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2 posts from October 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!)


The End of The Recession? Don’t Be So Sure.


There is little that delights a politician more than being able to state that a recession is over.  But much like trying to identify when a recession starts; it is difficult to determine when one ends.  Because many scales in the economy move in different directions, when one thing gets better, some other things remain stagnant or even get worse.


Everyone’s favorite yardstick is the US stock market.  Indeed the market has its fingers in many pies.  Stocks can be sold for cash or used as collateral for operational loans.  Stocks are where most Americans have sunk most of their retirement savings so when stocks rebound Americans get a bit more confident. In economics “confidence” is a code word for “more spending” and “more spending” means more people need to be hired to paint your nails, sell you a plasma TV and mow your lawn.  The market’s rebound then, offers a little to be excited about.

A little.


The thing to watch in this supposedly-soon-to-be-over-recession is unemployment.  High unemployment is a heavy ax that cuts into that ballooning confidence that an equities rebound creates.  If you don’t have a job you won’t spend much.  Even if you do have a job, high unemployment still scares you because that means there is a dude or a dudette out there who is willing to do your job for $5000 a year less.  So with your job hanging by a string, you hold onto your cash almost as much as your unemployed neighbor.


The message here is keep an eye on your spending and your long term commitments.  Save as much as you can (timeless advice even without a recession around.)