The supply of the world’s reserve currency, the dollar, has
been continuously expanded since the world economic crisis began in 2008. Two rounds of quantitative easing and
additional expansionary activities have enlarged the Federal Reserve’s balance
sheet. This monetary inflation has
yet to affect officially reported inflation aggregates but commodity prices
have been steadily rising since the monetary expansion began. In addition to this commodity price
inflation, there is a historical threat of broad latent inflation. Economic history shows us that there is
a delay between initial currency debasement and economy wide price
inflation. With interest rates
guaranteed to remain around zero percent through 2014 and Fed officials
expressing fear of price deflation, it
is likely that the dollar will continue to be debased.
As astute investors know, the future of the Eurozone
is as precarious now as it was last year and the year before. For nearly three years now we have
watched as the peripheral European economies repeatedly approach insolvency only
to be rescued at the last minute by Germany and France. Each rescue package and sovereign
wealth fund promises to produce stability but uncertainty inevitably returns
after a few months. In this environment,
the Euro looks increasingly fragile.
Leaders of the Eurozone are realizing the extent to which the single
currency has resulted in the structural problems currently troubling the
union’s periphery. The political
tension over these structural and monetary problems do not seem to be subsiding
but building. The only thing that
seems certain is the promise of future government bailouts via rescue
packages. These bailouts are
essentially funded by monetary debasement, necessarily lowering the value of
the Euro.
In contrast to these paper currencies, which lose their
value over time due to the expansionary central bank activity, gold and silver have
steadily increased in value since before the crisis even began. Backed by their own intrinsic value,
these metals hold value no matter the economic climate. As an investment class, precious metals
offer investors the certainty that their investment will never fail. There is no more certain or secure
investment in the world than precious metals. This why in times of crisis, investors seek precious metals
as a safe haven asset.
Lately, in response to both global economic uncertainty and
inflationary monetary policy, precious metals have steadily been gaining value relative
to paper currencies. As previously
noted, there is good reason to suspect that expansionary monetary policy will
continue. Consequently, there is
also good reason to expect the long run price of gold and silver to rise.
Gold’s upward trend began following the 2008 crisis as
investors sought to escape other riskier investments. Throughout the crisis gold continued to rise, supported by
its real appreciating value as new money was created to prop up the global
economy. As the global economy continues
to perform poorly, investors see gold as a safe, reliable store of wealth with
the potential for long run gains.
Gold has proven to be a well performing asset during times of central
bank balance sheet expansion. As a
hedge against risk, there is no more secure asset. Gold is the ultimate insurance asset. Investors can invest in physical gold
coins, bullion, shares of gold-based ETFs, and other products. Making gold 5% to 10% of an investment
portfolio can improve its overall performance and serve as a hedge against both
systemic risk and inflation.
Silver shares all of these properties of gold plus one
additional factor relevant to investors.
Unlike gold, silver is an industrial commodity. It is used in consumer
electronics, solar panels, batteries, bactericides, dental alloys, and many
other products. For the last
several years, global industrial demand for silver has outpaced supply. A continuation of this trend, in
addition to the continued debasement of fiat money, could provide a significant
return to silver investors.
Investing in a silver ETF may be the best way to reap the benefits of
the rising value of silver, as ETF shares are more liquid than physical
silver. Moreover, owning ETF
shares does not require a storage premium like owning physical.
Investors interested in investing in gold or silver ETFs
should conduct thorough research before investing. Not all precious metal ETFs are the same. These ETFs can target a variety of
assets and employ numerous strategies.
Some ETFs primarily own physical gold and silver while others emphasize
a futures or leveraged strategy.
Financial advisors can help interested investors find a precious metal
backed ETF that fits with their personal investment goals.
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