Wednesday, February 10, 2010

Gold & Silver Monkey Business

The inflation/deflation debate has raged for the last year and a half and along with it is the Gold/Silver rise/fall debate. What has been resolved in the last year and a half? Not much. Gold peaked at $1227. Private credit contraction is being offset by public credit issuance. Silver didn't quite reach an all time high. There hasn't been a hyperinflation nor a hyperdeflation. Overall, the debate has produced nothing of substance. And why should it? The price of any asset is the value that someone puts on it at any given time in accordance with supply and demand (for the most part).

While the rage has been that gold has been on a tear and overall it has performed better than almost every other asset since the credit crisis began, the simple logic of owning gold or silver has been lost among the hype. While I admit I do hold a slug of silver, I do not hold it for "investment" value. Gold and Silver are not investments. Gold and silver are protection against inevitable government fiscal and monetary stupidity.

I am a big believer in insurance. Life insurance is important to ensure that your loved ones are not saddled with your financial debts when you pass. Auto insurance comes in handy when you total your dad's new Corvette while doing donuts in the Wal-Mart parking lot. Home insurance is nice to have when your son's pyromaniac friend gets a little too happy with his Zippo. All of these events are outside of your control and so is the Federal Reserve and the Federal Government's management and extension of sovereign credit.

I would like to believe that the Fed and our government would like to maintain the purchasing power of our money and we would all be able just save and accumulate our earnings into perpetuity. However graphs like this just aren't that comforting to me. For an interactive chart see here:

So I hold silver for insurance. Silver does nothing except sit in a box and look pretty to the cardboard and metal box that surrounds it in complete darkness. It provides no cash flow, dividends, interest, and it is not in an IRA. Why would you want to hold an asset that would protect yourself from government fiscal stupidity in a government sponsored account that is subject to the whims of printing press politicians?

If you want to know what Weimar Germany's printing press looked like, I could do no better than Jesse's Crossroads Cafe's post on common misconceptions of hyperinflation.

I hold silver for piece of mind. If one day there is a hyperinflationary collapse of the currency, I'll maintain some of the labor value stored in the silver.

Now, as a commodity trend follower, I trade silver and gold, not for insurance but for profit. These are two completely different objectives. One is for protection of value in the face of uncontrollable idiocy while the other is a price risk hedge offset to commodity producers.

So while you debate about whether inflation or deflation is going to happen, I'll sit on my small stash of silver and live life knowing that I'm protected in case things get really bad (unless the government decides to just seize anything, which would be unconstitutional). Life is too short to be scared what the government will do with sovereign credit. So buy yourself a bit of insurance and use the rest of your money to invest in cash flowing assets.

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