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Buying Silver to Hedge Inflation and a Bond Crisis

By: Peter J. Cooper

-- Posted 25 April, 2010 | | Discuss This Article - Comments:

Interest in buying silver as the precious metal best suited to hedging against inflationary government debt levels around the world, and a consequent imminent bond crisis, is growing among investors.

Articles on about investment in gold and silver typically receive ten times more page views than items about investment in UAE stocks, for example. This does not necessarily mean that precious metals are actually the better investment but it does say a lot about investor sentiment and likely future momentum.

Silver bulls

Besides the bulls have a good case, and are still not leaning on an extreme position to justify buying precious metals. There is none of the top-of-the-market distortions of US economic data as seen in the stock market right now.

If you look rationally at 10 years of rising precious metal prices then the story to date has been one of slow but sure growth, leaving gold prices four times higher and the actually the best performing asset class of the past decade, apart from silver which is up six-fold, albeit with far greater volatility along the way.

There is no 80 per cent price spike in the past 13 months like US stocks. When markets spike it is almost always the time to get out. Gold and silver just are not there yet or even close to it. Indeed, the fundamental drivers of gold and especially silver prices are still in place.

Consider inflation, is it really under control? In the UK inflation is running at around 3.5 per cent against GDP growth of 0.4 per cent, so in real terms the economy is contracting by three per cent. Then again we hear reports of 20 per cent salary hikes in Chinese coastal cities and a bubble in Chinese house prices.

US stock market and silver

And surely the biggest forward predictor of inflation has to be the surging US stock market. Share prices are being pushed up by a monetary bubble with very little real evidence to support a strong economic recovery (see previous article). Once this bubble pops, up will go bond prices again, but for how long can that last?

Not for long surely if the laws of supply and demand mean anything. All over the world governments face mounting deficits due to their bailout packages and a shortfall in taxation from the worst recession since the Second World War. This means a gigantic government borrowing program is in progress.

We know this much for a fact and do not have to speculate. Now what normally comes with increased government borrowing? Higher inflation is the answer. This slowly, or not so slowly, devalues the debt burden of high bond issuance over time. The bond owners get a haircut to pay for government excesses.

Higher interest rates lower bond prices

Of course, what happens is that bond buyers wise up and demand higher and higher rates of interest to fund government debt. So you end up like in the late 1970s with high interest rates and high inflation. That also means lower bond prices as interest rates rise.

So you get a lot more buyers for gold and silver which are very tight markets on the supply side. In the late 1970s the gold price rose eight-fold from 1976-1980, and silver rose a staggering 25-fold. Silver is in shorter supply than gold, and so does better as prices take off.

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

-- Posted 25 April, 2010 | | Discuss This Article - Comments:

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