Following on with the success of the gold fund, Castlestone Management launched the Aliquot Precious Metals fund, weighted between physical gold, silver and platinum. At the end of 2013 we further diversified the range of precious and platinum group metals, launching a separate share class that adds palladium and rhodium to its holdings.
Generally referred to as a subset of the platinum group metals (also called PGM’s), we have identified the importance of owning these metals as fundamental supply and demand dynamics become more and more relevant. This is mainly due to their industrial applications and more specifically their use in the production of catalytic converters which reduce toxic emissions in vehicles.
We live in a world that will increasingly demand cleaner emissions and a diversified clean energy. In countries such as China and India, where an expanding middle class is driving the surge in automobile production, tightening emissions standards are likely to drive platinum group metals prices higher. Meanwhile South Africa’s miners are experiencing some of the most severe labour turmoil the country has ever seen while global above ground stocks continue to be depleted. South Africa’s platinum belt accounts for approximately 70% of total platinum output.
From a supply standpoint rhodium and palladium are even rarer because they are bi-products of platinum mining and will be harder still to find in the future. In addition, both will inevitably benefit from the rising cost of production associated with rising labor, energy and exploration costs. It is because of this delicate balance between supply and demand fundamentals that palladium and rhodium become such an integral part of the Aliquot Precious Metals fund.
Gold, silver and platinum have a significant high correlation even though gold is primarily an investment vehicle with little industrial use. Palladium and rhodium have a much lower price correlation to gold, silver and platinum and, since the advent of the 2008 recession, offer a significant buying opportunity with prices currently at an eight year low.
At Castlestone Management we have often reiterated our view that in the long run, over a 20-year period, developed world equity markets will be broadly flat. That is why the suite of products we currently manage also includes the Equity High Yield & Premium Income Fund which invests in defensive, consumer staple, quality stocks that provide dividend yields of between 4-6% per annum. In addition the fund writes covered calls on the underlying equities with the intention of adding to performance while minimizing downside risk.
We’ve tested this approach for the last two years and the strategy works. Markets simply don’t move in a straight line. As such we believe that owning diversified global equities that have a significant market share with strong balance sheets, inelastic demand and high dividend yields, we mitigate downside risk in times of economic contraction while taking advantage in times of economic expansion.
This core principle is equally applicable to the incorporation of less correlated metals to the Aliquot Precious Metals fund. While gold and silver often act as safe haven assets in times of geopolitical instability, the economic sensitivity of platinum group metals should lead to their outperformance as the global economic recovery continues.
The two funds are a good complement to each other in a well-constructed, low correlated and diversified portfolio. This approach stands to benefit from sound fundamentals and smart strategies which should ultimately lead to outperformance. It is this long term approach that makes the addition of rhodium and palladium a sensible move for our clients.
For further information on this or other Castlestone Management products please contact us.
