It is increasingly difficult to maintain and grow capital in a world of rapidly expanding credit, growing global debt, and low interest rates. There are new challenges facing investors like the war on cash, the fragile yet complex financial system, and a general lack of confidence in once trusted institutions. Precious metals provide the ultimate hedge in that they offer zero counter-party risk. They are a store of wealth and rare.
The fundamentals for holding hard assets such as precious metals (gold, silver, platinum, palladium) are quite simple. There are essentially four fundamentals; currency destruction, inflation, geo-political unrest and supply/demand.
Currency Destruction / Inflation
As currencies are created out of this air their value is eroded and with it our purchasing power. Inflation is nothing more than more money chasing the same amount of goods. When this happens prices rise. So as people lose confidence in a currency or see their purchasing power erode they look for assets that maintain wealth. Gold as a rare commodity has maintained its purchasing power over the long term. Over the last fifteen years while the central banks around the world have created trillions of dollars out of thin air, gold has increased over 300% in US dollars.
In the early 2000’s geo-political unrest was considered no more than the threat of oil supply chains being disrupted. Today it is the fragility of relationships, not just between large trading partners but between governments and citizens. We have seen the Arab Spring, the split in the Ukraine, the Syrian war, the Greek default, Brexit Currency wars etc. Protecting against black swan events like Cyprus’ bail-in or India’s war on cash means having assets outside the banking system that are unencumbered. Hold precious metals as a store of wealth is a way to keep your wealth out of harms way.
There is approximately five billion ounces of gold above ground. A commodity that must be dug out of the earth and refined. Five billion ounces of gold set against trillions of dollars in multiple currencies and debts. There is only one billion ounces of silver used in solar power, batteries, water purification, and anything electronic. With over seven billion people on the planet there is simply not enough silver to go around. Countries like China and Russia are accumulating gold while other countries try desperately to repatriate their gold. In the end there is not enough supply to meet demand. The only way to balance the scale is with significantly higher prices in both metals.
Guildhall believes that hard assets, including precious metals, should have a place in a investor’s portfolio. Hard assets such as gold and silver offer zero counter-party risk. Beyond the security that comes with hard asset ownership, the fundamentals for gold and silver have never been as bullish as they are today. Protection of one’s wealth is paramount in today’s economic environment.
Below are key points to consider for precious metals ownership
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RRSP Eligible Gold and Silver
Physical gold and silver are now eligible for investment within an RRSP, TFSA, and other registered savings accounts. Canadians can now hold precious metals as part of their retirement portfolio. To learn more click here.
Ways to Invest
Not sure how to buy silver or gold? Some investors wish to own precious metals in a registered account. Others may look to store their silver in a depository. You may wish to simply buy gold or silver and take it home. Learn and explore the ways to invest in precious metals with Guildhall Wealth.
Four Fundamentals that are key to consider are:
Increases in debt and monetary stimulus will ultimately lead to a devaluing of currency values.
Inflation risk based on the increasing money supply.
Geo-politics and political unrest throughout the world as a result of monetary policies.
Continued diminishing supply of physical gold and silver, coupled with an ever-increasing demand.
Central Bank Monetary Policy
Many governments and central banks are continuing to pursue a policy of growing deficits and monetary stimulus. For example, the Federal Reserve has added over four trillion to its balance sheet in recent years, and its Quantitative Easing program added as much as 85 billion a month to the market at its peak. Even with tapering, there is mixed consensus on slowing the rate of asset purchases and reducing the size of the Fed balance sheet. There are several effects from the Fed’s monetary policy. First, the economic growth slows considerably once gross government debt reaches 90-100 per cent of GDP. Secondly, high levels of private debt to GDP have also slowed growth. In addition, the Fed has relied on the economic expansion to create prosperity, which has not occurred or is paper wealth only. Even the current tapering is only slowing the increasing debt.
The U.S. national debt has increased above $17 trillion for the first time in history as the debt increases. This dictates an ongoing slide in the purchasing power of fiat currencies and rise in the purchasing power of real assets and particularly monetary metals such as gold and silver.
Long Term Inflation
The Fed’s much discussed “exit strategy” will remain difficult to attain because the Fed’s strategy of asset purchases keeps interest rates low. The artificial suppression of interest rates hinders productive economic activity by distorting price indicators and misusing capital. The longer these Fed policies remain in force, the greater the potential disruption to financial markets when policies change. Unforeseen events are the most likely to create the movement to change. (Please see John Williams of ShadowStats.com for more on the subject of inflation and the true rate of inflation).
Courtesy of ShadowStats.com
Geo Political Instability
There is a repetitive wave of geopolitical instability in the form of regime overthrow, regional instability from economic fallout, poorly diversified countries, and even war. Looking back, the 1970s Russia and Afghanistan war, and the Iran Hostage situation were major geopolitical threats. Today we have Syria, Iran and North Korea as both new and potentially larger threats.
In the past several years, geopolitical instability has expanded to include geopolitical positioning. Entire nations and geographical regions have come to identify with assets such as gold and silver, and their central banks change policy to acquire, in a net sense, as much as they can.
This has generally been the case now with many central bank buyers of gold since at least 2009. China has been brazen in their acquisition of gold. So too has Russia and India. Look to countries like Iran, Germany, Venezuela and many others for more insight on the topic of central bank buying and the repatriation of gold by countries.
Physical Supply and Demand
Demand for gold and silver investments free of counterparty risk will be driven by the realization that paper bullion is not a secure investment and subject to manipulation by speculation.
Asian and Indian demand for physical gold and silver continues in complete contrast to liquidation by Western investors over the past few years. Asian premiums for bullion continue to remain high.
The cost of mining has not diminished in recent years as mining stock prices have become depressed. The current low prices in both gold and silver have created shutdowns in many mines and further exploration, as the gold price is currently lower than gold production. The result being that mine supply is expected to decline over the next few years.
Time to Buy Precious Metals
More and more investors are beginning to believe and agree with these fundamentals are much more likely to move money into physical precious metals, as there's no other alternative from the increasing uncertainty and excesses of our financial and economic system. The bail-in crisis in Cyprus has shown that money in a bank account is not safe and yet this does not even take inflation into account.
Global fiscal and monetary policies have been directly and indirectly subsidizing asset values, and this will end possibly with greater consequences than we can imagine. Those who want to maintain the current economic system may try to continue to create the impression that markets are stable so that the majority of investors continue to feel comfortable with their investments in stocks and bonds. But gold, silver and other precious metals prices will not remain low for long; the fundamentals will cause gold and silver and other precious metals to appreciate.
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