Physical investments refer to tangible assets that investors can hold in their possession, such as precious metals, real estate, artwork, antiques, etc. Compared with financial assets like stocks and bonds, physical investments have some unique characteristics. In the following passages, we will discuss what makes precious metals and real estate good choices for physical investments from aspects like limited supply, intrinsic value, inflation hedge, diversification and cash flow.
Precious metals have limited supply and intrinsic value
As one of the most popular physical investments, precious metals like gold and silver have limited supply in nature. Annual production of gold and silver is small compared to the total above-ground stocks accumulated over history. Their limited supply helps preserve and increase their value over time. Precious metals also have intrinsic value due to their unique properties. Gold and silver have served as money and store of value for thousands of years. Platinum and palladium have extensive industrial applications. The combination of scarcity and usefulness gives precious metals intrinsic value that doesn’t solely depend on faith in government or public opinion.
Precious metals can hedge against inflation
History has proven that precious metals, especially gold, can preserve purchasing power over long periods of time. When inflation rises, the prices of precious metals tend to increase accordingly. So investors can use precious metals as an inflation hedge in their portfolio. This is particularly useful when central banks engage in stimulus policies that dilute paper currency value. In periods of high inflation or economic uncertainty, precious metals tend to perform strongly, providing a hedge for investors’ purchasing power.
Real estate has inherent value and diversification benefits
Similar to precious metals, real estate has inherent value because people need places to live and work. Especially for commercial real estate located at prime spots, the limited supply helps drive up value over time. For investors with a long-term horizon, quality real estate purchased at a reasonable price can provide stable appreciation. Moreover, the returns of real estate have low correlations with stocks and bonds. Adding appropriate real estate allocation can enhance the diversification of an investment portfolio.
Real estate can provide recurring cash flow
Besides potential appreciation, income-producing real estate can provide recurring cash flow in the form of rental income. Quality properties leased out on long-term contracts can generate stable rental income for investors. The rental yields of real estate are generally higher than bond yields, especially in the current low interest rate environment. Investors can also realize tax advantages from real estate investment. Depreciation deductions lower taxable rental income. Realized capital gains from property sales may be taxed at lower rates. The recurring cash flow and tax benefits make real estate appealing for investors looking for regular income.
In summary, the limited supply, intrinsic value, inflation hedging ability and diversification benefits make precious metals like gold and silver good physical investment choices. Real estate also has inherent value, diversification benefits, recurring cash flow and tax advantages that can meet various investment objectives. For investors interested in physical assets, precious metals and real estate deserve consideration in their portfolio.