Lear Capital’s Take on Building Stability Into Your Financial Portfolio

The stock market has been notably unpredictable in recent months, making risk an increasingly important consideration when investing. According to Kevin DeMeritt, founder and chairman of Los Angeles-based precious metals firm Lear Capital, gold and silver prices have shown solid performance in recent decades, making the assets a potentially beneficial addition to investors’ portfolios.

“Gold has an inverse relationship to stocks and other types of assets,” Kevin DeMeritt says. “In times of war or terrorism, usually you’re going to find the markets become extremely volatile. Nobody knows what’s going on from day to day. The volatility of gold is not going to be the same; it’s going to give you that stability.”

The Trouble With Inflation 

While, on average, the stock market has provided approximately 10% annual returns — which, factoring in inflation, would really be roughly 7%, according to the U.S. Securities and Exchange Commission — stock performance can fluctuate significantly from month to month.

The widely publicized crashes that occurred in 1929 and 1987 haven’t been the market’s only trouble spots.

Take 2022, for example. Following a record-setting year in 2021 — when the S&P 500 reached 70 closing highs, and from 2020 to the end of 2021, stock wealth in America moved from $22 trillion to $42 trillion, according to CNBC — this year, stock market declines have erased more than $9 trillion in U.S. household wealth.

Numerous factors can affect the market — particularly inflation, which has been widespread in 2022, reaching 9.1%, its highest point since 1981, this past summer.

Not only does inflation typically weaken consumers’ purchasing power and the value of the money they’re stowing away for retirement, but generally, the moves that the Federal Reserve makes to reduce high inflation can weigh on stock market activity. 

When former Fed Chairman Paul Volcker attempted to reduce the hefty levels inflation had reached in the 1970s through policy changes that included monetary reserve-related efforts, the correction wasn’t quick or easy. Stocks, according to The New York Times, almost immediately fell.

Rectifying Rising Costs

The Fed’s current attempts to lower the 8% inflation level to a 2% range have included federal funds rate target range increases that have bumped the rate range to 3.75% to 4%. Those changes have likely already caused some borrowing-related cost increases, and the Fed has indicated future federal funds rate target range adjustments may occur.

“It’s been a long time since we’ve had this kind of inflation,” Kevin DeMeritt says. “We’re starting to see more and more people become concerned about the volatility in the stock market — which happens when you have high inflation.”

Consumers may be hoping inflation quickly abates, but DeMeritt feels more economic discomfort might be in store.

“Everybody was thinking in 1978, when inflation was the same 8% we see today, ‘When is this all going to end?’” the Lear Capital founder says. “Volcker came in and said, ‘We have got to just push up interest rates as high and as fast as humanly possible,’ and they went all the way up to 14% and 15%, almost double where they were in 1978. We may only be halfway to the top, if inflation plays out like it did in the ’80s; it could be worse, actually, because the supply chain part of the inflation equation is broken.”

Investments — whether they involve the stock market or another venue — are rarely risk-free; precious metals, however, have a history of faring well when the economy is struggling.

Gold prices rose nearly 13%, for instance, during the first year of the 2009 recession — after increasing significantly less, 2.6%, the year before. Prices then rapidly escalated by 50% from September 2010 to September 2011, according to the U.S. Bureau of Labor Statistics.

National Mining Association records indicate prices for precious metals such as silver and gold have grown relatively consistently over the past two decades. Premium coins, in particular, exhibited a strong performance during past recessions, according to Lear Capital data.

Historically, when interest rates have risen, gold and silver prices have followed suit. In 1980, when interest rates reached a high of more than 15%, gold and silver prices also doubled, hitting what were then new historic highs — $49.50 for silver and $850 for gold.

When inflation previously reached a high point in 1980, gold’s price actually skyrocketed 147% — and silver escalated even more, zooming up 557%, according to Lear Capital’s “The Double Play Opportunity” guide.

Even if interest rates continue to rise in the coming year, if gold and silver’s activity echoes their past performance, they might potentially be able to provide returns. 

“If you look at gold, it’s dramatically outproduced the stock market,” Kevin DeMeritt says. “The misconception that gold can’t produce profits for people, and it’s just more of a safety-type asset, is completely incorrect.”

A Measured Approach

War and other major conflicts — such as Russia’s invasion of Ukraine — can also cause damaging widespread supply chain issues and agitate investors. If businesses have to struggle to maintain operations and profitability, and that leads to lesser returns than investors had hoped, some may be looking for investment alternatives. Precious metals may be able to serve as an additional option, Kevin DeMeritt says.

When conflicts between nations and other events send a shock through the domestic or global economy, having a portfolio that combines investments like traditional IRAs composed of stocks, bonds, and mutual funds with assets that may be less reactive, such as gold, could potentially help provide some balance.

According to Kevin DeMeritt, “You need to look for that asset that’s going to give you stability and offset the volatility from some of the other areas.”