Precious metals have experienced tremendous gains in the past decade, with a 500 and 1,000 percent increase in the market value of gold and silver, respectively. However, with global economic instability, a sharply declining U.S. dollar, rising unemployment rates, and previously wealthy nations on the brink of bankruptcy, the future of many traditional investments has been called into question. That is why Olevian Numismatic Rarities believes precious metals and other tangible assets like rare coins and paper money have an important place in every investor’s portfolio. Blanchard and Company, a highly respectable supplier of rare coins and precious metals for over 30 years, describes several primary reasons why precious metals in particular should be a component of every well-diversified portfolio:
1. Precious Metals are a Hedge Against Inflation
Precious metals are renowned as a hedge against inflation. The most consistent factor determining the price of metals has been inflation—as inflation goes up, the price of bullion generally goes up along with it. Since the end of World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold for instance was 130.4%. Today, numerous factors are conspiring to create the perfect inflationary storm: extremely stimulative monetary policy, multibillion-dollar bailouts for banks and corporations, a precarious dollar, a mammoth trade deficit, and America’s status as the world’s biggest debtor nation. In a vote of no confidence for the dollar, gold and other commodity prices are breaking tradition and continuing to rise even when the dollar rallies.
2. Precious Metals are a Hedge Against a Declining Dollar
Precious metals are bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of metals to rise. The U.S. dollar – for now – is the world’s reserve currency: the primary medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities is calculated, and the currency primarily held as reserves by the world’s central banks. However, now that it has been stripped of its gold backing, the dollar is nothing more than a fancy piece of paper. Indeed, the greenback’s value has been shored up amid Europe’s sovereign-debt crisis, but its future will not be so bright when the United States’ own debt disaster begins to hit home in the coming years.
3. Precious Metals are a Safe Haven
Precious metals have often been called the “crisis commodity” because they tend to outperform other investments during periods of political or economic tension. The very same factors that cause other investments to suffer will traditionally cause the price of most metals to rise – which is why having some of your assets allocated to bullion investments makes such a stable, robust portfolio. As national debts rise, banks fail, and currencies around the world begin to lose value, governments rescue themselves with the printing press, making their currency worth less and bullion worth more. Gold has always risen the most when confidence in government is at its lowest.
4. Precious Metals Demand Exceeds Supply
Demand for bullion is outpacing supply and gold and silver production is declining. Global gold production has not surpassed its record output in 2000, leading some experts in the mining industry to wonder whether the world has hit “peak gold.” Both China and India have been purchasing unprecedented quantities of gold, not only at the central-bank level but also by encouraging their increasingly well-off citizens to accumulate bullion. With the Dollar looking increasingly frail over the long haul, China will only be buying more bullion in the future as it attempts to divest itself of some of its estimated $2 trillion in U.S. dollar reserves.
5. Precious Metals are a Store of Value
One major reason investors look to gold, silver, and platinum bullion as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in an accounting scandal or a market collapse; it will never be just a worthless piece of paper. Economist Stephen Harmston, of Bannock Consulting, notes that:
“Although the gold price may fluctuate, over the very long run gold has consistently reverted to its historic purchasing power parity against other commodities and intermediate products. Historically, gold has proved to be an effective preserver of wealth and a safe haven in times of economic and social instability. In a period of a long bull run in equities, with low inflation and relative stability in foreign exchange markets, it is tempting for investors to expect continual high rates of return on investments. It sometimes takes a period of falling stock prices and market turmoil to focus the mind on the fact that it may be important to invest part of one’s portfolio in an asset that will, at least, hold its value.”
6. Precious Metals are a Great Portfolio Diversifier
Investment advisors have recognized for decades that diversification of investments can improve overall portfolio performance. Precious metals are the ideal diversifier for a stock portfolio, simply because it is among the most negatively correlated assets to stocks – which means, when stocks go down, bullion goes up. The key to diversification for risk reduction is finding investments that are not closely correlated to one another. Most stocks are closely correlated and most bonds are closely correlated with each other and with stocks, but gold and silver react to a different set of market conditions entirely. Precious metals also serve as a hedge against the erosion of the purchasing power of paper money, known as currency devaluation. Although the price of bullion can be volatile in the short-term, it has maintained its value over the long-term, even when currencies fail.
7. Investing is Easy
Investing in precious metals is easy ―and with the help of a trusted supplier like Olevian Numismatic Rarities—can even be an exciting and enjoyable experience. This website provides an overview of specific investment metals, including the most popular ways to invest in gold, silver, and platinum bullion. Furthermore, most if not all of the advantages to owning bullion described here also apply to owning rare coins and paper money. In addition, rare coins and paper money have their own unique advantages, which are discussed elsewhere on the website in the section on numismatic investments.