For months, analysts have been saying the United States of America may, at some point, enter a recession.
While investors most likely won’t be able to predict if — and exactly when — that might occur, making a few proactive moves could help mitigate the potential effect if it does, according to Kevin DeMeritt.
He is the chairman and founder of Lear Capital, a firm based in Los Angeles that deals in precious metals.
What DeMeritt Has To Say About Financial Scenarios…
Economic scenarios like a recession and inflation — which rose in 2021 and remained high through 2022 — can be particularly important considerations if you’re close to retiring, DeMeritt says.
“People should really think about how to protect and grow their retirement account, especially if you believe inflation’s going to run over 3-4% the next five or six years,” he states. “Because we don’t want your dollar bill to be cut in half in 10 years, and your retirement plans to evaporate. How you protect that retirement plan is more important today than it was 10 or 20 years ago.”
Three protective steps are key, tips Kevin DeMeritt: Investors may want to take a moment to review how their portfolio is allocated; decide if they feel physical precious metal-based investments might be a positive addition; and, if so, integrate them or make any other adjustments — before a recession occurs.
Why a Recession May Materialize
The National Bureau of Economic Research weighs a number of factors to officially identify a recession; however, a key sign that one may happen actually took place last year.
A yield curve inversion — involving the difference between the 10-year and 3-month Treasury rates — has been seen before every recession dating back to 1960, according to the Federal Reserve Bank of New York. In 2022, that type of inversion occurred more than once.
In a typical yield curve, people anticipate they’ll earn higher returns by investing their money for a longer period; if a line was drawn on a chart to represent that, it would arch progressively upward, indicating higher interest rates correspond with Treasury securities that are set to mature further in the future.
According to U.S. Bank’s website, when the curve inverts, yields for some shorter-term securities exceed longer-term securities’ yields; this occurred in April of last year, with an inversion involving the 2-year Treasury note and 10-year note, and it happened again in July.
In October 2022, the yield on the 3-month Treasury bill ascended above the 10-year Treasury note — a spread that has expanded this year; 3-month Treasury bills now pay interest rates that are more than 1.75% higher than the rates 10-year Treasury bonds offer.
Although two consecutive quarters of negative gross domestic product activity — which transpired in the first half of 2022 — isn’t the official criteria used to define a recession, some people consider it to be an indication a recession may occur.
Possibilities Of A Recession
Other economic factors have also fueled discussion about a possible recession. Although the Federal Reserve’s series of increases in the funds rate of the federal’s target range helped reduce inflation, with it standing at 4% as of May, inflation is still above the Fed’s 2% target.
Due to such fund rate-related increases, consumers are now paying more to borrow money, which can cut into their ability to spend and save.
“A lot of people are waking up to higher interest rates,” Lear Capital’s Kevin DeMeritt says. “They’re used to 3.5%, 4% mortgage rates, and then it goes up to 6% or 7% — at some point, you’re going to want a new car, and the interest rate might be a bit higher there, as well.
Slowly but surely, purchasing power drops through higher interest; your bills go up, and everything else is going up. That’s one of the reasons they’re saying 2023 might be the year of the recession.”
Preparing for a Possible Recession
During economic scenarios like a recession or an inflationary period, investment performance can vary. Options such as stocks that are very dependent on investors’ perception of current events may lose value if the economy stumbles.
Factors like high unemployment can make some investors question the feasibility of obtaining robust returns from companies that could be affected by those economic conditions, prompting a number to pause or pull back from the market.
Precious metal assets, on the other hand, have historically weathered recessionary periods well. Premium rare coins’ performance has been strong, for instance, during the 15 recessions America has experienced since 1919, according to Lear Capital.
The 1980s was the only decade that marked the tail end of a recession; the collectible occasional coin index compiled by appraisal and certification provider the Professional Coin Grading Service remarkably rose 660%.
Comparison Between Gold Prices & Silver Prices
Prices for both gold and silver have, in fact, been generally increasing for essentially the past two decades, according to Lear Capital data. Between 2001 and 2022, silver shot up 377%, and gold rose approximately 566%.
Kevin DeMeritt is of the opinion that gold consists of an inverse relationship to each type of asset, even stocks. He further adds that the gold volatility will not be consistent in comparison to other investments. It might provide you with more stability in the future.
Gold is used as a safe haven during recessions and war; when investors are worried about the economy, usually more people turn to gold — which can drive up its price. The best to view that this keeps growing and growing.
Investors who are worrying about the possibility of a recession may want to think about taking three key steps in advance to try and lessen its effect — such as reexamining their portfolio to see what allocation structure is in place, potentially incorporating physical precious metals-based investments into their investment plan, if they’re looking for a way to add more diversification; and also considering making any desired portfolio changes soon, before further economic changes occur.
The demand for gold in particular — which remained high last year, due in part to central banks buying a quarter of all that was mined in 2022 — could soon increase, according to Kevin DeMeritt, raising its value but also making it more expensive.
Both recession and inflation looming teach individuals to consider valuable metals a protective layer against financial uncertainties, as per the Lear Capital founder. “It’s a great time to add at least some portion of their portfolio into that asset category.
As we start to see more of these financial instabilities happen around the country and probably around the world, demand from central banks could intensify, along with demand from institutional and individual investors. You might just wake up to $3,500 or $3,700 gold [prices] in the next 24 to 36 months.”