Investors often use hedges and safe havens to limit their exposure to unwanted risks. A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A safe haven is an investment that is expected to retain or increase in value during times of market turbulence. Safe havens are sought by investors to limit their exposure to losses in the event of market downturns.
Traditionally, commodities have been considered effective hedges against inflation as well as safe havens during times of financial or political crisis because supply cannot be arbitrarily increased. Currencies are only as strong as the governments that support them. During times of looming crises, many investors either divest their holdings of the national currency and purchase commodities to insulate and protect their wealth or sell their holdings in exchange for cash.
Investors often look to commodities during steady or bullish markets to diversify their portfolios with a safe investment. During times of market volatility or bearish markets, frantic investors often turn to commodities as a haven from stock uncertainty. We will focus our comparisons on gold, silver, platinum, copper, and fancy color diamonds.
Over the past 30 years, the price of gold has increased by 280%, the Dow Jones Industrial Average (DJIA) has gained 1,019%, and the 10-year Treasury note has returned 315%. Over the past 15 years, the price of gold has increased by 278%, roughly the same as the 30-year return. The DJIA increased by 173%, and the 10-year Treasury note returned 65%, which are both significantly lower than their 30-year returns. As of February 2020, the price of gold is still below its all-time price high of nearly $2,000 an ounce that it reached in September of 2011.
Gold is not a fool-proof investment, as with stocks and bonds, its price fluctuates depending on a multitude of factors in the global economy. The primary advantages of investing in gold are that there is strong global market demand for gold, it is an ideal hedge for financial market risks, diversification with gold offsets inflation, and gold is a highly liquid asset. The primary disadvantages of investing in gold are that gold appears to have no yield, large amounts of bullion may incur storage fees, Gold ETFs may incur brokerage fees (like shares), gold can be volatile on a short-term basis (again, like shares), and gold price volatility is influenced by monetary factors, such as inflation or interest rates.
Silver is not influenced by monetary factors, such as inflation or interest rates. When comparing silver to gold, although they act as safe havens during the same bond and equity market crashes, there are times when only gold acts as a safe haven and other times when only silver does. Silver is valued primarily for its industrial usage. When economies are booming, there will be greater demand for silver than when economies are in a recessionary state. Thus, investing in silver when the market is heading for trouble may not be as safe as some analysts suggest.
The pros of investing in silver are that the price of silver has been increasing in the market because of industrial expansion. Silver as an Investment is also one area where the demand is rising because people have started looking for alternatives to gold considering how volatile it is getting and how abundantly it still exists in the world. Since silver mines are being explored and dug up at an unprecedented rate, the production of silver could possibly now go through a significant decline when these mines run out of silver deposits by the next decade.
The cons to investing in silver include the lack of value with smaller investment amounts. Industrial silver is used at a very fast pace so if you can’t invest large amounts, you won’t see substantial returns.
Platinum is an eco-friendly metal that is used in several consumer goods, though it does not have an easy-to-mine steady supply. The refinement procedure of mined platinum is complex. Platinum offers the best prices when the economy is relatively stable. Platinum investment may not work for short-term holding and may fare better for the long term. There are pros to investing in Platinum, such as its easy liquidity. Platinum’s value is also not entirely based on the value of the US dollar, so the price is not impacted by the volatile fluctuations of the price of the dollar.
The biggest downside to investing in Platinum is that it is a relatively new investment with less financial history. Less financial data makes it less attractive from an investment perspective. Also for consideration is the additional cost of storage and security. Finally, most of the platinum is mined out of South Africa, which was facing many political and infrastructural problems in meeting the supply-demand.
Rising copper prices during the mid-2000s eventually led to advanced uses of aluminum as a substitute in power cables, electrical equipment, and refrigeration tubes. Copper prices then dropped dramatically toward the end of 2008 during the height of the financial crisis and the decline of the housing market. This tie to housing meant that copper struggled more than most metals during the recession.
Systematic variables, such as the weather or time of the year, can affect copper production, demand, or transportation. A large portion of the global copper supply originates in Peru and Chile. Worker strikes against copper-producing mines often occur in these regions, and concerns about geopolitical instability have the power to force prices up.
Fancy Color Diamonds
Fancy Color Diamonds are considered valuable regardless of size and other factors. For this asset class, displaying a rare and strong color is a distinguishing factor. The valuation of a diamond is based on the individual characteristics of the diamond itself and the rarity of Fancy Color Diamonds that keep their value highly appreciated. Fancy Color Diamonds remain independent of market behaviors, fluctuations, or credit. Based on years of study on various commodities, I have not found anything that has a more secure future than Fancy Colored Diamonds.
Please email FCD Invest at firstname.lastname@example.org to discuss your personalized long-term investment strategy. For more information on Fancy Colored Diamonds as an investment, please visit our Fancy Colored Diamond informational page linked here.