Risk vs. Reward
Risk vs. Reward
Climb a mountain, expect a view. Throw a Hail Mary, expect a touchdown. Sink money into the stock market, expect a decent return.
Reward for risk has always been the bedrock for investment. Today, however, the reward is slim. Stocks are volatile. The global economic downturn has pushed interest rates to rock bottom or into the red. Bonds and U.S. Treasuries, the traditional haven for risk, offer low returns.
So what to do?
Investors should cut risk by placing money in precious metals, because markets can no longer offer double-digit gains in a zero interest-rate environment. Gold, which has risen more than 25% this year, is the reward.
Low interest rates around the world have undercut the very basis of our credit-based financial system. For nearly a decade, low yields have become the norm, earnings scarce. Stocks are a question mark. Bonds now bottom feed given the Fed’s low-interest rate policy.
We may soon see negative or low yields start getting exchanged for gold or cash. This is when the global financial system begins to teeter. This is where credit, vital to the global economy, begins to sputter.
Low interest rates not only affect the global economy. They damage investors, and millions of retirees’ nest eggs. They harm overall growth.
“Low interest rates may raise asset prices, but they destroy savings and liability based business models in the process,” said Bill Gross, a portfolio manager at Janus Capital. “Banks, insurance companies, pension funds and Mom and Pop on Main Street are stripped of their ability to pay for future debts and retirement benefits.”
Central banks seem clueless to the damage caused by low interest rates. If they continue, the economy will stagnate, investment spending will stop. This will create a funnel cloud of no returns — and no growth.
Banks also employ the risk versus rewards. But company growth is often not considered worthy of investment, or risk. So companies aren’t spending.
Now the banking system has hoarded piles of cash, but at the current rates aren’t lending. Credit is what lubes the economic system. It’s what fuels growth.
In the absence of credit creation, financial assets such as stocks, bonds and Treasuries begin to lose their luster, while real assets such as gold become more desirable. When it comes to risk versus rewards, central banks have increased their metals holdings. And smart investors now buy gold and silver.
One Percent Finance recommends long-term investment planning through diversification with precious metals. Click here To learn more about precious metals IRA’s.
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