By John Fisher
In light of the continued dollar devaluation – with more to come after the U.S. government bailouts, a doubling of the annual deficit, new spending programs, money supply growth and political shenanigans – the prices of gold and silver are getting ready to take off again.
When people have tangible evidence that something has gone badly wrong with the economy, they begin to hedge against it. They hoard real assets. Those with discretionary capital hoard gold and silver.
Hedging is like buying life insurance. You buy insurance so that if something terrible happens your family will have something to live on. Likewise, you should have some exposure to gold and silver in your portfolio. And no, it’s not too late to buy some – far from it. This bull market is only getting started!
How can I say that with gold trading around $1,100 per ounce? Take an informal survey of your relatives, neighbors, friends and co-workers. Ask how many have bought even a modest amount of gold or silver in the last 2-3 years. Experts report that only about 3% of those with investable assets have purchased physical gold and silver.
There is a tremendous amount of capital on the sidelines, as well as invested in bonds and other instruments. Should even a small portion of that begin to flow into the metal, watch out. And remember, precious metals are desired globally, not just on the NYSE and the NASDAQ. Only us and a few others own any appreciable amount of metal. See my article entitled “Modern Day Alchemy” to see why GLD, SLV and others don’t qualify.
What you want in a hedge is a lot different than what you want in an investment. With an investment, you need something that’s stable, which hopefully provides a yield, and isn’t going to drive you crazy with volatility. Silver is none of these things. But it is a perfect hedge, because, when things go wrong economically – when there’s a crisis – the price of silver goes bananas. You must have silver exposure and when you start to buy, you should start with silver.
Why? Because of the silver-to-gold ratio.
Historically, when demand for silver soars because of a monetary crisis, the price rises until it’s roughly equal to 16 times the price of gold. As a result, the price of silver tends to move far more than the price of gold during a monetary crisis. Today, gold trades for around $1,100 an ounce. Dividing $1,100 by 16 shows the price of silver would be $68.75 an ounce. But today, silver still trades around $16.00
Said another way, silver is the best hedge against a monetary crisis because its price will increase many more times than gold as the silver-to-gold ratio reverts to its historic average. Silver will once again be worth 1/16th the price of gold. Said yet another way, it will only take 16 ounces of silver to buy an ounce of gold. Today it is now worth only about 1/69th the price of gold.
Make sure you own a substantial amount of gold and silver. Of your net worth, I would recommend at least a 5% position in gold and a 10% position in silver. In today’s climate, I would carefully and thoughtfully consider allocating a significantly larger part of your portfolio. If you are contemplating a much larger percentage, I would like to visit with you first. It is paramount that you would own the right type, form and allocation of metal to afford the lowest possible cost and the highest liquidity.
Actions to take now: Continue to accumulate in modest amount on a regular basis. NO NOT ATTEMPT TO PICK A BOTTOM. It might work occasionally, but you will be wrong more often than not. I continue to buy personally – I’m not at all worried about the prices levels today. In fact, I firmly believe we will look back in as little as a year and wish we had loaded up.
What to buy now: Weight in favor of silver. Purchase the lowest premium items, barring extenuating circumstances. Purchase silver over gold on a 2/3 to 1/3 ratio. I have come across some tremendous deals on old silver coinage and silver bars (ingots).
Thought of the day: Do not buy high premium items, unless you are a collector. This includes Silver American Eagles and Silver Canadian Maple Leafs. You will not recoup all the excess premium you paid. Remember this: In a metals bull market, all premium on gold and silver reverts to zero. Don’t buy the stories about how this coin or that is going to outperform. It’s a sales ploy to substantially increase profit margins. Maybe in some short-term time frame only they will outperform, but never in the long term. Plain old gold and silver, just like meat and potatoes.
Now, pick up some more silver and stick to your knitting.
