Key Factors That Are Currently - or Soon Could Be - Driving the Demand for Safe-Haven Assets, According to Lear Capital

May 1, 2024 (Investorideas.com Newswire) Although stocks can be a popular asset option, a number of investors are also showing an interest in including precious metals in their portfolio, says Kevin DeMeritt, chairman and founder of Lear Capital.

Diversifying your investments can potentially help mitigate the risk of one or more factors heavily affecting an asset and leading to a significant loss of portfolio value. However, we don't always see individual investors - or larger entities - embrace that mindset.

In 2023, Silicon Valley Bank became the first Federal Deposit Insurance Corp.-insured institution to close in more than two years. The bank had focused on investments that lost value when the Federal Reserve increased interest rates, according to The New York Times; anxious depositors then removed their funds, causing a bank run.

"[As] bankers, they should know to diversify that portfolio - but they put almost everything in long-term bonds and mortgage-backed securities," Kevin DeMeritt says. "Rates [went] up, and they were sitting on $16 billion in unrealized losses at the end of 2022."

Somewhat similar issues occurred leading up to the 2007 to 2009 Great Recession.

Lax credit and lending practices and rising home prices contributed to homeowners purchasing properties they couldn't afford. The number who defaulted on their mortgage within months of getting it nearly doubled between the summer of 2006 and late 2007, according to The Financial Crisis Inquiry Report written by a government-appointed committee.

When the housing bubble burst, millions of Americans owed more on their mortgages than their homes were worth. Some faced rising loan costs and an inability to refinance.

At the time, financial institutions had been adding debt holdings for years. The 10 largest commercial banks in the U.S. held 55% of the industry's assets by 2005 - twice as much as they'd possessed in 1990. When the housing market collapsed, a number were left with sizable shares of at-risk mortgages. During the following global financial crisis, more than 25 banks closed, according to CNBC.

"Diversification usually works out much, much better over the long term," Kevin DeMeritt says.

Gravitating Toward Gold

While the stock market can present the potential for significant gains, investors need to have a fair amount of risk tolerance to weather the often unpredictable dips in stock value that can occur because of economic and other conditions.

Research published by LPL Financial, for example, shows the S&P 500 stock index declined by 5%, on average, during 20 major geopolitical incidents, such as the attack on Pearl Harbor and President John F. Kennedy's assassination.

Amid the ongoing Russia-Ukraine conflict and Hamas' terrorist attack on Israel in October, institutional investors said geopolitical bad actors - groups or nations that can upset the economy and market with a single action - pose the top macroeconomic risk this year, according to a survey conducted by global asset management company Natixis Investment Managers.

In the past, when international issues have occurred, investors have shifted their attention toward gold - which is often viewed as a safe harbor asset during times of market uncertainty, according to the U.S. News & World Report.

Within two months of Silicon Valley Bank closing its doors in March 2023, for instance, Business Insider reported by early May, gold prices had grown 8%.

A well-balanced portfolio might contain a mix of assets with different projected return time frames and performance tendencies.

When the economy is booming and consumers are spending money, some companies may be more likely to earn sizable profits quickly, presenting an opportunity for their stock to pay off relatively soon. Because of precious metals' performance record, investors may choose to allocate a portion of their portfolio to assets like gold that they plan to hold for a long period of time.

As an asset that's generally less reactive when a number of conditions that can uproot other markets occur, gold can potentially offset losses if stocks or other investments fail to provide robust returns, according to Kevin DeMeritt.

"We're starting to see younger people come into the [precious metals] market," the Lear Capital founder says. "They put a lot of faith in crypto, and it's had a lot of volatility, so they want to diversify. It might not even be their entire portfolio; it might be, ‘I'm going to take 30% or 50% of my crypto and move that over' - which is great."

What Lear Capital Says May Influence Gold Demand This Year

To date in 2024, large information technology and communication services companies with significant cash reserves that don't need to borrow capital - a potentially costly proposition, due to today's elevated interest rates - have helped drive and keep the market high, according to a recent U.S. Bank article.

Smaller companies, though, may still feel the pinch of hefty borrowing costs, which could challenge their profitability, affecting their stock's value and appeal.

Investors might also seek less volatile assets if a severe economic downturn occurs, sending stocks off course. During the era of the housing market crash and Great Recession, for instance, the Dow Jones Industrial Average fell to its lowest point in 12 years on March 5, 2009 - a more than 51% tumble from the high it had reached in 2007, according to the Federal Reserve Bank of Atlanta.

Gold's value, however, rose 5% within a year of the 2008 housing market collapse, making it one of the only assets that managed to recover shortly after the incident, according to Lear Capital.

If economic and other occurrences that can be hard to predict transpire this year - or in the future - a diversified portfolio, Kevin DeMeritt says, may offer some relief.

"No one has a crystal ball," he says. "I can't tell you when the stock market or home values are going to fall, but it can have a devastating effect. Gold has an inverse relationship to stocks and other types of assets - the volatility is not going to be the same as other investments."

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