Investors increasingly have been putting their wealth into precious metals to preserve their wealth amidst global economic uncertainty. Among the precious metals investors have taken an interest in are gold, silver, platinum and palladium.
Global Economic Uncertainty
Western banks, and in particular European banks, were heavily invested into real estate during the real estate boom, and, due to the collapse of global real estate markets, have faced significant losses. In Europe, governments have been running up huge deficits, and, while the deficits were tolerable during times of economic growth and rising real estate prices, they are now facing a credit crunch and rising interest rates due to the perceived risks in the financial markets. Facing massive deflationary pressures, Western central banks have been printing unprecedented amounts of money to keep asset prices inflated and stimulate economies.
Though in the short term the central banks have succeeded in preventing another Great Depression, with soup lines and massive civil unrest, they are creating persistently high inflation, as reflected in the increasing prices of commodities, such as food and fuel. They also risk igniting hyperinflation, which is an extremely high rate of inflation, by encouraging the abandonment of their currencies by other nations due to their continued debasement. Facing the loss of their purchasing power by inflation, and concerned about the risks of hyperinflation, investors have flocked to precious metals to preserve their wealth.
Gold Once Again Recognized As Money
For thousands of years, gold has been recognized as money due to its rarity, durability, divisibility and fungibility. Because gold was rare and difficult to extract from the earth, governments were limited in the amount they could spend. Since the supply of gold increased modestly from year to year, prices for goods and services were generally stable. Gold has also commonly been used to make jewelry due to its bright yellow luster.
In 1971, President Richard Nixon took the United States completely off the gold standard, which meant that other nations could not convert their dollars for a fixed amount of gold. The dollar began to float freely against other currencies, based on supply and demand. Unrestrained in its ability to create money to finance American deficits, the Federal Reserve began to print massive amounts of money, thus devaluing the dollar in a manner that most Americans did not obviously perceive. With economic growth following the abandonment of the gold standard due to credit expansion, many people began to see gold as a relic of ancient times and no longer as money. However, with the credit expansion nearing its limit, investors are beginning to recognize that the deficits are unsustainable and that money printing is not a viable long-term solution. Gold, by contrast, continues to gain value relative to paper dollars, since it cannot be inflated at will by spendthrift bureaucrats.
In the last several years, given the systemic risks to the financial markets from money printing, the central banks have been net buyers of gold. In particular, Russia and China, both of which are emerging economies, have been buying massive amounts of gold, and China, the largest producer of gold, will not allow the exportation of its gold. Central banks are therefore building their gold stocks to hedge against the risk of hyperinflation. If the values of paper currencies are to collapse, nations with gold reserves will preserve their wealth placed into gold.
Recently, Germany has demanded that hundreds of tons of its gold be repatriated from the United States and France. Other nations, such as Switzerland, are now considering repatriating their gold, given concerns that their gold has been sold or leased due to financial malfeasance. If all nations are to claim their gold simultaneously, there may not be enough gold to satisfy all claims, thus causing the gold price to move much higher.
Small investors who have been buying gold have generally done well, since gold has risen in value for 12 consecutive years. With unrelenting money printing by central banks, the value of gold will likely continue to rise for the next few years. Small investors who are purchasing gold will be able to preserve their wealth much better than others if hyperinflation is to arise.
Investing in Silver
Silver has similar properties to gold, in that it is rare, durable, divisible and fungible. Increasingly, it has been used as an industrial metal due to being the most electrically conducive metal in existence. Due to its bright white luster, silver has been frequently used in making jewelry. Historically, the gold to silver ratio has been about 15:1, meaning an ounce of gold has been 15 times more valuable than an ounce of silver. Because the ratio is currently at 55:1, many investors believe that silver has better potential than gold as an investment.
Silver has been used as money even more than gold throughout history, because it was cheaper and thus more affordable for the masses. Up until 1965, American dimes, quarters and half dollars were made of 90 percent silver. Thus, virtually every American used silver to purchase goods and services until the Sixties. In Spanish, “plata,” or silver, literally means money. That silver has been demonetized and no longer seen as a monetary metal in recent decades is an indirect consequence of America’s abandonment of the gold standard. As gold begins to regain recognition as money, silver will also regain its status as a precious metal and a form of money for the common people.
Like gold, silver has increased in value for 12 consecutive years. However, silver is a much more volatile metal than gold, which means it swings higher and lower based on trends in the commodities market. Therefore, conservative investors should consider diversifying their purchases of silver with gold to reduce the volatility of their assets. However, investors who are more tolerant of volatility may prefer to allocate a larger percentage of their wealth into silver.
Investing in Platinum and Palladium
Platinum and palladium are alternative precious metals to invest in for those seeking to further diversify their precious metals investments. Both are very rare metals used primarily in the making of catalytic converters for automobiles, though have other industrial uses and are used in making jewelry. Both platinum and palladium have performed relatively well since the commodities bull market began in 2000. Because platinum and palladium are primarily industrial metals, they tend to perform better than gold during economically prosperous times, whereas during times of economic uncertainty gold tends to perform better. However, with declining production of platinum since 2006 and increasing global demand for both metals, coming largely from emerging economies, some investors believe both metals will perform well despite global economic uncertainty.
Over 90 percent of the world’s platinum and 80 percent of the world’s palladium is mined in South Africa, Russia and Zimbabwe. Thus, political instability in any of these countries threatens the global supply of these metals. Last year, violent strikes in South Africa involving workers of the largest primary producer of platinum in the world, Anglo American Platinum, contributed to lower than expected platinum production. If the global supply of these metals is decreased due to continued strikes, nationalization or other forms of political instability, then their values will appreciate due to growing global demand.
Precious metals are an excellent store of value in a time of continuous debasement of paper currencies. Because the values of precious metals move inversely to depreciating paper currencies, they preserve the wealth of investors who are concerned about the monetary policies of central banks. Investors can choose to invest in gold, silver, platinum or palladium, or some combination of the above metals, for both financial gain and peace of mind.