суббота, 24 марта 2012 г.

Precious Metals


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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