If you have been following financial markets closely, you have almost certainly heard the term “quantitative easing.” What exactly does this term mean? Quantitative easing refers to a process by which central banks increase the money supply and liquidity within a national financial market by creating new money to then buy assets, such as stocks and national debt bonds. Unfortunately these policies can undermine the value of currencies, causing stock markets to inflate and cash savings to decline in actual value.
Japan's government has shaken financial markets throughout the first quarter of 2013 with wide sweeping and dramatic financial policies that could cause the yen to collapse. The Japanese plans to create some 1.4 trillion dollars’ worth of new money to buy government bonds and other assets. This move will literally double the country's money supply. In theory, these efforts will increase liquidity, encourage investments and help make exports cheaper. In reality, the value of the yen could be undermined as Japanese citizens and companies shift their assets overseas and inflation begins to rise.
The United States is following a similarly dangerous course, funding its burgeoning national debt with money created by the Fed. After financial and particularly lending markets froze in the wake of the 2009 Financial Crisis, quantitative easing seemed like a great way to increase liquidity. Now, the United States government has committed to purchasing some $85 billion per month through its quantitative easing programs. These efforts will both suppress bond interest rates, another relatively safe investment albeit with low returns, and also cause a gradual decline in the value of the dollar. Indeed, over the next 20 years the U.S. Fed plans to devalue the dollar by 33%.
Meanwhile, as currencies decline in value many investors are rushing to stock markets. Some analysts believe that the recent surge in the United States stock market has more to do with quantitative easing than any recovery in the “real economy.” Japanese stocks have been surging to new heights too amid Japanese efforts to devalue the yen. Could government policies be creating stock bubbles? While it is too early to tell, a long history of stock market bubbles collapsing should cause investors to invest with caution.
With currencies in Japan, the United States, and elsewhere at risk of being deflated through quantitative easing, and the additional risk that national financial policies could lead to trade wars, many investors are now parking their assets in precious metals and other commodities. Why? These investors believe that precious metals will offer stability and appreciating value should financial markets stumble or collapse. And they have good reason to believe this. Precious metals tie your investment into something real and tangible, not just the perceived value of a currency that can easily be influenced by national fiscal policies.
Some people believe that precious metals are already over inflated. While prices can and will go up and down, there is good reason to believe that the prices of gold, silver, and other precious metals can continue to move upwards. Globalization has lifted millions of people out of poverty, and this economic growth has generated increased demand for gold, silver and other metals. Further, many precious metals have use values in circuitry and other technological applications. This strong demand for precious metals should keep prices high and stable. Further, with demand likely to increase in the long term as more and more people are lifted out of poverty, the long term trends look even better.
Every investment carries risk, of course, but precious metals have proven to be among the more stable and resilient markets over the last several decades. Ever since the end of the gold standard in 1971, precious metals have become a favorite for investors across the globe. By parking some of your assets in gold, silver and other metals you can protect your investments from declining currencies and unstable stock markets. Every investor should maintain a balanced portfolio with investments spread in a variety of assets, but precious metals remain one of the best investment vehicles in the world.