Is the U.S. Still at Risk of Entering a Recession? Lear Capital Explains What That Could Mean for Precious Metal Investments

Precious Metal Investments

Concern that the U.S. might enter a recession has lingered for more than a year. Although the country hasn’t officially fallen into one yet, analysts haven’t ruled the possibility out — and Lear Capital Chairman Kevin DeMeritt says investors may want to take note.

“[Policy makers] have pushed interest rates up,” Kevin DeMeritt says. “They’re trying to get ahead of inflation. Because interest rates are so high, you’re seeing consumers with late payments on their credit cards, their car payments; as that trickles through the economy and it usually turns into a recession, the dollar [strength] will start to come down. Precious metals will benefit from that.”

Understanding Recessions

The National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months” — although the length can be shorter, depending on the involved conditions. The recession that occurred in the early days of the COVID-19 pandemic in 2020, for instance, lasted for just two months.

The organization considers a number of factors when determining whether one has begun, including real personal consumption expenditures and industrial production.

While those haven’t all yet lined up, the U.S. did experience two consecutive quarters of negative gross domestic product activity in the first half of 2022 — another element some people consider to be an indication that a recession is imminent.

Analysts have said that prior to every recession dating back to 1960, a yield curve inversion, involving the difference between the 10-year and 3-month Treasury rates, has occurred, according to the Federal Reserve Bank of New York. Inversions happened more than once in 2022.

To date, despite a series of predictions from various industry members suggesting a recession could occur a quarter or two down the line, the U.S. has not officially entered one. Americans, however, aren’t completely convinced the economy has reached safe shores. A survey conducted earlier this year by Nationwide found 68% expected a recession to have occurred by now, and 80% of those respondents said they felt it would be severe.

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While in July, 78% of economists said there was a 1-in-2 chance of a recession occurring within 12 months, the most recent Bankrate survey on the topic indicates the odds of one happening have decreased — yet a number of economists aren’t ruling the possibility out. As of last month, 46% said there’s a chance of a recession occurring within the next year.

The Financial Fallout

Due to outcomes such as elevated unemployment and reduced income, recessions can have a significant effect on the economy — and consumers’ ability to both spend and save.

Interest rate increases can push prices up, reducing the value of what consumers have put away for retirement and, if prices remain high, causing them to need to save more than originally planned to be able to fund their future living expenses.

“People should really think about their retirement accounts, especially if you believe inflation’s going to be a problem over the next five or six years and you’re close to retirement,” Lear Capital’s Kevin DeMeritt says. “Because we don’t want your dollar bill to be cut in half in 10 years, and your retirement plans evaporate along with it. How you protect that retirement plan is more important today than it was 10 or 20 years ago.”

To proactively prepare now for the possibility of a recession occurring in the coming months, investors may want to consider incorporating physical precious metal assets into their portfolio.

Because factors like high unemployment, which can affect operations, may make investors question whether businesses will be able to provide robust returns — which may reduce their interest in investing in them — stocks can bear the brunt of economic events like a recession.

Precious metals, which have historically been less affected by economic downturns than other assets, may be able to help buffer some of the impact a recession could have on numerous portfolio components.

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In general, gold and silver have held up well when compared to the stock market. The metals outperformed the Dow Jones Industrial Average and S&P 500 between 2001 and 2021, according to Lear Capital.

Silver and gold also pulled ahead during past downturns. According to Forbes, gold outperformed the S&P 500 by an average of 37% in six of the last eight recessions; as this Lear Capital investment primer points out, premium rare coins have performed well during the 15 recessions that the U.S. has experienced since 1919.

Gold performed well during the Great Recession that lasted from 2007 to 2009; prices for the precious metal ascended 2.6%. In 2009, gold’s value increased by nearly 13% — and continued to rise, according to U.S. Bureau of Labor Statistics data. From 2008 to 2012, gold’s value escalated significantly, as indicated by the producer price index for gold, which increased 101%.

If a recession occurs in the coming months — or concerns persist that there will be one — as people gravitate toward less volatile investment options in response, investors, Kevin DeMeritt says, might find that helps drive the demand for physical precious metal assets higher.

Amid predictions a recession was incoming in 2022, for example, the annual global investment in gold coins and bars experienced a 10% rise.

“The economic uncertainty right now is going to be a big factor,” Kevin DeMeritt says. “Gold is used as a safe haven during recessions, market volatility, war — it typically is going to give you more stability. When investors are worried about the economy, usually you get more people turning to gold, which can drive up its price, and we’re starting to see that more and more.

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