Gold And Silver - Financial Body Armor For Your Portfolio Against Inflation

Includes: GDX, GDXJ, SIVR, UGL
by: Austin Craig

Gold and Silver... consider these precious metals kin to an insurance policy written not for a future car wreck, but rather insuring you against future financial calamities - perhaps as financial body armor for your investment accounts. Today's economy is certainly volatile, chock full of uncertainty and unpredictable events. When times get tough, the metals offer you protection against mayhem.

Consider events challenging our financial markets (which cause gold and silver to appreciate in value); how much to hold of the metals; where to buy them; and in what form (Physical, Stocks, ETFs).

This article is not to come off as alarmist, but rather to provide guidance on real issues affecting today's investors. Think of it as: Metals against Mayhem.

Catalysts for the Rise of Gold and Silver

When we look at the overall picture of issues facing our 2012 economy, we can picture economic forces and pressure much like tectonic plates - slow in their transitioning, but stoked by underlying tremendous pressure that mounts until an economic earthquake arises.


Notice the price of food and fuel creeping up the past few years? That is inflation working its magic. Unfortunately, the inflation numbers cooked up by the government vastly under-report true inflation by using a method referred to as Core Inflation. It paints a pretty deceptive picture. The bad news is that inflation directly attacks the purchasing power of the dollar. By misreporting inflation, the government can keep the interest rates low in an attempt to maintain economic growth. (People can borrow money for homes and cars at lower interest rates). However, people still notice the effect of inflation when reviewing their grocery bills or buying consumer products.

If the government were to raise interest rates to halt inflation, it would put the brakes on an already-morbid economy and paralyze the weak housing sector. Let's review just how the numbers are calculated: A great explanation is found here.

Core inflation is most often calculated by taking the Consumer Price Index (CPI) and excluding certain items from the index, usually energy and food products. Other methods of calculation include the "outliers" method, which removes the products that have had the largest price changes. Core inflation is thought to be an indicator of underlying long-term inflation.

Wow! How convenient is that? Just:

1. Remove the very things that are inflating the worst (food and fuel);

2. Remove any items that have had large price changes;

3. Assign different 'weights' to items to affect the outcome; and

4. Use substitute items in place of items inflating quickly.

Williams points out that one of (Federal Reserve Chairman) Greenspan's manipulations of the CPI involved the consideration that when steak got too expensive the consumer would substitute hamburger for the steak. Greenspan thus argued the inflation measure should reflect the costs of buying hamburger rather than steak.

"Of course, replacing hamburger for steak in the calculations would reduce the inflation rate," Williams commented, "but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival."

Gold and silver are a natural refuge against inflation. As inflation increases (in rising food prices, etc., or as reported in the government numbers), the prices of gold and silver rise accordingly.

National Debt - The national debt is 16.1 trillion dollars and growing.

(National Debt 1940-2011)Click to enlarge

The deficit (government spending vs. income) has been ranging between 1.2 to 1.8 trillion annually since 2008. As inflation and government spending rise, it creates pressure on the dollar and simultaneously empowers gold's and silver's escalating prices.

Click to enlarge

(Deficit by year) 10/1/2000 to 9/1/2012

Other factors that affect prices are: quantitative easing 3 (aka QE Infinity covered here and here), and high unemployment numbers,

Growing Industrial Use

Silver has many industrial uses: Batteries, Bearings, Electronics, Catalysts, Automotive, Brazing and Soldering. Gold is used in the: Automotive, Electronics, Medicine, Nanotechnology, Space, and Engineering sectors.

Silver, also a considerable part of solar power, is an alternate energy source which is growing quickly domestically. According to Casey Research, "A typical solar panel uses a fair amount of the (silver) metal - roughly two-thirds of an ounce (20 grams)."

Just since 2000, the amount of silver consumed by solar-panel makers has risen an average of 50% per year. Demand grew from one million ounces in 2002 to 60 million ounces in 2011.

Click to enlarge

Ways to Invest in Gold and Silver

We suggest that 10% of investment assets be held in the metals. There are a variety of ways to own metals and fulfill a solid hedge against a downturn in the economy. Owning actual physical bars or coins offers the ultimate form of safety.

Gold and Silver Eagles or Canadian Maples provide a very convenient way to build a position. Merit Financial offers very competitive rates for gold and silver purchases.

The only downside to holding gold and silver is that you have to store the metals in a secure location. If this is a problem for you, you may consider investing in a Gold ETF like the SPDR Gold Trust (NYSEARCA:GLD) or ProShares Ultra Gold (NYSEARCA:UGL).

If the white metal is your vice, then iShares Silver Trust (NYSEARCA:SLV) or Physical Silver Shares (NYSEARCA:SIVR) would be a good choice to capitalize on the bright metal while maintaining liquidity through the stock market.

A third option would be to invest in a Miner ETF such as Market Vectors Junior Gold Miners (NYSEARCA:GDXJ) or Market Vectors Gold Miners ETF (NYSEARCA:GDX).


No matter which road you elect to travel down with the metals, it is sage advice to hedge your bets to expect the unexpected. The metals provide a degree of safety and act as foundation to your portfolio while offering a sound sleep through inflationary and turbulent market times.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own physical Silver.