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Editor's note: Today you'll find the first essay of a week-long series addressing our readers' No. 1 investment worry: inflation. We've gathered five essays from Porter Stansberry, author of the End of America... Each one will show you a simple, practical step to take to preserve and grow your wealth in an inflationary environment. And we're kicking off with a classic...
Why You Must Buy Gold, or Even Better, Silver, NowBy
Monday, October 22, 2012
Many investors believe gold is a hedge against inflation. And that's true... but that's not the real secret of gold...
The real purpose of gold is to hedge against government hubris.
I won't get into a political analysis today – you get enough of that in the paper and on TV. But surely you can see that around the world, the role of government is at the top of a huge period of expansion...
Around the world, governments have promised their citizens a level of economic security in the form of pensions and health benefits they cannot possibly afford.
Today, not very many people understand the fallacy of these actions... or their inevitable collapse. But... over time... more and more people will begin to doubt the solvency of their governments and the practicality of their schemes.
If the government can't pay its bills... why am I saving its dollars? If I can't depend on the government to protect me and my family, how will I pay for protection... for health care... for energy...?
When people have tangible evidence that something has gone badly wrong with the economy, they begin to hedge against it. They hoard real assets. Rich people hoard gold and silver.
Hedging is like buying life insurance. You don't buy life insurance as an investment, except maybe as a tax strategy... but that goes beyond this metaphor. In general terms, 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...
What you want in a hedge is a lot different than what you want in an investment. With an investment, you need something that is stable, 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.
Why? Because of the gold-to-silver ratio.
Historically, the price of gold has been around 16 times the price of silver. So for example, based on the long-term historical average ratio, with the price of gold around $1,725, the price of silver should be around $108. It's not, of course. It's around $32.
Today then, the silver ratio is more like 54. What explains the difference between hundreds of years of history and today? Simple – demand for silver as money. During periods of history when silver has been used as a currency, it has almost always been valued around 1/16th the price of gold.
When silver has been "demonetized," supplies soar as people sell silver for gold and currency. On the other hand, during periods of monetary crisis, the price of silver tends to increase far more than the price of gold as demand for silver is once again created by monetary needs.
This influences the silver-to-gold ratio heavily in silver's favor. For example, the ratio returned to its historic range (16) during World War I. It happened again in the early 1970s, when Nixon abandoned the gold standard. It also happened most famously in 1979-1980, when gold briefly soared to $800 an ounce and it seemed as if America was really entering a severe money crisis.
Silver is the best hedge against a money crisis because its price will increase many more times than gold as the gold-to-silver ratio reverts to its historic average. Silver will once again be worth 1/16th the price of gold. It is now worth only around 1/54th.
Back in 2006, with gold trading for around $650 an ounce, I set a target at $2,000 an ounce. We're nearly there. A $2,000 gold price divided by the historic silver ratio of 16 sees the price of silver at $125 per ounce – about four times the current price.
Given this perspective, I hope you see why silver's move from around $15 an ounce to over $30 in the last three years is only the very early signs of a money crisis. It's going much, much higher.
Even if you think I'm nuts, it's still a good idea to hedge your portfolio from the currency risks I believe are very real. You can do so easily and safely by taking a position in silver today.
Good investing,
Porter Stansberry
Further Reading:
Dr. David Eifrig is another big believer in silver as a chaos hedge. In August, he showed readers his favorite vehicle to maximize the "insurance" silver offers. It's a simple, easy, low-cost way to diversify outside of conventional investments. And your broker may not even know about it… Get the details here: The Two Things Your Broker Doesn't Know About Silver.
Market NotesNEW HIGHS OF NOTE LAST WEEK
American International Group (AIG)... insurance
W.R. Berkley (WRB)... insurance
Travelers (TRV)... insurance
Allstate (ALL)... insurance
Chubb (CB)... insurance
Berkshire Hathaway (BRK-B)... you guessed it
Loews (L)... the "next Berkshire Hathaway"
Lowe's (LOW)... home improvement
U.S. Home Construction Fund (ITB)... homebuilders
Wyndham Worldwide (WYN)... homes away from home
Constellation Brands (STZ)... booze
IBM (IBM)... blue-chip tech giant
ExxonMobil (XOM)... blue-chip oil giant
Wal-Mart (WMT)... blue-chip retail giant
Pfizer (PFE)... drugmaker
Merck (MRK)... drugmaker
Eli Lilly (LLY)... drugmaker
Johnson & Johnson (JNJ)... drugmaker
Novartis (NVS)... international drugmaker
Sanofi (SNY)... international drugmaker
Abbott Laboratories (ABT)... medical-devices maker
U.S. Financial Stock Fund (XLF)... America's financial backbone
Southern Copper (SCCO)... copper miner
Yamana (AUY)... gold miner
Encana (ECA)... natural gas
NEW LOWS OF NOTE LAST WEEK
LDK Solar (LDK)... solar energy
Permian Basin Royalty Trust (PBT)... natural gas royalty trust
Advanced Micro Devices (AMD)... semiconductors
Annaly Capital Management (NLY)... mortgage REIT
Nordic American Tankers (NAT)... shipping |
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