appropriately valued.

Unfortunately no investor has a crystal ball and cannot predict what advances in mining or refining techniques will lead to surpluses or shortages and therefore the prices of a particular PM. Some PMs such as silver and aluminum can be hazardous to your wealth. The study shows a possible range of returns from -0.07% to 1.07%. PMs return less than bonds.

Furthermore, the charts above show that PMs are far more volatile than stocks or bonds. PMs are a poor choice for those seeking steady, stable wealth preservation.

Feel free to learn more about alternative PMs with the following articles on Seeking Alpha:

Sources: All charts from kitco.com or chartsrus.com.

Disclosure: Long Equities, REITs and TIPS. No position in PMs. You should perform your own due diligence and consult with an investment advisor before investing.