Portfolio diversification aims to reduce the overall impact of risk when investing. Silver is often overlooked in these asset allocation decisions in favour of gold, however, despite having its own unique return characteristics. This study examines whether silver should be viewed as a distinct asset class that warrants a strategic investment allocation within an efficient multi-asset portfolio. We find that the optimal allocation to silver is significantly higher than holdings in most institutional investor portfolios.

The price of silver is often benchmarked against the price of gold, but there are important distinctions between the two precious metals that can affect their risk/return profiles. In particular, over half of demand for silver originates from industrial applications, meaning the price of silver tends to be more sensitive than gold to trends in the global industrial cycle, which also contributes to its higher volatility.

In order to examine the potential long-run benefits of holding silver in a portfolio, we compared its historic performance with a range of traditional asset classes, including stocks, bonds, commodities and gold for the period January 1999 to June 2022. We found that silver has relatively low historical correlations with asset classes other than gold, which suggests that silver should have valuable diversification potential.

As a more rigorous test of whether silver should have a consistent allocation in a multi-asset portfolio alongside gold, we also ran a series of dynamic portfolio optimisation simulations. The optimisation simulations were run with the aim of maximising the risk-adjusted returns of a mixed-asset portfolio under varying constraints designed to reflect differing investor risk preferences.