Why I’m Piling Into Silver
I have been building up a sizeable silver position lately. The reason I am buying silver is the main reason many are buying gold, as a hedge against inflation and the dollar value destruction.
Congress and Obama are piling up record deficits and causing our debt/GDP to soar. I do not believe we will be out of this recession anytime soon, especially with the anti-business attitude in Washington. The proposed tax increases either will not happen or won’t put a dent in the deficit anyways. What we are left with is a gigantic amount of US treasuries to hit the market.
Left unchecked, the yields on the treasuries will soar, meaning it will cost more for the government to borrow money. China and other foreign investors don’t have unlimited amounts of money they wish to loan our government, so the natural effect would be higher government interest rates, even higher rates for borrowing on business, and a deeper recession. In this scenario, shorting US treasuries would be the best bet (something I am doing).
However, it’s not this simple. As demonstrated by the Fed yesterday, our government is going to print off money to pay down the debt. Basically, government runs up debt and then prints off money to buy off their debt. Their reasoning is that while this is inflationary, inflation is under control right now…..we’ll see for how long.
What is lying ahead of us is stagflation, a stagflation worse than the late 70’s in my opinion. At that time, silver and gold soared in value, but especially silver. The silver/gold ratio dropped to an all-time post-WWII low. If you think about this, it would make sense since the demand for silver (in terms of production and jewelry purposes) is higher due to the trade down effect. If everyone is poor, people sure won’t be wearing gold jewelry! Silver has both the value as a store of value but will still see demand in jewelry and for industrial uses.
Silver is also well off of its lows. The silver ETF, SLV, is at 13.42 as I write this article and its 52 week range is 8.45 - 19.169. In contrast, the gold ETF is near the high-end of its 52 week range.
As they say in poker, I’m all-in.