The problem for investors is that it is not always so straightforward what the current condition of the economy is, much less the all-important future direction of the economy.
Right now many investors believe that the US economy is improving and they have taken this to mean that they should not buy hard assets, such as rare coins and precious metals.
Investors who follow this philosophy are making two mistakes:
- The economy is still very weak and storm clouds are gathering on the horizon.
- Hard assets have a role to play in a properly diversified investment portfolio in all economic environments.
A Great Deal of Uncertainty
At the present time, the US economy is actually dominated by an overwhelming climate of uncertainty. In some areas the economy is improving. In other areas it is not. In still some other areas, what looks like improvement isn’t actual improvement after all.
An area of improvement that can definitely be pointed to is energy prices. Despite most forecasts, oil and gas prices have declined, perhaps saving the economy from the onset of stagflation—a combination of inflation and a stagnant economy. The problem, of course, is that we’ve just entered the summer driving season, so the jury is still out on this one.
The economy is clearly not improving in the real estate sector as an example. The US real estate market is in an outright depression and most historians maintain that there has never been a robust economic recovery without a recovery in real estate. That isn’t happening right now and it doesn’t appear to be in the cards any time soon.
Some pundits are looking at the unemployment figures and proclaiming that the US economy is improving. But only a superficial analysis of the statistics leads to that conclusion. While the unemployment rate has declined slowly over the past year, it is still high and, most importantly, the overall employment situation is still very poor because many people have simply given up on finding a new job and have exited the workforce. This artificially lowers the unemployment rate but it is not a sign of an improving economy—just the opposite in fact.
What all this adds up to is a great deal of uncertainty. The future direction of the economy remains a mystery at this point. Diversification is more important than ever in such uncertain conditions because different types of investments react differently to different economic situations. Without proper diversification, an investor can get caught in a trap if the economy moves in an unexpected direction.
Hard assets, such as rare coins and precious metals, are especially useful in this regard since they have historically not had a close correlation with financial assets. This makes them the perfect holding to provide balance to a portfolio of stocks, bonds and cash.
Just as hard assets are key to the effective diversification of an overall investment portfolio, it is just as vital that investors exercise proper diversification within their hard asset holdings. This is because different hard assets (the various precious metals and different sectors of the rare coin market) provide different sets of benefits in different stages of the economic cycle.
Some hard assets provide security during recession and even depression. Others excel during periods of high inflation. Still others perform best during periods of economic growth and prosperity.
It is imperative you accumulate a diversified portfolio of hard assets that will serve you well in all phases of the economy, during good times and bad.