Bill Bernstein wrote an interesting post on this asset class several years ago.The Longest Discipline
In short, putting 5-10% of your portfolio in this asset class and mechanically rebalancing has historically improved variance-adjusted returns. But only if you stay the course over decades.
Too good to be true, really—a long-term real rate of return of nearly five percent, within shouting distance of industrial stocks—and that’s before the five percent "rebalancing bonus." One doesn’t need to fire up an optimizer to realize that this asset class, with its 0.29 correlation with the S&P, belongs in every portfolio.
As you might suspect, there’s a price to be paid. You think that value and small-stock exposures were a tough row to hoe in the 90s? Have Japanese stocks given you fits for the past 15 years? You ain’t seen nothin’: since 1963, the precious metals equity (PME) series has lost more than 35% five different times and, on one occasion, nearly 70%. Between October 1980 and August 1998, it lost a total of 53.8%, or 4.2% annualized—a 7.7% annualized loss after inflation. For the more than 24 years between October 1980 and December 2004, the real return of PME was –0.3%.
Bernstein wrote this in 2005. So how has Vanguard Precious Metals done since then? Well, it has behaved true to form, so to speak. It tripled in value from 2005-2008, only to give up all of those gains (a 70% drop) in a matter of weeks during the 2008 crash. Then from 2009-2011, it recovered back to almost its 2008 high, only to have another 50% drop from early 2011 to the present. Take two Dramamine and rebalance in the morning.
If you decide you want to own this asset class, go ahead and own it--more or less forever. Don't even think about trying to market time it.
Most of my posts assume no behavioral errors.