Investing in Silver as an Inflation Hedge

At first glance, gold might not seem to be that great of an inflation hedge these days. After moving above $2,000 an ounce in March, the precious metal has lost ground even as consumer prices have risen at their highest pace since the 1980s.

Despite its short-term weakness, digging a little deeper shows why gold, an element that has transfixed humankind for thousands of years, can serve as a strong store of value over the long run.

“Gold has proved, over hundreds and even thousands of years, to be a reliable store of value,” says Fergus Hodgson, director of Econ Americas, a financial consulting firm. “In other words, whatever events happen, gold has a robust value that stays relatively consistent over time in terms of its purchasing power.” Why has the price of gold fallen recently?

Demand for gold.

Gold price history.

How to invest in gold.

Gold stocks and mining ETFs.

Bitcoin vs. gold.

Is gold a good inflation hedge?

Is investing in gold a good idea?

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Because gold is a store of value, it competes against other relatively safe investments such as the U.S. dollar and Treasurys. As the Federal Reserve has been boosting interest rates to combat inflation, interest-bearing Treasurys have begun to look relatively more attractive than gold, which doesn’t pay any interest.

Those rising interest rates attract investment into the U.S. and push up the value of the U.S. dollar. A stronger greenback dampens demand for dollar-denominated gold by making it more expensive for those holding other currencies. This extra pressure makes gold less appealing as a safe harbor compared with the dollar and Treasurys.

But even though gold priced in U.S. dollars is down over the past year, the metal’s price in yen, euros and pounds is up. Also, gold prices in U.S. dollars are doing well by historical standards.

Investment in physical gold in the form of bars, coins, medals and physically backed exchange-traded funds, or ETFs , is also an important driver of demand, as are central banks, which use gold to diversify their reserves.

Gold also has some industrial uses. While dentistry might be the first use that comes to mind, more gold is actually used in electronics.

Like other commodities , gold prices can be quite volatile. But gold tends to move for different reasons than primarily industrial commodities, such as copper.

When the U.S. abandoned the gold standard in August 1971, an ounce cost about $43. That’s about $312 in today’s dollars. On Sept. 1, gold for sale immediately was trading around $1,700, demonstrating that the metal’s price has more than held up compared with the value of the U.S. dollar.

In 1980, inflation led by oil prices combined with geopolitical fears to push the metal to a then record of $850. When adjusted for inflation, that record still stands, as that price in today’s dollars would be above $3,000 an ounce.Prices slumped in the late 1990s as central banks and mining companies sold the metal, but sentiment turned a corner after European central banks agreed to limit sales.In 2008, the U.S. benchmark gold futures contract rose above $1,000 for the first time, as the dollar weakened amid worries over the U.S. economy.Worries about the global economy during the pandemic, ultralow interest rates and anticipation of inflation amid government stimulus helped the metal breach $2,000 for the first time in 2020.Geopolitical worries surrounding Russia’s invasion of Ukraine helped push the metal above that mark again in March, before the current slide kicked in.”This can work for a buy-and-hold strategy with a long investment horizon but does not work well for those who are more trading-oriented or want liquidity ,” says Steve Land, portfolio manager with Franklin Templeton. “Investors in many parts of the world often choose to hold gold in jewelry form so that it can be enjoyed for special events.”Security, transportation and insurance are also factors you’ll need to consider. And keep in mind when buying coins that you’re also paying for numismatic value and not just the value of the gold the coins contain.Investors who want exposure to physical gold without the hassle of storing and insuring it can consider physically backed gold ETFs , which have shares tied to gold stored in bank vaults.Investors can also consider gold futures and options , but these investments are often best left to the pros.”Futures, options and derivatives are not for the faint of heart because while there is potential for high reward, there is high risk,” […]

source Investing in Silver as an Inflation Hedge

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