Hard Assets and How To Choose One For You

Everyone has an asset of some sort. Something that you can sell if you need money. Sometimes you buy that asset at a cheap price, then sell it at a higher price, which means you made money. Other times, the price of the asset has depreciated, and you sell it at a loss because you need the money.

Some assets we own are actually someone else's liability. A bond is a promissory note from the government or a company that you loaned money to, for a promised annual yield, before they return your principal when the bond matures. Dividend stocks are a company's promise to share part of its profits with you. For the government and companies that issued these bonds, or dividend shares, it is their liability.

Assets like gold, silver, real estate, and, lately, Bitcoin carry their own value. We call these hard assets. If you sell or transfer these assets to someone, these are not someone else's debt. These do not need to rely on someone's promise to pay you back. The asset itself can be traded at spot value, either separately or in a trading market.

The developed countries of the world find themselves in a demographic situation where their working-age population is not growing as fast as their retirees from the Baby Boomer generation. Their pensions and social security cash outlays from their older citizens have become larger than their inflows from tax collections. The US debt right now is around $34T, and politicians have been approving expenditures for wars in Ukraine and the Middle East, student loan debt forgiveness, various entitlements, and unfunded social programs outside of social security which keeps growing.

Here's the problem. As debt goes higher and higher relative to GDP and taxes, through a ratio called Debt to GDP, at some point, the outflows and accumulated debt become so huge that the normal inflow of taxes and government asset sales and deals will take several years to come back to a balanced situation. If Congress is divided and consensus is difficult to reach, then the probability that your bond debt will be paid back goes down slightly. If it becomes a real problem, where a government actually defaults on its debt, it is called a credit risk.

Another risk right now is because of interest rate hikes; the older bonds that have lower promised yields get devalued. This is called duration risk. That is what caused Silicon Valley Bank to go under in 2023.

Now, the US will likely not default on payments to bondholders because they can print more money just in case. So sure, you will get paid back, but if they have to print a huge amount of money to pay all their bondholders back, then the US dollar becomes grossly inflated. This is dangerous and has happened in various other countries throughout history. A sudden, out-of-control devaluation of a currency can introduce dangerous political change.

This doesn't mean that the US dollar and bonds will fail tomorrow. But if there is no change by the government to work towards a balanced budget, we will all be headed in a dangerous direction.

These next few years, you need to increase your allocation of hard assets. No one wants crisis or chaos in the world, but it is better to be prepared by holding onto hard assets that retain their value with or without someone's promise to pay you back.

So what are some options for hard assets and how can you determine which is best for you?

For those who are younger, like Gen Z entrepreneurs or even older business executives comfortable with the digital world, you might want to consider some of the Bitcoin Exchange Traded Funds (ETFs) that are being offered by some of the leading Wall Street firms.

Or if you're more comfortable with precious metals like gold and silver, you can either keep these in physical form in a company safe or buy Gold ETFs or other certificates of ownership.

Some may be more comfortable with other types of hard assets like crude oil or some other commodity that can be traded in exchange for cash. One consideration though is your ability to store these items safely.

Having these hard assets does not mean that you will do away with money markets, bonds, and stocks. However, having something in your portfolio or company treasury that is not someone else's debt may be a wise move these days given the nature of the times.

The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.