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Interesting Times

May You Live in Interesting Times

There is an ancient curse that says, “May you live in interesting times”, while it may sound like a well wish, it is meant to be ironic in nature.

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I Do Not Know About You, But That Certainly Applies To 2020.

As we head into the last quarter of what has been perhaps the most tumultuous year since World War II, the interrelated macroeconomic, financial, and geopolitical scenes are fraught with contradictions and uncertainty.

It is these types of conditions that call for investors to remember time tested principles such as diversification. We would do well to understand that true diversification does not mean buying different stocks or even sprinkling a few bonds into our portfolio to balance our stocks.

True and Effective Diversification Involves Holdings Across Many Asset Classes

Despite what many investors have been told, stocks and bonds have historically had a positive correlation over the long-term. This is largely because of the impact of interest rate movements. Rising interest rates tend to be negative for the value of both stocks and bonds. Investors that only include a mix of stocks and bonds in their financial plan expecting diversification benefits will likely end up disappointed.

By the same token, if you have a stockbroker, he or she will no doubt tell you that diversification can be achieved simply by including the shares of companies from a variety of sectors in your portfolio. All one must do to see that this theory is bogus is look at a single chart showing all the Dow Jones Industrial Average, the S&P 500, the NASDAQ, and the Wilshire 5000. Over the long-term, these indices have historically moved in tandem and in very similar manners.

No financial plan is complete if it does not include hard assets to balance out paper investments that tend to make up most of an investment portfolio. Hard assets, such as gold, silver, and rare coins, tend to move independently of paper investments, notably stocks and bonds. By including hard assets into your portfolio, you can achieve the balance you need for true diversification because we simply cannot reliably predict unanticipated events and risk factors that pop up.

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2020 is the poster child for that. On New Year’s Eve 2019, who would have predicted that in just a few short months, almost the entire US economy would be intentionally shut down by a pandemic? While experts had warned of this possibility for decades, the concept was too abstract for most investors to take warnings seriously.

Further, world leaders of finance believe the reverberations from the ongoing pandemic will be with us for a decade or longer. Perhaps the most serious long-term consequence from a macroeconomic and geopolitical standpoint is how the pandemic has changed the relationship between China and the West, particularly the United States. A year ago, the US-China relationship could best be described as a “competitive partnership.”  Just this week, China and the CCP has called the actions taken by, not only the U.S., but many other countries actionable and we have entered a new Cold War. When the world’s two largest economies are swept up in conflict, it is inevitable that there will be economic and financial market repercussions and those repercussions will be difficult to time and predict. Stocks that benefited from US-China trade in the past could become blindsided by a new reality.

Furthermore, we can add to the chaos created by the pandemic, the further inevitable uncertainty surrounding the U.S. presidential election. No matter what your political persuasion, any hotly contested election creates a degree of uncertainty and if it is one thing Wall Street absolutely hates, it is uncertainty.

In just the last couple of weeks, the stock market has resumed its gyrations as the two political parties play football with another multi-trillion dollar “relief” package. Meanwhile, a prominent member of the Fed indicated that maybe U.S. monetary policy should not reflect vigilance against inflation.

All along, the national debt has quietly and suddenly soared to over $27 trillion and expected to top $30 trillion by the end of 2020. That is 138% of America’s Gross Domestic Product and represents almost a quarter of a million dollars of debt for every US taxpayer. We have added $7 trillion to the national debt in just the past 4 years, an increase of more than 1/3.

To put this explosion in debt in perspective. It took 240 years for our country to accumulate $8 trillion dollars of Federal Debt and only another 14 years to go to $27 trillion-plus. 

What Have the Consequences Been of this Explosion in Debt?

Well on the backs of Fed Funny Money QE Infinity due to “Dot Come Bubble of 2000”, “Too Big to Fail of 2008”, and now the “Pandemic Stimulus Relief of 2020 and beyond”, the dollar has lost 68% of its purchasing power in only 19 years. And this is far from over.

I hear no member in either political party willing to talk about where this will lead us, how we will service all that debt or what the implications for the US dollar will be.

It is difficult to imagine any scenario in which the debt is not serviced with dollars debased by inflation, i.e. the printing press. In other words, inflation, or worse, stagflation.

Finest-Known-Report-01-Stagnation

Historically, hard assets have outperformed other asset classes during periods of high inflation. In fact, high inflation is the arch enemy of stocks, bonds, and cash, whereas hard assets tend to benefit from the very conditions that erode the value of our paper assets.

But that’s only part of the story. While diversification of your overall portfolio by including hard assets is vital to your financial plan, it is also just as vital that you establish diversification within your hard asset portfolio.

Gold, silver, and rare coins do not all move in lockstep with each other. Gold, being primarily a monetary metal, is key for providing a form of insurance against monetary and currency crises, such as hyperinflation, stagflation, deflation, and currency wars. Silver has a monetary component, but also is an important industrial precious metal, so it responds to changes in industrial production and similar macroeconomic factors.

Adam-Crum

Adam Crum, President, PNG

Rare coins end up being the cement that forms the foundation of a properly diversified hard asset portfolio. Not only do rare gold and silver coins afford investors the benefit of the intrinsic value of their precious metals content, but they also offer so much more. On the security side, they provide unmatched security, portability, and privacy benefits that neither bullion nor paper investments can match.

Best of all, rare coins allow you to have your cake and eat it too. Not only have they historically provided a hedge against crisis, but in times of prosperity they can and have appreciated in value as sophisticated collectors add to the demand from investors.

The time is now, if you have not diversified your financial plan into an array of hard asset categories.

Interesting Times
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