Monday, March 05, 2007

Are metals still the right choice?

As I understand it the recent downward pressure on gold and silver is due to the liquidation of assets by fund managers needing to cover margins after the recent stock market fall. Will this continue? I don’t know. Yes there are going to be more sell offs of stocks as the U.S. economy slumps what we don’t know is where this money will go if stocks are seen as unsafe.

Will they plough it into bonds that have a lower return than the real inflation rate?

Will they sit in cash until the dust clears hoping devaluation does not strip them of even more buying power while they wait?

Will millions of people start behaving like Chinese investors after getting burned on stocks and go back to their olds ways of storing wealth in gold and silver?

Will more countries like South Africa start adding to their gold reserves?

Will the deflationists be correct and the U.S. dollar will gain in value lowering all commodity values including metals?

Will more funds like the recently announced Artemis Hedge fund sink 300 million into silver investing?

I’ve read inflationists who believe in metals and some who do not, I’ve also read deflationists who believe in metals and those who do not, it really is a leap in faith which ever way you go. My brain hurts sometime just trying to analyse all these views and rationalize my beliefs. It comes down to several basics.

There is no free lunch; U.S. government debt is out of control and unsustainable.

The markets do not have infinite patience; at some point the markets will stop funding U.S. debt addiction.

The ability of banks and governments to create money from the thin air is irrational and destructive to the value of previously existing money; this is evil and irresponsible and may well lead to a monetary crisis.

Metals have always had some value through out mankind’s history of commerce. The key is timing when to get in and out of this market with your investment money, and knowing never to leave the market with your emergency money.

Over time all fiat money loses value and eventually fail. The recorded loss of buying power of the U.S. dollar since the creation of the Federal Reserve and the quicker loss since the decoupling from gold shows us that fiat money is weak and unsustainable.

Even in the last few decades numerous fiat currencies have failed. Those who had a small portion of their net worth in metals ahead of time faired well, some simply offset their paper losses and maintained their way of life, others made out like thieves greatly increasing their wealth.

Diversification is a concept most financial advisors will talk about but they tell you stocks, bonds, t-bills, etc are diversification because they sell them. I say they are not; they are paper promises subject to default, debasement, and mismanagement. I don’t say you should not have any of these but to be fully diversified means also having real physical assets that cannot be destroyed or counterfeited such as land and metals.

If any of these points make sense to you, then you know your decision to buy metals was a reasonable move to protect yourself.

So will metals fall more? Maybe, but in the long run they represent an opportunity to safeguard you should something catastrophic happen to the dollar. Silver supply is still in a deficit situation and will be so for up to 10 years, these corrections are opportunities to buy more and take major profits when silver supply reaches a critical shortage even without a monetary crisis.

Do I get nervous on the drops? Hell yes! Do I sell? No, I go out buy another 100oz leap of faith and increase my holdings. I don’t spend money I can’t afford to, I don’t borrow, and I don’t worry. I could always take up making jewellery or anti werewolf bullets.

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