Silver, not gold, is the portfolio insurance to buy now
Silver, not gold, is the portfolio insurance to buy now By WILLIAM L. SILBER for Market Watch
Silver prices are low right now
Fear drives up precious metal prices. Fear of war, defaults, inflation, civil unrest and anything that undermines trust in government. A week after the Lehman Brothers bankruptcy in 2008, gold and silver jumped by 15%. Three years later, during the height of the European government debt crisis, when the obligations of Italy, Ireland, and Greece resembled junk bonds, silver more than quadrupled in value, while gold increased 250%.
Today, fear of a financial collapse has receded, and so have the prices of both precious metals. Gold GCJ9, -0.13% sits at about $1,300 and silver SIK9, -0.46% languishes a little above $15. Is it time to buy at these bargain prices? The answer is yes, especially silver, but not for the reasons you think.
Few worry about inflation in today’s U.S. economy, but right after the Great Recession, when the Federal Reserve embarked on its program of quantitative easing to jump-start the economy, many were concerned that inflation would emerge. With unemployment reaching 10% in 2009, the Fed expanded money and credit, drove down short-term interest rates to zero, and bought longer-term government bonds and mortgages in unprecedented amounts. According to basic economic analysis, too much money chasing too few goods leads to inflation. But the last nine years have upended that conventional wisdom. Unemployment is now under 4% and inflation remains in check. Buying precious metals to protect against inflation today seems foolish.
But no one knows when the next monetary upheaval will hit. The trigger might be an unanticipated default by a big company that has taken on too much debt — and there are many of those owned by private-equity investors. Or inflation may spurt when we least expect it. Economists can forecast the next financial earthquake about as well as seismologists can predict a tsunami. They know it only after they see it, but then it’s too late to take cover.