Anybody who switched their money into precious metals from US dollars at the start of this year will be kicking themselves because gold and silver prices have moved sideways in a trading band while the US dollar has the euro on the floor.
However, if you take a four year-view then the savers who put their wealth into 50:50 gold and silver are around 70% ahead, and that despite a collapse of precious metal prices in the 2008-9 financial crash.
Sure the US dollar would have given you less sleepless nights during periods of volatility – something not to be underestimated when financial markets get into extreme difficulty – but for absolute returns there has been no better asset class then precious metals.
The past, of course, is not necessarily a guide to the future, especially in the short-term. We could see a repeat of the 2008 crash this autumn or perhaps worse. There is a synchronized slowdown to slump in the major economies of the world.
Chinese electricity consumption did not rise in June. The eurozone economies are contracting. The UK is in recession. The ECRI reckons the US is already back in recession. Japan still looks a mess. How can stock markets head higher? They have barely registered this bad news so far.
However, this is a later stage of the problems that began with the subprime lending crisis and 2008 crash. This time it is the bond markets that are getting into deep water. Spain, Italy, Ireland, Portugal, Greece, Cyprus, the list of bond markets in trouble gets longer and longer.
This is the real achilles heel of the global economy. For bond markets are the largest and most liquid financial markets in the entire world, and as borrowers demand a higher return so the cost of borrowing rises imposing the equivalent of much higher taxes in a recession. It’s a downward spiral.
Now central banks will not sit idle while this happens. But they cannot control the markets forever and it is arguable that their attempts at market manipulation have brought us to this parlous state. If central banks had taken the punch bowl away earlier then countries would not be drunk with debt.
That observation does not help us now. All central banks can do is inflate the money supply to raise general price levels and devalue the debt. That is incredibly bad for savers already screwed by low interest rates and now facing the destruction of their principle by monetary inflation or reflation as it is called.
How do you protect your savings against this? You put your money into a currency that central banks cannot print – gold and silver. It has worked for the past four years and is hardly likely to stop working as things get really serious for the central banks.
What you then still need to decide is how to best buy your gold and silver and store it, and look for other ways to profit from advancing precious metal prices. This is the sort of wisdom you will find in our monthly sister investment newsletter (subscribe here).