Thursday, 6 December 2012
There Has Been a Strong Move by Investors Toward Hard Assets
One of the most appealing aspects of physical assets, lies in the correlation, or lack thereof; to traditional asset classes like stocks and bonds. Numerous academic studies have shown that hard assets exhibit low correlation to equities and fixed income, meaning that when added to traditional stock-and-bond portfolios, this asset class has the potential to lower overall risk; as well as provide a viable alternative to common investments and traditional investing strategies. Currently, Central Banks in emerging markets are investing in gemstones and becoming net buyers of gold, which clearly demonstrates that they understand the implications; that are associated with holding too much in fiat currency reserves. Suppose you were a commercial bank, would you be eager to hold U.S. treasuries or gold bouillon for the purposes of maintaining your own bank reserves? With that being said, the most likely outcome will be an increase in demand from commercial banks, for many types of hard assets; like precious gems and metals.
For those not interested in speculating on short-term swings, the appeal of hard assets lies in the ability of this asset class to both smooth overall portfolio volatility, as well as; preserve investment principle against rising inflation and other undesirable economic environments. The introduction of non-correlated hard assets to an investment portfolio, has the effect of smoothing the overall volatility of market performance, since the individual components are unlikely to move in the same direction; at the same time. Of course for some investors, smoothing volatility at the expense of overall returns, may be a far less desirable outcome.