Lear Capital Explains Precious Metals’ Liquidity Could Be a Critical Factor in 2024

Selecting a mix of assets can help you create a well-balanced portfolio. After some of the events that occurred in the cryptocurrency market in recent years, for instance, a number of young investors are now considering introducing physical precious metals into their portfolio, says Kevin DeMeritt, founder of precious metals firm Lear Capital.

In November 2022, crypto exchange Binance announced it planned to cash in $580 million worth of cryptocurrency trading platform FTX’s crypto tokens. FTX filed for bankruptcy, and as investors attempted to liquidate some of their other crypto investments in response, CNN Business reported a number of the firms suspended withdrawals.

“Uncertainty in the market [can] leave investors nervous about how certain coins are going to be treated, and ultimately the liquidity they’ll have,” DeMeritt says. “They put a lot of faith in crypto, and it’s had a lot of volatility, so they want to diversify from digital to real gold. It might not be their entire portfolio — [but] gold has a 5,000-year track record; compared to crypto, with a 12-year track record, you’re just going to get a lot more predictability.”

Interspersing Investments

A self-directed individual retirement account — a type of IRA that offers similar tax advantages to a conventional IRA — gives you the freedom to include numerous types of assets in the account. Alternative options like private placement securities and promissory notes can be held in the IRA, along with the stocks, bonds, and mutual funds you might find in a conventional one.

You can also include physical precious metal assets in a self-directed IRA, such as gold and silver coins that possess the fineness level the IRS requires — at least 0.995 for gold and 0.999 for silver (with the exception of the American Eagle gold coin, which has a lower fineness).

While a custodian, such as a bank or trust company, typically acts as the trustee for the account, a self-directed IRA essentially puts you in the driver’s seat regarding asset selection. You can dedicate a certain portion of the funds that are associated with the account toward specific physical precious metals and other kinds of investments, customizing your asset allocation based on factors such as your specific savings goals and the current value of what’s held in the account.

Reducing the amount of some assets you own, though, may not be an immediate process. Stocks, for instance, can experience significant market fluctuations. If, when one dips, you decide you want to sell it to prevent further losses, reduced demand could make obtaining a desirable price challenging.

Precious metals like gold, however, have historically tended to retain value, due in part to their limited availability and long-lasting durability. With an extremely malleable nature and resistance to tarnishing or corroding, gold has been used in jewelry, electronics, and dozens of other applications.

Gold’s continued demand and ability to be exchanged fairly easily for other forms of currency have helped heighten prices for the precious metal — and prompted a number of investors to view it as a relatively liquid asset.

After remaining generally stable throughout the 1800s and early 1900s, the average annual price for 1 troy ounce of gold doubled in the early 1930s, according to National Mining Association data, and kept moving upward.

As Lear Capital reported late last year, by Dec. 4, 2023, gold prices had hit a high of more than $2,100 per ounce — a new record for the metal.

“One of the biggest misconceptions is that gold is this relic and doesn’t have this great performance,” Kevin DeMeritt says. “Gold has dramatically outproduced the stock market.”

A Massive Influx of Resources May Not Be Likely

Although recycling can help augment the available amount of precious metals, it doesn’t seem to be able to solve all supply needs.

Silver recycling activity grew for the third consecutive year in 2022, rising 3%, according to the Silver Institute. However, that same year, the silver market experienced a record deficit of 253 million ounces.

A report from precious metal refining service provider Core Scientific estimated approximately $10 billion worth of gold, platinum, and other precious metals are tossed out every year.

The amount of additional precious metal assets that are introduced into circulation annually is largely dependent on mining operations, Kevin DeMeritt says, which tend to be fairly consistent.

“That really doesn’t change all that much,” the Lear Capital chairman says. “You can only pull so much gold out of the ground — and even with new technology, we’re having to go deeper and deeper inside the Earth to get it. The biggest [supply] impact right now is the demand side.”

Central banks, for instance, have been voracious gold buyers, snapping up roughly a fifth of the gold that’s been mined, according to World Gold Council records.

“They’re not speculators; they’re not day traders,” Kevin DeMeritt says. “They hold that metal for 10, 15, 20 years at a time. That metal is gone — and you’re not talking about small amounts.”

A 2023 YouGov survey found that — due to factors such as interest rate levels, inflation, and geopolitical risks — 69% of central banks have higher gold reserve levels now than they did five years ago.

If that type of purchasing continues, Lear Capital’s Kevin DeMeritt says precious metal asset prices could echo the activity we saw during the COVID-19 pandemic, when the interest in gold and silver helped push coin premiums up.

“If you go to the U.S. Mint as a dealer and purchase a Silver American 1-ounce Eagle, usually you would pay $2.50 over the spot price for that coin,” he says. “During the pandemic, you had the supply side issues; they couldn’t run the mint as much as they wanted to, and you saw a tremendous demand. That $2.50 premium skyrocketed to $14 and $15 over the spot price of silver.”

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