Hard Assets in Hard Times

by | Dec 8, 2008 | Multi Currency Investing

Hard assets in hard times do not automatically mean precious metals.

Many multi currency subscribers have be asking about the value of silver and gold.

One reader wrote: Have you heard the quote: “Hard Assets in Hard Times.  What’s your thoughts on the Physical Silver and Gold Markets?”

Currently the global economy is in a tug of war between inflationary and deflationary forces.

During inflation, commodities including hard assets traditionally perform well.

Please see a 2004 article I wrote that shows how silver performs in deflationary times.

During deflation, precious metals are terrible investments.

Gold is not so much an appreciating asset…but a commodity that maintains purchasing power over the long term.   In simple terms when the U.S. dollar falls, the price of gold in dollars goes up…long term.

So if the dollar looks weak, gold can be part of a purchasing power protection plan.

Gold in the long term is real money…inflated currencies are not.

Real money has five values. It is durable, divisible, portable, desirable and rare. Anything that fits these tests can be used as money. Gold as a commodity fits these standards just about best of all and for many years was money.

Portability, however, is gold’s weakest link. Gold weighs a lot!

Paper money (or plastic) fits the first three requirements of money perfectly. It is more durable (through reprinting), more divisible and more portable than gold.

Smart and honest jewelers started storing gold for people and issuing bearer gold certificates. The certificate represented gold in storage and because the jewelers were honest, the certificates were as good as gold. Then governments became involved and issued the certificates. For awhile these certificates were still…as good as gold. Then they backed off a bit and made the certificates redeemable in silver, then they backed off a bit more and linked their currencies to the global reserve currency, the U.S. dollar.

But now the US dollar is broken. For decades it has not been backed by silver or gold, but it was desirable because it bought American goods and shares in American companies and land in the U.S.

However as this U.S. land and U.S. shares have become more and more burdened by government and private debt, the dollar has lost value.

In years past when the U.S. dollar fell, investors fled to fiscal stalwarts-German mark, Japanese yen and Swiss franc because the governments who issued these currencies were financially prudent.

Today there are no currencies that are really safe nor any that are truly backed by gold. Japan and Germany now have high deficits and debt.  The Swiss franc in turn is linked to the Euro because of close trading links. All these currencies have some risk.  The old concept of buy and hold no longer works.

This leaves gold as a main way to preserve purchasing power.   There are three reasons to buy gold.  First, because of the weakening U.S. dollar. Second, because it is trending down and third because of the other currency problems…but timing is everything with gold.   Investors must be able to ride the downswings of gold prices.

One study of gold prices shows that it tends to move in spurts that take place about every 20 years. The spurt in gold last year may have been the big move…the trend has been down all year since, from$1,000 an ounce to $750.

In addition the weak economy will reduce sales of items made from gold and silver. This reduced demand will be a downwards pressure on the price of gold and silver.  This will create good value for long term accumulation of gold but may not provide quick returns.

An interesting short term play that has been developing is in the difference between the price of platinum and gold.

Normally platinum costs more than gold.  Traditionally when platinum sells for less than gold, it is a good idea to sell gold and buy platinum.

This spread is now interesting because platinum historically trades at a premium of 50%  to 100% over gold.

In this recession, there is declining industrial demand.  Gold prices have dropped but nothing like platinum.  Platinum has dropped this year from 2,300 an ounce to below $800!

Gold is in the $770 an ounce range and platinum has recently been as low as $780. The gold platinum spread has almost totally evaporated.

This is an interesting spread trade, buying platinum and shorting gold.

I rarely trade but in this instance may.  Once the economy recovers, the premium should go back to normal levels and create a nice profit.

The main risk in a recession is there could be gold price spikes and platinum demand may stay low. The speculation could lose on both sides,  Be sure you can withstand the potential swings.

I am looking at this with my investment adviser now. Check with yours, to see if this makes sense in your particular circumstance.

When you choose to buy gold, one of the safest, least expensive ways of holding gold is through Perth Mint Precious Metal Certificates. These government guaranteed certificates are as close as you can come to a gold backed currency.

The Perth Mint is operated by Gold Corporation a company created in 1987 by the Western Australian government (which by the way has a AAA credit rating). So you have a fiscally strong government backing your certificate…plus the certificate truly is backed 100% by gold or whatever metals you choose.

You can choose certificates in gold, silver, platinum or palladium. Since the certificates are non negotiable (but transferable) they are not deemed to be accounts and are one of the most private ways (along with overseas real estate-see yesterday’s message) to hold wealth. You can choose allocated or unallocated accounts. Because the certificates are backed by the metals, they can be redeemed at any time, anywhere and in any currency. I especially like the unallocated storage account because there are no storage fees. This creates a huge savings, yet the metal can be delivered (or sold) within ten business days of your instruction.

You can get full details about Perth Mint Precious Metals Certificates (fees-etc.) from Asset Strategies at rcheckan@assetstrategies.com

Good luck in your endeavors to protect your financial future.


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