2016 Precious Metals Performance Review
Christopher Aaron
With 2017 upon us and another year in the record books, let us examine the performance of the precious metals in relation to other major asset classes for the full year in an attempt to learn what 2017 may have in store. We begin the article with a broad examination of world assets and then narrow our focus toward gold, silver, and the related mining equities.
All Asset Classes
A review of the performance across some 50 diversified asset classes for 2016 is presented below.
The best performing asset for 2016 was ethanol at nearly a 46% gain, followed by heating oil at approximately 35%. Crude oil finished fourth at 28%. In sum, the liquid energy complex was the best performing sector for 2016. However, this must be put into context: oil prices had fallen 70% in the preceding 18 months, and so a recovery of this sort was largely expected. While we do not expect a continued gain of this sort for oil, the energy complex has likely found a long-term bottom, with prices generally expected to remain in the $30 - $60 per barrel range for the next several years.
Orange juice and sugar contracts were the best non-energy performers, with the Russell 2000 small-cap US index rounding out the top performers for 2016.
The worst performing assets were certain agricultural commodities: cocoa, rice, and wheat contracts, down 35%, 27%, and 23%, respectively. The VIX is a contract representing volatility across major US stock markets, and its 18.5% drop shows that markets saw low volatility for the year, irrespective of the wild trading immediately surrounding the major political events of Brexit and the US election. The British pound rounds out the bottom five assets and was the worst performing currency of the year, with the 15% intra-day drop after the Brexit vote accounting for the bulk of the currency's decline.
Major Asset Classes
Narrowing our focus toward the asset classes which have the greatest impact on the precious metals -- we note the following performances during 2016. Due to the differences between continuous contract futures and commodity spot prices, the percentages shown below vary nominally from those listed above.
Despite its weakness during the second-half of the year, silver outpaced the other major asset classes we follow, finishing with a gain of 15.6% for the year.
US stocks, as represented by the S&P 500, finished second at 9.5%, with the broad CRB Commodity Index of 30 commodities finishing at a 9.2% gain.
Gold finished higher for the year by 8.6%, with the US dollar finishing higher by 3.6% versus a basket of foreign currencies.
US 30-year bonds finished lower by nearly 2%, with the bulk of the drop happening in the final quarter of the year.
Gold, Silver And The Mining Equities
Narrowing our focus again toward only the precious metals and their related equities, we note the following results for 2016:
The gold equities, as referenced by the HUI Index of large-cap producers, finished with a gain of nearly 64%, compared with a gain of 8.6% for gold bullion itself.
The silver equities, as referenced by the SIL ETF of large-cap silver producers, finished with a gain of 79.5%, compared with a gain of 15.6% for silver bullion itself.
In sum, the precious metals equities largely outpaced both the metals themselves, with the gold equities finishing with a 7.4-fold leverage to gold bullion's performance, and the silver equities finishing with a 5.1-fold leverage over silver bullion's performance.
The Cost Of Mining Equity Outperformance
No leverage comes for free, and the precious metals equities are no different. Let us zoom in on the above chart starting with the declines which began around August 1 to observe what the downside was for the metals and their equities.
Since August 1, as gold has fallen 15.2% from its recent high of $1,378, the large-cap gold equities have fallen 33.5%. Thus, we can see that the gold equities fell 2.2-fold compared with gold bullion itself.
On the silver side, since silver has fallen 21.4% from its August 1 level of $20.50 per ounce, the large-cap silver equities fell 34.7%. Thus, we can say that the silver equities fell 1.6-fold compared with silver bullion itself.
Takeaway On Bullion Versus Mining Equities
Gold and silver each posted respectable gains for the year as a whole, at 8.6% for gold and 15.6% for silver. Silver performed largely as expected in a rising metals-price environment, i.e. it rose a greater percentage than gold on the way up, and fell on a greater percentage on the way down. This over and under-performance is largely attributable to the much smaller size of the silver market compared to gold.
Further, both the gold equities and the silver equities hugely outperformed the moves in the metals themselves when the complex was rising, while only moderately underperforming the metals themselves when the sector was falling. In other words, the cost of leverage in the miners to the upside was not matched with the same leverage to the downside.
Further, we note that the silver equities, which outperformed gold equities as a whole by 79.5% compared to 64% when the metals were rising, did not fall significantly more while the metals were falling, losing 34.7% versus 33.5%, respectively.
In other words, the silver mining outperformance over gold mining was not matched with the same leverage to the downside.
If one is bullish on the precious metals and sees 2016 as the beginning of a more complex and lengthy advance that is to come over the years ahead, we have strong data supporting an overweighting toward silver and silver mining equities, based on the outperformance in a rising metals environment and a relatively stable performance in a falling metals environment, compared to the gold miners. Further, we see that both the gold and silver miners are outperforming the metals themselves at a much greater percentage when the sector is rising, compared to their relative declines when the sector is falling.
Final Comments On 2016 Performance
We remain proponents of owning physical metals for numerous fundamental reasons related to diversification, privacy, and wealth insurance.
If one is considering the gold and silver sector, it is never recommended to go "all in" on the precious metals miners. A balance of both physical metal and equities is recommended, depending on the individual.
However, the outperformance during 2016 by the gold and silver miners over bullion was significant.
Further, 2016 marks the first year of gains for both gold and silver themselves since 2012, which may be indicative of a larger trend change in the works across the markets.
While the past is not a guarantee of future correlations, we believe that the trends now being observed deserve consideration when adjusting one's precious metals portfolio for optimization in 2017 and beyond.
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