Lear Capital’s Take on Why Investors Shouldn’t Ignore Precious Metal Assets’ Liquidity

When examining potential investments, investors may want to consider whether they’ll be able to easily sell assets, according to Kevin DeMeritt, founder and chairman of Los Angeles-based gold and precious metals firm Lear Capital.

The limited quantity of gold that’s available in the world has helped the precious metal retain value over the years. Gold prices have primarily remained steady or increased throughout the past 200 years, according to the National Mining Association records; at times, gold’s value notably rose — such as the 101% increase in the producer price index for gold that occurred between 2008 and 2012.

Its numerous utilizations — which range from jewelry, due to in part to its malleability and ability to resist tarnishing or corrosion, to applications in the electronic industry, thanks to its significant conductivity abilities, according to Britannica — have helped the precious metal remain in demand.

As a result, a number of investors view gold as a considerably liquid asset. Other investments that may perform somewhat inconsistently can potentially offer less liquidity.

Investors may, for instance, need to act quickly to earn profits or stem losses in the stock market. They could struggle to find a buyer when they want or have to sell certain stocks — particularly if the stocks have shed value. They may not obtain the price they’d hoped to get, and have to accept a financial loss.

Similarly, collectible items like art — which rose in value by 29% last year, according to the Knight Frank Luxury Investment Index, which tracks high-end asset performance — could prove to be a worthwhile investment, but not necessarily right away.

The average holding period for works of art is more than 25 years, according to ArtTactic, which analyzed auction data and found selling pieces that had been bought five or fewer years ago can incur a higher risk of monetary loss, which suggests art’s liquidity isn’t guaranteed.

Flexibility and Digital Currency 

Liquidity is also a factor investors may want to take into account when examining long-term investments. If you open a certificate of deposit savings account, for instance, per the terms of the agreement, the money will be held in the account for a set amount of time in exchange for what’s often a higher interest rate than a standard savings account. While you may be able to withdraw your money before the end of that period, that could incur fees.

Coverage of the cryptocurrency sector in the past year has highlighted liquidity issues it’s experienced. Crypto trading platform FTX, for example, filed for bankruptcy not long after cryptocurrency exchange Binance announced it planned to cash in $580 million worth of FTT, FTX’s crypto token — which set off a wave of customers trying to liquidate their crypto investments with other firms. CNN Business compared to a run on a bank, with some firms suspending withdrawals in response.

The events that occurred in late 2022 may have made some investors hesitant, Kevin DeMeritt says, wondering about factors such as what impact future regulations could have on the ability to sell some types of cryptocurrency.

“The uncertainty in the market leaves a lot of investors nervous about how certain coins are going to be treated, and ultimately the liquidity they’ll have,” the Lear Capital founder says. “No one wants to wake up, and you just can’t sell a type of crypto coin. Gold has a 5,000-year track record — compared to crypto, with a 12-year track record; you’re just going to get a lot more predictability than you will with everything that’s been going on in the crypto market.”

A number of younger investors, Kevin DeMeritt says, are actually now gravitating toward physical precious metal asset-based investments.

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“They put a lot of faith in crypto, and it’s had a lot of volatility, so they want to diversify from digital to real gold,” he says. “It might not be their entire portfolio. [They might say,] ‘I’m going to take 30% or 50% of my crypto and move that over’ — which is great. They’re diversifying.”

Both Demand and Value Contribute to Investment Trends

Gold’s liquidity may be a key reason central banks, Kevin DeMeritt says, readily invested in the asset in the past year. As Lear Capital commented last October, central banks enthusiastically added gold to their reserves in 2022. 

The amount they purchased for the year ultimately ended up being 152% more than they’d bought in 2021, according to the World Gold Council — a total of 1,136 tons, the highest-ever level.

If one of the banks ever needed to quickly raise capital, selling some of its resources could be an option, given the ongoing interest in gold.

“What are the central banks holding?” Kevin DeMeritt says. “Gold — because they understand the paper and the digital currencies could potentially go away. They need something that’s physical and has value.”

For an investor to hold physical gold, silver, or platinum assets in a self-directed individual retirement account, such as the Lear Advantage IRA, the assets need to meet certain criteria — gold, for instance, must possess a fineness of at least 0.995. 

With an IRA that’s backed by gold, the physical precious metal assets must also be stored remotely in an IRS-approved depository, such as the Delaware Depository, the provider with which Lear Capital works. Metals held at the depository are insured for their full value if any fire, flooding, or other physical loss or damage were to occur.

Although you may not be able to store the items at your home, you have full ownership of them — and can withdraw them when you’re ready to retire and either have them sent to you or liquidated. A liquidation-related cash distribution generally takes just about a day to process; you can have the amount wired to a specific bank account or sent as a check.

You can also opt to purchase gold, silver, and platinum coins and bars and retain physical possession of the items, if they’re not held in an IRA — and also obtain the benefits of any price increases those metals experience. 

“If you look at gold, it’s outperformed the stock market since 2000,” Kevin DeMeritt says. “A quarter of all of the gold pulled out of the ground last year, central banks purchased; if that continues into 2024, the demand from central banks will start to move up significantly — along with demand from institutional and individual investors. When investors are worried about the economy, usually you get more people turning to gold, which can drive up its price; we’re starting to see that more and more.”

Disclaimer: This content does not necessarily represent the views of IWB.


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