The metals and mining sector tends to move inversely with the broader market. As such, many investors use precious metals, such as gold and silver, as well as securities in the companies that mine for these metals, to hedge their exposure to traditional investments that move with the market. This diversification technique helps mitigate losses during a down market, as a portion of the investor's portfolio consists of securities that increase in value during such times. How much of an investor's portfolio should be exposed to the metals and mining sector depends on how bullish or bearish his or her outlook is on the broader market.
The ideal portfolio management style for an investor is based on his or her long-term outlook on the economy. While there is no singular portfolio management style that is considered standard, most investors devote the bulk of their portfolios to stocks and fill out the remainder with bonds, possibly leaving a little room for holdings such as real estate and metals. Many advisers recommend, as a basic strategy, that an investor subtract his or her age from 100 and invest the result as a percentage of the portfolio in stocks. The reasoning behind this technique is that younger investors have more time to weather the ups and downs of the stock market, while older investors need the security and stability of bonds, which pay a set interest rate.
Metals and mining fits into a completely separate category from traditional stock market investing and bond investing. Historically, precious metals have been even more volatile than the stock market, but their ups and downs have occurred at opposite times. During the economic malaise of the late 1970s, which was marked by a stagnant stock market and runaway inflation, gold prices went higher than $2,000 per ounce, and silver reached $100 per ounce (both values adjusted for inflation). During the late 1990s, when the stock market was booming and the U.S. dollar was strong, gold dropped below $350 per ounce and silver to a paltry $6 per ounce. Precious metals experienced a resurgence between 2007 and 2011, when many investors rushed to them as a safe haven from a plummeting stock market and weakening U.S. dollar.
Between 2011 and 2015, the metals and mining sector receded from its highs as the U.S. dollar strengthened and investors began to regain confidence in the stock market. As of January 2015, gold sits at $1,260 per ounce, more than $400 off its peak during the Great Recession.
An investor who fears that the U.S.' trillions of dollars in debt and penchant for economic bubbles point to a long-term downward trend for stocks and the U.S. dollar may devote 25% or more of his or her portfolio to metals and mining. However, most traditional investors with more optimistic outlooks keep their exposure to this sector at less than 10%.