Should Your Add VGPMX To Your Retirement Portfolio?

Many investors favor adding precious metals of some form to their long-term investment portfolio as they seek speculative gains. Most of them prefer holding bullion, but funding hard assets directly with a retirement account is not allowed by the IRS (unless a self-directed precious metals IRA rollover is used).

With that being said, there are certain funds related to precious metals that can be purchased with tax-free retirement assets like a Roth IRA, SEP, etc without the need for a custodian or trustee to manage the funds.

The VGPMX, or Vanguard Precious Metals & Mining Fund, is a popular fund among investors but not without controversy and debate. The VGPMX is still a paper asset as it is a mutual fund managed by the Vanguard Group. Investing in this mutual fund means you are not directly investing in precious metals. Rather, you are investing in portfolio holdings of a group of precious metals and mining companies chosen by Vanguard (source):

Top VGPMX Portfolio Holders

Largest Equity HoldersPortfolio RatioValue (Millions USD)
Johnson Matthey PLC8.76201.7
Umicore7.99184
Dominion Diamond Corporation7.19165.7
Nevsun Resources Limited6.04139
Kinross Gold5.57128.2
Agnico Eagle Mines5.26121.2
Potash Corporation of Saskatchewan4.77109.7
BHP Billiton PLC4.49103.3
Iluka Resources Limited4.48103.3

The minimum investment for the VGPMX is $3,000 with a minimum subsequent investment of $100. The fund manager, Graham French has a rating of -7.20, but the VGPMX fund itself currently has a a strong “buy rating” of 1.0 from zacks.com.

Even though the the fund is up 0.30 points for the past three-month spread (regarding the date of this post), it is still considered a strong buy when you look at the bigger picture. For example, here is the 5-year spread:

VGPMX 5-Year Trend

VGPMX 2009 - 2014 (July 4th)

With a high of 28.35 USD (per share) on April 8th, 2011, the current price of 11.88 USD means there is plenty of long-term growth potential left. Many precious metals investment experts agree stability and large growth potential of precious metals, especially gold and silver, will lead to large price increases over the next 5 to 10 years. So where does the controversy come from?

When you peruse investment forums, you will see, as with many types of investments, some experts praising the fund and others warning against it. As with any major mutual fund, it is not exactly a low cost retirement fund.

Those who favor the VGPMX argue its current short-term growth potential (for the next 1 to 3 years) and that its stability is backed by the strong projections for precious metals prices. However on the flip side, others argue that the major portfolio holdings (as seen in the table above) are not so much precious metals companies as they are mining companies.

Investing in mining companies is obviously a whole other animal altogether as opposed to investing in precious metals companies or especially precious metals directly. For example, when we use an XY scatter plot  to depict a correlation between the price of VGPMX vs the price of silver (from 2000 to current day), we can immediately tell that the linear trendlines do not match up. When comparing it to gold, there is an even larger deviation. For both gold and silver, the linear trendlines show a significantly steeper upward trend than the Vanguard mutual fund.

Stocks vs Hard Assets: VGPMX Fund vs Silver Prices

vgpmx-vs-silver

Data Sources:

VGPMX: http://finance.yahoo.com/echarts?s=VGPMX+Interactive#symbol=VGPMX;range=5y

Silver Price: http://www.sacdc.org/price-charts/#custom

The weak correlation substantiates that the Vanguard Precious Metals & Mining Fund is a paper asset with relatively weak ties to the hard assets themselves. Even if the fund’s significant portfolio holdings were more precious metals companies rather than mining companies, the sales of precious metals apparently does not have a strong correlation to the price of this mutual fund.

Investing In Precious Metals Directly For Retirement

If you are serious about adding precious metals to diversify your retirement assets, you have better alternatives when it comes to investing in them directly rather than through the stock market. If you want the option of holding your own gold, silver, or other hard assets for your retirement, you can do this through the use of a custodian and the assets are held by a trustee. If you would like to know more about how a self-directed IRA can help you diversify your retirement portfolio with tangible assets rather than paper assets, read our guide here.

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