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How to Invest in Uncertain Economic Times

During the present economic crisis, traditional investments such as stocks, bonds and housing are no longer healthy investments, due to the continued loss in purchasing power of currencies. Gold and silver and other precious metals, on the other hand, are providing investors with large returns and preservation of savings.

Published: 09-10-2012 12:00

How to Invest in Uncertain Economic Times

Any takers for stocks, bonds or housing?

It is difficult to invest in times like these. What should a smart investor consider when assessing different investment classes in times of high economic uncertainty? What is the next asset class to outperform or crash? We have already seen phenomenal returns for stocks and housing followed by crashes and somewhat drowsy rebounds.

The stock markets are performing decent although common sense would suggest that risks are very high. Governments, companies and individuals worldwide are racking up record high debts and struggle to maintain financing programs running on easy credit. The question everyone needs to ask is how long it will be possible to maintain the current debt levels. What will happen to the stock markets if there is a severe deleveraging of debt and/or if the governments are over-extending themselves in trying to print their way out of the crises by just printing money? What Western governmens do has its effects on the entire world, as seen during the 2008 crisis.

The bond market is still performing well after a run that has been lasting for decades. However, in Singapore as in other parts of the world, interest rates are at a record low. The 10-year Singapore government bond yielded 1.3% as of September 2012, down from an average of about 3.1% since 1998. 

In the US, the 10-year Treasury yields 1.64%, which sounds pretty dismal when investing in the largest debt of all time now having surpassed $16 trillion dollars. Add unfinanced pension liabilities, costly wars and a track record of an imbalanced budget for almost every one of the last 50 years and it doesn’t look like a prime investment.

With conventional investments posing high risk with low potential, it is necessary to consider other investments. 

Gold & Silver?

The gold and silver market historically performs well during economic downturns. If we for example look at the gold price during the 1970s recession, it proceeded to rise from US$35/oz. in 1971 to US$850/oz. in 1980.

The explanation for the drastic increase in the price of gold and silver during the 1970s can be found in the US defaulting on the redeemability of US Dollars into gold. Because of the instability of the dollar then, investors sought out an investment class that would not lose in value like the dollar was doing. People were willing to buy gold for over 20 times the price of just a few years earlier.

The current economic climate is not different. The economic problems are not only affecting conventional investments but also the currencies. The current faith in currencies, such as the Euro, is clearly in decline. It is then interesting to remember that gold and silver have been used as money for the past 6,000 years.

Gold and silver have always returned as money when paper currencies have failed. Make no mistake, paper currencies without any real physical value or backing have been tried many times in history and have never lasted more than a couple of decades. The price of gold is over 50 times the price about 30 years ago which clearly shows that paper currencies are once again failing to serve as storage of value.  

Euro vs. Gold & Silver

With the discussion that some countries such as Greece may leave the Euro, it could be interesting to also investigate the price of gold and silver in euros.

Since the turn of the millennium, January 1, 2000, the prices of gold and silver have increased more than 400%.

Compared to gold and silver that used to be officially recognized as money, the Euro has not held up very well. This is seen in prices for essential products, such as food, going up. Along with the Dollar, the Euro may just spell the end of fiat currency as we know it, whose detrimental effects will spill over to other parts of the world, including Asia.

Gold & Silver as Investment

Both gold and silver have characteristics that make them safe havens in times of crisis. Many people trust them as stores of value. Unlike paper currencies, the supply of gold and silver are not dependent on policies, which more often than not are oriented towards inflation.

As investments, gold and silver have had quite impressive returns. Yet many investors themselves would characterize their purchase of precious metals not only as investment but really as currency. The reason is that gold & silver used to be currency for thousands of years and to this day they are much more stable in value than any of the paper currencies.

If you just go back in time to consider how much something cost you 10 or 20 years ago, you realize that the purchasing power of the paper currency is diminishing quickly. Gold and silver on the other hand have maintained, or even increased, their purchasing power over the last century.   

For some, gold and silver remain a peculiar type of asset in which to invest. Critics ask: What use do gold and silver actually have to protect against crises and inflation? The answer is that gold & silver have preserved wealth for thousands of years. Even though gold and silver are no longer used as money, they still serve as a store of value, albeit unofficially.

In times of economic uncertainty, such as the present, it becomes more important to hold a form of money that retains its purchasing power over long periods. Gold and silver serve such a purpose.

Silver

When finding out about precious metals as investment, most people turn to gold. Silver may however serve as a very good alternative for first-time investors.

The supply of silver continues to get tighter. All silver easily accessible has already been mined. Miners have to dig deeper and deeper with higher costs to be able to mine any silver at all.

The characteristics of silver make it a much demanded metal for industrial use. Silver is an excellent conductor, reflector, and is strong while remaining malleable. These features and others make silver excellent for electronic products. Silver is an important part of many high-tech products such as mobile phones and computers. With the development of new high-tech components, the demand for silver will likely continue to increase.

It is also very difficult to reuse silver from many electronic appliances since there is only a tiny bit of silver in each item. The supply constraints, high demand and limited recycling abilities have led to silver stocks dropping from about 10 billion ounces in the 1950s to about 1.2 billion ounces at present.

Comparing all the silver that has ever been mined in history to all the gold that has ever been mined, silver is only 10 times more abundant than gold. Yet for most of the 21st century so far, the gold price has been about 50 to 60 times the price of silver, indicating an undervaluation of silver that has yet to be corrected upward.

Got Gold & Silver?

Awareness of precious metals, and their importance in one's investment portfolio, is increasing. There are different ways of investing in gold and silver. There are, for example, paper investment certificates and futures. These may however not only be complicated in nature but the amount of issued paper gold and paper silver is significantly larger than the amount of available physical gold and silver. There is thus a substantial risk that paper certificates will be rendered worthless in the future.

With real, physical gold and silver, there are no counter-party risks. You don’t have to rely on any bank or commodity exchange and there is no question whether your certificate is really backed by the real thing. You can buy gold and silver online for physical delivery or vault storage from BullionStar Singapore.