The chart below from an article at zfacts.com (the entire article is linked below) “How we get out of the great depression II” by Steven Stofts shows how huge government debt has piled up and is still rising in the United States.
This stimulus may get the economy going… but at a cost… inflation. To beat inflation and take advantage of the stimulus, one has to participate in the economy which means own real estate… commodities, equities or have your own business.
The most traditional commodities for beating inflation are gold and silver.
This site recently updated thoughts on gold. Here is an update on silver in the form of an excerpt from a complete silver update recently sent to our multi currency subscribers.
Here is the excerpt: The first question is, “Why invest in silver>” and “Why international silver?”
The next question is “How should we invest in silver?”
Should we invest in silver bars?
Should we invest in silver coins?
Should we invest in a silver business?
Should we invest in silver shares or certificates?
Let’s begin with silver question #1, “Why invest in silver?”
There are three reasons to invest in silver. Silver can be viewed as a hedge (insurance), as a speculation or as a long term investment.
Silver… like all commodities is a hedge against inflation. We should expect inflation. Inflation is the great tear in the fabric of modern society. Millions of us in the western world could have this problem…inflation.
Just not right now.
Looking ahead we can see that for the past 39 years, since the US dollar was unhinged from silver, the buck has been falling in value versus most currencies. Yet the greenback’s demise is not just a symptom of US government ineptitude. As in so many ways, the United States is a leader… doing things bigger and better. In this case the US government is doing bad better, destroying the purchasing power of its currency more magnificently than most governments.
Do not let this reality blind you to the fact that almost all currencies are losing purchasing power!
Politicization of global currencies affects us all.
If we are near retirement age, inflation can slaughter our pensions and turn the golden color of our last years to rust instead.
Younger people, raising their children, have it even worse. Food, clothing shelter…educating the kids, health insurance…taxes not to mention dealing with the stress of an ever faster, more complicated world erode the value of currency.
The really young ones? Who knows what our children and grandchildren face because of inflation?
There are four main solutions to inflation… invest in your own business… invest in equities… invest in real estate or invest in commodities. That’s all there is folks…commerce fights inflation. Commerce is the process of integrating services, natural resources and real estate.
Gold and silver are the two most liquid, monetary commodities and as such good potential inflation fighters.
The first way to invest in silver is as an investment or insurance (or hedge) against inflation… pure and simple.
Modern society needs a central commodity of value used for exchange of goods and services. If barter was the only method of exchange we had, the global economy would contract enormously.
Metals were used as the first currencies of human civilization as malleable, versatile metal gained importance as the component of axes, knives, plows, etc. Bronze became the first universal medium of exchange around 4,000 B.C. The earth’s four most ancient civilizations — India, Egypt, Babylon, and China — have all left records indicating that bronze and copper were used as currencies.
The important point here is that the first currencies did not merely “represent” items of value — they “were” items of value. A small lump of bronze could be melted down and combined with other lumps of bronze to make an axe or sword. People knew how much bronze it took to make such implements, and a lump of pure bronze had definite, universal value.
As time progressed, metals became the medium of exchange in every civilization. Bronze, copper, gold and silver were durable and could be stored for long periods of time without maintenance. They were easily transportable, all qualities required for a commodity to be an efficient currency.
Silver was a base for some of the earliest coinage around 600 B.C. when the Greeks coined silver money stamped with the head of an ox.
If it took man many millennia to learn how to create effective money, governments took far less time to learn how to debase it. History is filled with stories of governments destroying its currency.
The Greeks were responsible for introducing one of the first forms of debasement. They invented gold or silver plated base metal coins.
Rome improved on this plating idea allowing its mints to produce one plated coin out of every seven coins produced. Within a few years, the value of Roman money fluctuated so violently that it was difficult to determine how much anything cost. In fact, this was such a problem that the word gratitude comes from the name of a Roman “Gratidianus” who helped restored the value of Roman currency. He became a hero and people gave him enormous gratitude for this. This story shows how deeply the value of money affects the common person and society as a whole. People crave stability.
The maintenance of monetary value is vital in our modern society but because severe fluctuations of currency values do not often result in widespread loss of life we do not notice the steady erosion of purchasing power.
But money allows specialization, the ability to trade and this is a major foundation of a modern society. When an economy’s currency (medium of exchange) is weak, the economy is at risk. History shows trade to be an essential factor of advanced society. History also shows that stable money is essential to trade. We can conclude that currency stability is essential to society.
However history also shows that there has never been a time when all currencies were stable. There are rarely times when any currency is stable for long. In economic terms, man’s whole story can be told in terms of many currencies and their continual rise and fall.
The US perfected this system of debasing its money and US coins have lacked any gold or silver, or metal of any value for years.
The current version of the quarter is nickel plated copper. Before 1965, quarters contained 90% silver, 10% copper.
The dime’s composition was 90 percent silver and 10 percent copper until 1966. Beginning in 1965, dimes also began to be minted with a clad composition of cupronickel; this composition is still in use today.
In 1962, the metal composition of pennies was 95 percent copper and 5 percent zinc until 1982, when the composition was changed to 97.5 percent zinc and 2.5 percent copper (copper-plated zinc).
Merri and I continually focus on three solutions to this problem of a dissolving currency. One step we take is to continually improve our ability to serve. One is to invest in real estate in Smalltown USA and Ecuador. One is multi currency investing and we view gold and silver is one form of international currency.
This leads us to the question should we invest in silver as a hedge against inflation?
The charts from www.Kitco.com must give us pause and suggest that silver is not a good hedge against inflation. Here is silver’s price movement from 1792 to 2000. Yes, silver was a hedge against inflation… IF… you held it for 180 years and ignored (and did not buy during) the 1970’s spike.
Here is silver’s rise from 2000 until now.
Silver only looks like an inflation hedge only if you view the graph from 2004.
Going back a century… gold looks like a better hedge against inflation. Turning to www.Kitco.com again, here is gold’s price from 1883 to 1999.
The chart from 2000 to date shows gold effectively advancing with inflation.
This history suggests that gold is a much more effective hedge against inflation than silver.
The charts above and the 2009 silver chart from Kitco.com shows that the price of silver is volatile. Volatility can create profits for a trader.
This silver volatility leads us to Question #2: Is silver a good speculative investment?
With silver hitting $18 an ounce and gold having passed $1000 an ounce many investment gurus suggest there may be a great leap in the price of silver.
Yet right now the economy is in a deflationary mode. This deflation may be short term, but one must question how long silver’s price will rise.
Since 2003 there have been six strong silver price rises. Each lasted seven to 12 months before the price dropped dramatically or entered a dangerous period of sideways motion. The average upwards period was 8.8 months and this price run that last broke in October has lasted eleven months.
This suggests that the current downturn is the beginning of a strong correction or a period of sideways motion.
Silver’s price is more volatile than gold’s price. The global economy is seeing a downturn. Silver is more affected by industrial activity than gold, and silver has enjoyed a strong run up. These are all downwards pressures on the price of silver now.
Speculators may be selling rather than buying silver right now. Plus professional speculators know to never risk more than they can afford to lose.
Chartists note that silver price movements tend to lag gold in the early months of a major price advance and then suddenly sprint ahead, bringing down the gold-to-silver price ratio. A gold to silver price ratio chart at www.gold-eagle.com/charts/gegsr.html
The current gold to silver price ratio suggests an upwards pressure as it stands at around 64 today compared with its long-run average of 15. This leaves considerable room for a closing of the gap between the gold and silver price. Owning silver therefore adds a bit of leverage over the gold price but as we have seen with a lot of downside risk.
Most of the analysis above suggests that silver is not a good long term investment. Instead it is a speculative medium. One way to spot when to speculate is when the Gold-Silver ratio rises.
A November 3, 2009 article “Gold to silver ratio jumps higher to 63.92” at Commodityonline.com says: Silver is showing as a large down week at current 16.29. The price action is bearish with support not seen until 15.75. We believe significant liquidation will take place on a break of 15.75. The Gold Silver ratio has seen a major jump higher this week to 63.92 from last week’s close of 59.79. Support is now at former highs 62.02 with next resistance at 65.16 (50% Fibo of 71.91 to 58.41 down leg).
The next question is how to invest in silver?
You can read the balance of this silver update, which explains why silver investments do not look like the best inflation hedge and why personally, I choose gold, by subscribing to our multi currency course.
Tomorrow’s message looks to the most profitable way to deal in silver… to have a silver business…perhaps in Ecuador.
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