The Truth and Lies — Precious Metals as an Inflation Hedge

The Truth and Lies — Precious Metals as an Inflation Hedge

The terms “quantitative easing” and “austerity” are casually thrown around in U.S. and European media, respectively. The Federal Reserve generally describes the previous as a monetary tool to stimulate the economy, while the European Central Bank (ECB) would define the latter as a deficit-cutting tool meant to help struggling governments. The simplest definition for both terms can be summed up in four words: central banks printing money.

The money printing sprees by the Fed and ECB since the mid-2000s have simultaneously occurred, coincidentally or otherwise, with the 2008 U.S. economic collapse; the 2010 collapse of Greece; the 2008 collapse of Spain; and so on. Lost in all the “quantitative austerity” is that the price of gold went from about $712 per ounce in late 2008 to $1889.70 per ounce by late 2011. Similarly, silver went from about $9.00 per ounce to $48.58 in that same time period. And as long as the central banks continue their “monopoly money mentality,” this trend will not end anytime soon.

One Silver Dollar

Why the Dramatic Increase?

It may seem like decades ago when there was $2.00 per gallon gas, but this was, in fact, the case in late 2008. Today, the average price per gallon of gas across the U.S. hovers around $3.35. Not only did the price of gas rise dramatically, but U.S. homeowners lost $1.4 trillion collectively in the value of their homes in 2008 alone, according to, an online real-estate database. You don’t have to use the way back machine to remember the first “economic stimulus” package executed by President George W. Bush in 2008, than the second one a few months later by President Barack Obama in 2009. The spikes in precious metal prices happened at the same time of these “bailouts” because it simply costs more dollars to mine, refine, and buy them due to inflation. What has happened is that the U.S. dollar and euro simply have far less buying power than they did five years ago.

Is It Too Late to Buy Gold and Silver?

As of Feb. 5, the price of gold stands at $1673.29 per ounce and silver at $31.85, according to US Money Reserve. Thus, gold has actually dropped by almost 11 percent since 2011 and silver almost 35 percent. This is a cause for alarm for some investors, but the reason for the decline is simple. The dollar index – the value of the dollar weighed against other world currencies – has been steady or rising since the beginning of 2012. The best way to understand this is with a simple proverb: when the dollar pops, the market drops; when the dollar drops, the market pops.

How High Can Prices Possibly Go?

The media laughed and joked when a petition appeared on the White House website that encourage the United States Mint to create a $1 trillion coin, or a bunch of $10 billion coins and use them to finance the government. Most of them reasoned that this would amount to creating money out of thin air. But how’s that any different from what the Fed and ECB have been doing for decades? The short answer: there’s no difference (except the coin would be interest-free). As long as the central banks continue their policies of liberal printing, there’s no limit as to how high prices of gold and silver can go. It behooves the savvy investor to take advantage of the dips, however, and stock up at a relative bargain.

Tony Wilkins is a New York paralegal who shares his legal and investment advice with readers on various blogs and business websites.

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