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10/30/2009

The ULTIMATE Inflation Hedge

In the financial world nothing is better than a good old fashion hedge.  Hedges are those financial moves you take just in case, oh I don’t know the market loses 40% of its value in one year.  Hedging usually consists of only limiting your downside risk; not eliminating it altogether.  Rare indeed is the chance to bet on both teams at the same time, but they do exist.  Permit me to outline one.

 

If I were to sum it up in two words I would say “silver coins.”  Silver coins, like all precious metals, are an inflation hedge.  Their price tag increases with inflation in two ways.  One happens because when inflation takes hold, dollars become worth less and less.   It takes more dollars to buy an ounce of silver than it did last month.  So the price rises.  But the value of the silver isn’t really going up; it’s more that the value of the dollar is going down. 

 

The other way silver climbs in price is through good old supply and demand.  When demand goes up prices usually go up, unless the economy can easily resupply the item.  We’re probably mining silver as fast as we can (and if we are not, what are we waiting for?)  So the problem cannot be solved on the supply side.  When people fear inflation (whether they are right or not) they usually try to convert their soon-to-be worth-less dollars into something with “intrinsic value.”  In short they purchase gold and silver.  So silver can provide the double whammy (whatever a whammy is) payoff by offering a return from both greater demand and plummeting dollars. 

 

But gold and real estate can do this as well, so why is silver the ULTIMATE inflation hedge?  It has to do with something that I rarely concern myself with in the investment world: price.  Price, except in a few cases, means almost nothing in the investment world.  What matters is value.  A stock priced at one penny could be a rip off, a $40 million home could be a bargain.  But the current price of silver (again forget for a moment about value) is such that it has a great investment hedge.  The reason? 

 

It can be given as a gift.

 

Say I buy a $15 silver coin right now (www.apmex.com allows modest investors to buy small amounts of coins.)   (No I don’t work for them.  No I’ve never had dinner with the CEO.  No I am not an affiliate.)  If inflation increases then my coin does well for reasons previously stated above.  But suppose it doesn’t?  Suppose the price of the silver coin drops to $10?  Most people would say I have two options:  sell it or hold it and hope it goes back up.  But the silver coin offers a third option.  Give it away.

 

A silver coin is an ideal gift for sons, daughters, graduates, newlyweds, nieces, nephews, anyone really.  If your speculation in silver goes the wrong way you’ve still saved yourself the time and trouble of shopping for a gift.  No need to tell the IRS either since gifts under $13,000 are exempt from reporting.  (And if you are giving your friends gifts over $13,000… let’s be friends!)

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Hi Peter,
I liked your post on the Ultimate Inflation Hedge.
I thought the value was informative, because you are right; gift giving is also a good idea. The friendship part is extremely amusing.
Thanks for your informative posts.
Doris Hullett

Yes, precious metals hold their value - they are true currencies and should be the preferred investment choice. Paper and digital money are money based on faith in the governments and they eventually come back to their original value - which is zero - or the value of the paper used to produce them (or metal if coins). There is no inflation with Silver!

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