By David G. Wilson Jr.
The Daily Record Newswire
Investors mulling over how to rebuild their portfolios after the financial crisis may want to consider adding a hard asset component to provide diversification while also taking advantage of macro-economic trends around the world.
Hard assets are commodities like gold, platinum, oil, silver, copper, nickel and lead. In my opinion, unlike stocks in a long-term bear market, hard assets appear to be in a bull market that may last for several more years. Hard assets are negatively correlated to stocks and bonds, meaning they tend to behave differently and move in the opposite direction. Thus, hard assets may help cushion the blow should stocks take another tumble or bond values fall.
The primary reason to consider hard assets is that economies are growing rapidly in China, India and other emerging countries around the world. According to the International Monetary Fund, in the next five years Asia will represent a third of the world’s output and its economies will grow nearly 50 percent. That implies significantly higher levels of energy and raw material consumption primarily to build infrastructure like roads, bridges, highways and industrial complexes.
Consider China’s need for oil in the years ahead. In 2009, The Wall Street Journal reported that auto sales in China grew 46 percent to 13.6 million units — making it the largest car market in the world. By comparison, U.S. auto sales in 2009 were 11.1 million units. By 2020, China is expected to have more than 200 million cars on the road. That’s a lot of oil consumption, which may lead to upward pressure on oil prices.
Another factor to consider is the movement of people from rural China into the cities. The U.S. has just one city (New York) with more than 6 million inhabitants; China has 34! That migration will spur consumption of a variety of goods and services, and the raw materials needed to supply them.
Television and radio broadcasts these days are flooded with commercials touting gold. I believe many investors these days now recognize that hard assets like gold and silver are becoming a store of value in anticipation of falling currency values. Recently, silver reached a 30-year high of $24.65 per ounce and gold hit an all-time high of $1,381 per ounce. Interestingly, gold is still below its early 1980 price on an inflation-adjusted basis. In my opinion, the appreciation of gold and silver is a direct result of developed countries like the U.S. debasing their currencies in order to stimulate exports and accelerate economic growth through quantitative easing.
In addition, worried businesses and governments around the world may begin hoarding hard assets because of increasing global instability. These entities know they will need raw materials for a specific project or for day-to-day operations, so they may accumulate these raw materials now to protect themselves against future uncertainty. This could lead to additional demand, which could boost the price of hard assets.
Participation in this market is much simpler than previously. There are now a number of investment products that invest in hard assets. Heretofore, individual investors had virtually no means of participating in the hard assets market unless they ventured into futures contracts. Now, the process of purchasing hard assets is as easy as purchasing a stock.
Keep in mind that it’s important to exercise caution when investing in hard assets. They are risky, and even a diversified portfolio can be highly volatile. Investors looking to diversify their portfolio should seriously consider hard assets, but seek professional advice before buying.
David G. Wilson Jr. is senior vice president of investments with Stifel, Nicolaus & Co. Inc., member SIPC and NYSE, in Portland, Ore. Contact him at 503-499-6260 or wilsond@stifel.com.
