Historically, numerous investors have turned to physical precious metal assets like gold when they’ve become concerned economic issues might cause stock market upsets. Precious metals, though, can also be a potentially positive portfolio inclusion when the economy is strong, according to Kevin DeMeritt, founder and chairman of Los Angeles-based Lear Capital.
Unlike stocks, which can fluctuate due to a number of external factors, the limited supply and ever-expanding need for gold, silver, and platinum have helped imbue the metals with an intrinsic value. As a result, some investors view them as options that can potentially help counter other asset losses.
Gold, for example, tends to perform differently than stocks during times of war, Kevin DeMeritt says.
“Usually, you’re going to find the markets become extremely volatile,” DeMeritt says. “Nobody knows what’s going on from day to day. The volatility of gold is not going to be the same; it’s going to give you that stability.”
Precious Metals’ Staying Power
Even economic conditions like a recession haven’t seemed to dampen precious metals’ value. During the Great Recession, gold prices rose 2.6% in 2008 and approximately 13% in 2009, according to U.S.
Bureau of Labor Statistics data.
Between 2001 and 2021, gold and silver prices, according to a Lear Capital analysis, outperformed the Dow Jones Industrial Average and S&P 500. Gold, in fact, increased twice as much as either of the indexes.
With a growing industrial demand for silver, it has also experienced significant price increases over the years. Between 2001 and 2022, silver’s value rose 377%.
“Silver has become a highly in-demand asset, yet the available supply hasn’t vastly increased,” Kevin DeMeritt says. “Numerous investors view silver as a hedge against inflation because it has tended to increase in price during periods of high inflation.”
Platinum’s availability has likely helped contribute to its value. The precious metal is approximately 30 times rarer than gold; Lear Capital estimates the amount that’s mined each year equates to less than 7% of the amount of gold that’s excavated.
Since 1976, platinum’s price has risen 523%, according to the World Platinum Investment Council.
Any additional conflicts, or an extended conflict like the one between Russia and Ukraine, may drive its value up further this year, according to Kevin DeMeritt.
“We have some supply issues with platinum because it’s relatively limited, with the majority of the world’s platinum coming from just a few countries — two of which are South Africa and Russia,” the Lear Capital founder says. “Russia, because of this war, is not supplying the market with the same amount of platinum they typically would. So we’re starting to see demand for platinum increasing.”
A Difficult Financial Scenario
In 2022, the U.S. faced a number of economic challenges — including inflation, which reached 9.1%, its highest level since 1981, in June.
The stock market also struggled. By the end of 2022, the S&P 500 had declined more than 19%, the Dow Jones had shed nearly 9% and the Nasdaq was down 33%.
The investment-related demand for gold, however, grew in 2022, rising 10% year over year, due in part to robust interest in gold bars and coins, according to the World Gold Council.
A Gallup poll published in May of this year suggests investment interest in gold may remain strong throughout 2023. Nearly twice as many Americans now view gold as the best long-term investment, compared to the amount who felt that way in 2022.
Central banks also snapped up a record amount of the precious metal last year — 152% more than they bought in 2021. This year, they’ve continued to favor gold over Treasury securities, which some had previously focused on purchasing, according to Kevin DeMeritt.
“It makes sense,” he says. “They believe holding a Treasury [security] that pays 3% makes absolutely no sense. They want to hedge against inflation. They get to hold gold, and that’s going to offset some of the loss in purchasing power from the paper money they hold.”
What’s Next for Precious Metals
Although it’s still unclear if the U.S. will enter a recession this year, recent reports have painted the state of the economy in a more positive light.
Employers, for instance, added 209,000 jobs in May; job growth has now occurred for 30 straight months, and unemployment has been below 4% for more than a year.
Despite elevated inflation and the increased borrowing costs that resulted from the Federal Reserve’s attempt to tame it, amid a strong job market and wage growth, consumer spending has continued to be considerable. In May, it rose 0.1%, following a 0.6% increase in April.
Mortgage rates increased after the Fed’s first rate hike in 2022, eventually reaching the 7% range. However, even with today’s hefty interest rates, the housing market has remained active. Home prices have risen in recent months; new single-family home sales in May increased 12.2% from the month before — and are up 20% year over year, according to Census Bureau data.
If inflation, which is currently at about 3%, continues to decline, prices for goods and services become lower and other economic conditions improve, investors may not be as concerned that the stock market will experience the same level of volatility as in 2022.
While, if that occurs, having physical precious metal assets to serve as counterbalancing agents may not be as urgent a need, Kevin DeMeritt says precious metals can still be a valid portfolio inclusion.
“If you look at gold, it’s outperformed the stock market since 2000,” he says. “The demand from central banks could intensify, along with demand from institutional and individual investors. You might just wake up to $3,500 [or] $3,700 gold [prices] in the next 24 [to] 36 months.”