In the wake of the global financial crisis, many investors have been looking for new ways to protect their assets. The recent pandemic has created a climate where more and more people are looking at investing in precious metals to hedge against inflation and uncertainty. In this article, David Ebrahimzadeh will explore how the pandemic is changing the investment industry by exploring three key points:
The Rise of Gold as an Alternative Currency
Gold has risen 12% year to date and more than 25% over the last five years. It is currently trading at close to $1800 an ounce, with prices expected to rise further as governments worldwide debase their currencies in response to growing debt levels. This significant investment opportunity means that now may be a good time for investors to protect themselves against inflationary pressures or economic turmoil caused by unrest in countries like China, Russia, and Africa.
Gold has long been seen as a hedge against inflation, but most investors place too much emphasis on current prices. While it is true that gold tends to rise in times of high inflation, its price will also be influenced by supply and demand factors such as industrial usage, jewelry purchases, and investment flows. For example, with the onset of new car manufacturing plants in China shifting away from traditional steel components towards lighter aluminum alloys, there could be an increase in the future need for physical metal even if production does not change significantly. This means that while some precious metals may still look like good investments, investors should not forget that supply and demand factors will also play a big role.
The Impact on Asset Prices
In a world where life expectancy continues to rise, it is also important for investors not to forget the impact of demographics on asset prices. In previous decades an aging population meant that investment in fixed income assets may have been desirable. People spent down their savings and required greater inflow from investments rather than outflow by spending money on property or luxury goods. This has changed over time, with many countries experiencing low birth rates, making this dynamic less prevalent today. This means that the future may see a shift towards more purchases of luxury goods and real estate, which would impact prices. However, let’s look at China, for example. There are still around 180 million Chinese citizens aged 20-45 who will require housing shortly (and given social norms, these houses would be expected to be multiple bedrooms). These individuals could represent demand pressure that could drive residential real estate prices up in the next few years.
Investment Strategies for Survival
Given these issues, it is clear that gold will remain an attractive investment opportunity even during economic uncertainty or volatility caused by pandemic effects like rising unemployment levels due to factory closures. However, when choosing which type of precious metal you should invest in (either physical or through ETFs), some important factors such as storage costs and liquidity need to be considered. For example, if you buy large amounts of physical metal at one time, its value could fall significantly since finding buyers would become more difficult while paying high storage fees.
Given the changing investment landscape, investors need to adopt more robust and flexible ways of investing their assets. For example, rather than looking at asset classes in isolation (such as gold), it may make sense to look at how these can be combined or even exchanged across time using elements like options contracts which offer greater flexibility when seeking income streams. Investors should also consider alternative investments that provide inflation protection while allowing them some discretion over timing associated decisions such as buying equities (stocks), foreign currency exchange rate exposure, and real estate trusts. This is why many people are exploring “basket” funds. They pool money together into a fund managed by professionals who invest in all shareholders according to clearly defined investment objectives.
In the event of a global pandemic, it is important to be prepared. It may not happen in our lifetime, but we must now prepare for this potential future scenario. The changes that have occurred throughout the investment industry due to recent outbreaks are enlightening and terrifying. Gold has become an alternative currency with increasing value. At the same time, other assets such as stocks or bonds can lose their worth if they don’t protect from an outbreak, including inflation risk and geopolitical shocks. To survive, you will need to keep your investments diversified across many asset classes. There is no single catastrophic loss should something unexpected occur, like a pandemic-induced recession.
