How to Invest in Hard Assets2015-06-24
Deciding to invest in commodities is a good first step to diversifying a portfolio. However, the universe of investment vehicles available at one’s fingertips can be a bit frightening, if not downright overwhelming, at first glance.
For many investors, even after doing their homework, it’s not uncommon for commodity futures markets and exchange-traded products to remain clouded with complexities and nuances [see also Jim Rogers Says: Buy Commodities Now, Or You’ll Hate Yourself Later].
Just like the old saying, “You have to see it to believe it”, it’s hard to argue with the investment case behind hard assets. Investors often overlook the sheer variety of investable products which they can literally hold in their hands. Below, we outline seven hard asset investments that have demonstrated the ability to preserve capital as well as appreciate in times of uncertainty and inflation.
No surprise here. Gold has been around forever and its appeal as a precious metal has truly withstood the test of time. Since the U.S. abandoned the gold standard in 1971, this precious metal has seen a meteoric rise in value; gold prices have appreciated over 500% since the year 2000 alone. Serving as a worthy hedge against rising prices, it’s no wonder that investors have embraced physical bullion as a means of preserving their capital while also maintaining lucrative upside potential. Buying gold bars, coins, and jewelry ensures that the value of the assets in one’s hand will move in unison with spot gold pricing. This is appealing because it enables investors to avoid the nuances of futures contracts and allows indirect equity exposure through mining companies. Further, it is relatively cheap to store a material amount of gold bullion (just remember to arrange for security) because the yellow metal has a high value-to-weight ratio.
This shiny metal offers similar benefits as its yellow counterpart, although it certainly has a few other tricks up its sleeve. The appeal of investing in silver, whether it be coins or necklaces, is twofold: silver holds appeal as a precious metal and is considered to be a worthy hedge against inflation, although its price can be considerably more volatile than gold. Widespread industrial use is how this metal separates itself from the yellow metal. The price of silver is impacted by a variety of factors closely tied to the economic cycle; silver is a necessary resource for numerous commercial applications across the health care and electronics industries. It’s blend of luxury and industrial appeal is what makes it so attractive. Silver also has the flexibility to appreciate in times of economic prosperity as well as uncertainty.
Much like silver, this precious metal offers a unique risk/return profile thanks to its inflation-fighting abilities and industrial use. Platinum demand stems primarily from the automobile and electronics industries, although jewelry markets are also a vital price driver. Furthermore, since the production of this metal is so heavily concentrated in emerging nations, platinum is often prone to price spikes, which makes it an even more lucrative investment for those who wish to hold it over the long haul. If investors continue to lose faith in paper currencies, demand for platinum could also rise as an alternative since it is so scarce. Platinum coins, bars, and jewelry are all viable options for investors looking to preserve, and potentially grow, their capital with hand-held investments.
4. Antique Guns
Purchases of guns, both commercial and collectibles, have been steadily on the rise, surging in recent years as fears of tightening gun-control laws have intensified. While semi-automatic weapons are quite uncommon across most portfolios, these products have steadily appreciated in value over the years, a feat that few asset classes can brag about. Just like every other commodity, the price of guns is influenced by supply, demand and speculation. Many are anticipating tighter gun-control and sales laws in the foreseeable future, while some investors are even preparing for the reinstatement of the federal assault weapons ban. If the 1994-2004 ban comes into effect once again, it will be illegal to manufacture weapons in the banned categories, although weapons already in circulation can continue to exchange hands. Any such restriction would likely spark a drastic increase in the value of certain guns as they become commodities with fixed supply levels [see also Three Things Wall Street Journal Didn’t Tell You About Commodities].
The collectible firearms market is also steaming with activity. Scared by the volatility in the stock market after the recent crash, a growing number of investors have turned to classic firearms as a means of preserving their capital. For instance, valuations for handcrafted English shotguns have climbed by approximately 3%-5% per year, making this a rather safe bet by equity market standards. After all, guns are an investment which you can enjoy (responsibly), and thus the potential for capital appreciation makes them all the more attractive.
Stamps aren’t quite as shiny as gold and they certainly can’t compare to guns in terms of utility. Nonetheless, this palm-sized investment is a worthy consideration for those looking to tap into the vast universe of profitable collectibles. Although stamps appear to be perhaps the most fragile product on this list, they are not much different from other hard assets. Stamps derive their worth from a shared psychological belief that they are in fact valuable. Simply put, stamps are a non-productive, collectible asset, much like gold bars and silver coins [see also 25 Things Every Financial Advisor Should Know About Commodities].
In fact, recent studies show that returns on collective stamps could rival precious metals over a long enough timeline. Research shows that over the period from 1900-2008, stamps generated a nominal annualized return of 7%. This is a rather remarkable feat to which few collectibles can attest. Historical evidence also suggest that stamps feature a return pattern that bears a close resemblance to the yellow metal; stamps are a worthy hedge against rising prices, and much like gold, they can also serve as a partial hedge against unexpected inflation.
Rising populations in booming emerging markets across Asia and Latin America are driving food demand now more than ever. The result: farmland prices, both at home and abroad, have greatly appreciated in recent years as agribusiness has expanded to meet the needs of an ever-growing world population. Buying a plot of land requires a bit more hassle than going to the jewelry store, but doing your homework could pay off big time.
Historical data reveals the appeal of this timeless hard asset; between 1987 and 2004, farmland prices averaged annual increases of 4.8%. What’s even more exciting is that prices have gone on to appreciate even more rapidly in recent years thanks to record-low interest rates and a steadily growing demand for commodities. Farmland prices averaged annual gains of 15% between 2004 and 2008, showcasing the ability of this asset class to deliver uncorrelated returns to broad equity markets. Experts have expressed their concerns that land value increases of this magnitude are unsustainable, although they have also acknowledged that increasing food demand from all over the globe is a key factor that would prevent a major collapse [see also 50 Ways To Invest In Agriculture].
7. Classic Cars
While its true that only a few people could actually ever lift a car off the ground by themselves, the investment thesis behind classic cars is strikingly similar to collectible guns; both are luxury goods that can also be used for personal enjoyment. Classic cars are a viable alternative investment for one simple reason: these hard assets can preserve capital because they posses intrinsic value given their limited supply. Finding a good deal on a 1966 Shelby Cobra compares to mining for gold because at the end of the day you are ultimately looking for something scarce.
Much like the other hard assets on this list, classic cars have the potential to generate impressive, uncorrelated returns, especially when stock markets turn sour. In fact, the HAGI Top Index, which measures the performance of 50 key collective classic cars, has increased 30 times in the past 30 years. This sort of appreciation translates into an annual growth rate of more than 12%, making classic cars a worthy adversary to even the most stable stocks. In 2011 alone, certain segments of the classic car market saw prices surge upwards of 20%, blowing past gold’s 10% gain on the year. Investors should, however, consider a number of other factors before dipping into their life savings and heading to the nearest auction. Experts emphasize the importance of accounting for restoration costs and general maintenance expenses, as well as having a keen eye for which models are consistently popular among collectors.
Disclosure: No positions at time of writing.