Buy Silver, Platinum, And Palladium To Hedge Inflation

Includes: GLD, PALL, PPLT, SLV
by: Trending Value


Gold is overpriced compared to historical valuations against other precious metals.

Platinum and Palladium are historically cheap.

Silver is cheap enough and comes with robust demand.

Buying the cheapest metals should provide the best inflation hedge.

Diversifying your precious metal holdings will reduce some of the risk.

Many governments across the world are in excessive debt. Everyone is worried money printing in the form of quantitative easing will be the only solution.

Even now, with deflationary pressures all across the world, it seems the solution for all governments is to devalue their currency to increase exports. With the exception of the British Pound, every major currency in the world has devalued against the U.S. Dollar this year. This has led to deflation within the United States in the form of cheaper imports such as oil, but high inflation outside the United States. This is only temporary, as the United States will eventually have to devalue their currency to compete internationally, fueling the never ending spiral of currency debasement and inflation. Deflation is only temporary; long term inflation will always be the case with fiat no matter which currency you choose to favor.

I am not making a case against fiat. I believe any portfolio should have lots of cash due to its optionality. I am also a proponent of the fiat system, the flexibility it affords governments, and the way it allows currency to expand with increasing populations and growing economies. However, I am making a case to have some precious metals as a contingency should this never ending spiral of currency debasement build too much momentum. This is to make your portfolio more robust to a variety of different scenarios, rather than to predict a high inflation situation. I believe now is an opportune time to buy some precious metals since a more expensive U.S. Dollar has lowered the prices. This opportunity might only be temporary, as the United States will eventually need to devalue its currency as well, both to compete in international trade and to pay off its own debt.

Fortunately, you can easily invest in precious metals by purchasing shares of exchange traded trusts. You get ownership rights to the metals while knowing they are stored securely behind vaults for a small annual fee. You can also purchase the bullion through trusts very near to the market price of the metal. In contrast, if you buy physical bullion directly then you must pay a premium over the metal's market value, which can be as low as 4-5% or as high as 30%, depending on the quantity you buy, which country you buy it in, and the form you buy it such as bar or coin. These higher premiums are a deal killer to me in most cases, as I cannot afford to buy in bulk.

The trusts I'll mention in this article are the following:

  1. SPDR Gold Trust (NYSEARCA:GLD);
  2. iShares Silver Trust (NYSEARCA:SLV);
  3. ETFS Physical Platinum Shares (NYSE:PPLT);
  4. ETFS Physical Palladium Shares (NYSEARCA:PALL).

Gold is obviously the best choice as an inflation hedge. This is due to its long history as a currency as well as its intrinsic demand as a beautiful, ornamental metal. Unfortunately, gold is very expensive right now. It's not as expensive as it was a few years ago in 2012, but it's still very high priced compared to historical standards. I believe at current prices of $1,158 per ounce, gold already accounts for a major currency flight or high inflation scenario. I say this because I can still remember buying an ounce of gold in 2003 at $350 an ounce, which I considered a fair price back then.

There are better options than buying gold at today's prices. These options are silver , platinum , and palladium . All of these metals are relatively inexpensive compared to gold, and all of them are priced significantly below their historic market highs.

Let's take platinum as an example, valued at $1,019 per ounce today. Platinum is currently more than 50% cheaper than its 2007 high, and almost equal to its price in 2005. However, its price in 2005 does not reflect inflation over the last ten years, so today's price is even cheaper than that. Granted, there were some fundamental changes in the industrial demand for platinum, as auto manufacturers began alternating cheaper palladium in place of platinum to make catalytic converters; this effectively lowered the price of platinum and increased the price of palladium. This is why I recommend to own both platinum and palladium, since they can be used interchangeably in some instances, it lowers the risk to have some of both.

This brings me to my next point. It is best to diversify across your metals to reduce the risk of industrial demand falling off for any single one of them. This is why I think holding silver is beneficial to go with platinum and palladium. At approximately $15 per ounce, silver isn't quite as cheap as the other two metals, at least according to historical standards. Its current price is roughly 200% higher than its approximate price in the mid 1990s at around $5 per ounce. Even so, its value in relation to gold is low, as the gold price to silver price ratio is approximately 77 right now, whereas ten to fifteen years ago is hovered around 45.

I believe an admixture of platinum, palladium, and silver is a good way to hedge against inflation, and it is my personal opinion that these three metals combined, at their current market prices, present significantly less risk than holding gold. I think 10-15% of a portfolio allocated to these metals is a reasonable quantity.

Disclosure: I am/we are long SLV, PPLT, PALL.

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: The shares of SLV, PPLT, and PALL represent approximately 15% of my brokerage account portfolio.