It seems that no matter where you turn these days, you’re likely to see or hear an ad encouraging you to start investing in gold and silver. However, is there any merit to the claims that are being made in them? Can investing in gold and silver really serve as a hedge against inflation?
Speculation and Precious Metals
One of the most fundamental concepts that you’ll need to understand before moving into the precious metals market is just how stable they are. In order to do so, you’ll need to consider how global economies drive various markets. The stock exchange provides the perfect example.
When the housing market crashed in the United States, it caused a wave of activity primarily based on fear. Investors started selling any shares that seemed risky. In turn, this caused the value of the shares to drop, causing other investors to do the same. Since this was happening to multiple companies, the cumulative effect was a huge, sudden loss for the market.
Since nearly all of the activity taking place in the stock market is based on speculation, the trend continued the next day. When the public began to learn about the troubles, the banks were having things worsened. Those who had promising portfolios just days before found themselves with excessive losses.
The values of precious metals are also influenced by speculation, but in a much different way. While the stock markets were experiencing excessive losses, those who had already started investing in gold and silver experienced solid gains. Their fear had driven them, in droves, to an investment that is generally considered stable.
The Stability of Precious Metals
When someone invests in a stock, they’re investing in the value of that company. If the company generates a profit, then the value of the stock goes up and the investor experiences a profit, too. That’s how it is supposed to work, in theory, but as explained above, speculation tends to drive the value of stocks.
Precious metals are a commodity, just like corn, sugar, or silk. The major difference, though, is that precious metals are incredibly rare. They can’t be produced on a farm or created in any other way. Unlike stocks, the values of commodities are actually tied to consumption.
What makes precious metals so incredibly stable is their rarity. There is virtually no change that a mine will produce enough new bullion to have a major impact on the market. In essence, those who are investing in gold and silver are investing in what’s available today, providing them a small percentage of the world’s supply.
Because there are no major changes in the world’s supply of precious metals from one year to the next, their values remain relatively stable. Of course, if there was suddenly a shortage in the supply of a precious metal that is largely used for industrial or commercial purposes (like copper or palladium) that could have an impact. The shortage would cause the value of the precious metal to improve, though.
Gold and silver do have industrial applications, but the demand is nowhere near close enough to impact the global supply. It is unlikely that the amount of either gold or silver will change drastically in the near future. Because of this, the value of both is adjusted to account for inflation and demand.
Therefore, over the long term, it is highly unlikely that anyone will ever truly take a loss from investing in gold and silver. When the demand surges it’s possible to experience rapid gains, too. Buying and holding gold and silver is a long-term strategy that is perfectly suited for asset protection.