While many people on the right are still making a case to fire Bernanke as Federal Reserve Chairman, it’s difficult to argue with the fact that the man reported yesterday there is still no real sign of inflation to speak of in our economy, despite “Helicopter Ben” pumping millions of dollars of fresh currency into our economy. Many are asking if it’s time to buy gold and silver as a hedge for inflation that must certainly be coming on the horizon? While I don’t fall into the “fire Bernanke” camp myself, I’m going to discuss the issue of buying gold and silver to hedge for inflation in today’s blog. It’s an important investment decision to make, because buying gold and silver coins could be the difference between keeping your net worth over the next decade, or losing half of it. Let’s discuss the facts…
Typically in countries that print massive amounts of currency, you see a devaluation of that currency which reflects as inflation in the macro economy. This can show up in the form of paying more for a gallon of milk, or for a loaf of bread in the grocery store. Bringing up the topic of investing in gold and silver spurs images of people pushing wheel barrels full of worthless cash to the grocery store to buy a loaf of bread, and thankfully we’re showing no signs that such a hyperinflation scenario is in our immediate future. It would seem that our sluggish economy might be a weight that is holding inflation down while we prop up the stock market with quantitative easing, and huge cash infusions into the economy from the government printing presses.
As someone who invests in real estate, in addition to my stock market holdings, I can honestly say that I have benefited from Bernanke’s policy to keep interest rates at record low levels for an extended period of time. I have multiple adjustable rate mortgages, and over the past decade, they have all adjusted down. They are now lingering around 2%, which is unheard of for a mortgage. Bernanke’s policies have kept my payments down, increased my rental cash flow and allowed me to pay my properties down quicker than I normally would have been able to.
Obviously this sort of dream scenario with low interest rates can’t continue forever, and is the reason many people are considering buying gold and silver as a hedge against coming inflation. When the economy turns around and begins to pick up again, there can be no doubt that prices will start to rise with wages. We saw this occur in the late 1970′s under the horrible leadership of Jimmy Carter. Mortgage rates shot up to near 20% levels, and people were paying more in the grocery store for everything. People asked for raises at work, and they got them — just to keep up with the cost of living increases.
Investing in gold and silver can be a way to counterbalance such inflation, because the price of precious metals increases when inflation goes up. You might pay $1500 for an ounce of gold today, but if 100% inflation occurs, that same gold might be worth $3000 tomorrow. In such a scenario, people who kept their money in the bank have lost money — but you have retained the value of your money. Gold and Silver investing is not for everyone, and I’m definitely not advocating that you run out and fill your closet with gold and silver coins tomorrow. Do your due diligence, and find out if buying gold and silver will be right for your particular situation. As always, consult a tax adviser and do your own research.