"A long-term believer in gold, is inherently a misanthrope." - Joe Weisenthal
Those who believe in the value of precious metals have heard comments of this ilk plenty. When paper assets are at their height, it is commonly bandied about that "gold bugs" are misanthropic, stodgy pessimists who wish to profit from any lapse in the glory of capitalistic progress.
I tend to think of it a bit differently. In my purview, markets can behave irrationally, sometimes for years on end, and the intelligent investor seeks undervalued assets wherever they may be found.
To this end, let's take a look at the inherent value of precious metals as an asset class, the current pricing disparity of silver, as well as the investing climate today (NB: This deals primarily with silver and secondarily with gold, leaving the discussion of alternative precious metals to others).
Why do silver and gold have any value at all?
The inherent value of precious metals is heavily debated. As with any asset, the value is tied to its objective usefulness and the law of supply and demand. The most-accepted notion is that gold and silvers are the objective holders of value versus fiat currency. This stems from their historical use as currency.
Gold.org puts the earliest use of gold as currency at 550 B.C. In more modern times until 1971 the U.S. dollar was backed with a fixed value to gold for foreign investors. Since Nixon put the kibosh on that, how can gold be an objective holder of value in relation to currency?
To answer this question, it's important to look at what a currency truly is. Looking at the currencies around the world today, the oldest fiat currency is the U.K.'s pound sterling. Those with their savings in sterling took quite the hit after Brexit was announced, as it fell all the way to the 1.19s at one point against the U.S. dollar. Pretty hefty hit, right. Funny thing is, this is nothing compared to the ravages of inflation. Consider the value lost during the pound's existence as reported by a study sponsored by the U.K. House of Commons:
The ravages of time have eroded away 99.5% of sterling's value.
But of course that's the pound. If you think the U.S dollar is safe, check some inflation calculators online to see how much less your money will be worth in twenty or thirty years. I did so here for my own purposes:
That's a huge hit on my retirement. Gold and silver have remained valuable commodities for millennia, and inflation buoys their prices, making them true holders of objective value.
Why Precious Metals Beg Consideration
The 4 reasons I would offer for silver as a strong buy are:
-Track record of value holding
-Current price disparity of gold to silver
-Premium pricing of other asset classes
Hopefully my equities will comfortably outpace inflation. A fundamental tenant of all investing, however, is diversification. An allocation of bonds is highly encouraged by the vast majority of advisors, but precious metals seem to get lost in the shuffle. Why?
The short answer I'd offer is that they have no yield. Treasury bonds are oft considered the safe haven asset of choice, as one can still collect yield when their prices are low. In the current investing climate, I would discount this strategy, but I will speak to that in a bit.
When things go south (see the markets yesterday), gold and silver prices spike. This is accepted as the way things are even by avowed critics of precious metals. Most would say equity markets will always rebound on a long enough timeline, but what do you do until then?
As a long-term investor, I firmly believe in not selling low and buying high always. This statement is easy to scoff at; who doesn't believe that? The difficulty is executing according to this principle. When recession hits, and my equities take a dive, those companies hopefully retain favorable prospects upon a recovery in the business climate. What do I do until then to pay the bills, or to snatch up more shares at the most opportune time of all?
I might take a pay cut or even be laid off as a declining business climate puts pressure on all industries. Concerns over the solvency of the underlying issue could depress their prices. Gold and silver are highly liquid, and can be sold quite easily when needed to the most.
So why silver?
The question of gold versus silver is a simple one. They both act as inflation hedges and safe haven assets. The disparity of the price of silver versus gold is what currently makes physical silver a strong buy.
France and the United States had the gold:silver ratio fixed at 15:1 throughout the 1800s when bimetallism was the status quo of currency. From a supply/demand perspective, some posit the supply in the Earth's crust of silver to gold to be around 16:1. The current ratio of gold spot price to silver spot price is over 74:1.
If both the ratio contracts and the equity markets head south, silver stands to make a massive profit. One will counter that markets can remain irrational longer than you can stay solvent, but how can one be insolvent on an asset that has held value for thousands of years and increases in times of market distress?
So what about ETFs that hold precious metals, should one take a look at these? Funds such as the well-known SPDR Gold Trust (NYSEARCA:GLD) or iShares Silver Trust (NYSEARCA:SLV) hold physical reserves, so do they have the same benefits? Forbes writer Olivier Garret has a nice piece showing why physical gold and silver are vastly preferable. Plus why pay a percentage for management fees for something you can obtain and hold discretely. Leveraged funds such as Direxion Daily Junior Gold Miners Index Bull 3X Shares (NYSEARCA:JNUG) or Direxion Daily Gold Miners Index Bull 3X Shares (NYSEARCA:NUGT) are even more worrisome and dangerous.
Investment in gold (and silver even more so, are worthy of very careful consideration). In an investment environment where central banks have flooded monetary reserves, equities are hitting all-time highs, 10 year U.S. Treasury yields barely eclipse 2%, and real estate markets show excesses internationally, take a long look at assets undervalued and unloved. It just makes sense.
"Paper money eventually returns to its intrinsic value, zero." - Voltaire
Disclosure: I/we 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.