As the U.S. stock market Dow Index continues to set record highs, many are asking about the reasons behind the climb. Certainly, there is enough world economic finance news and uncertainty to have many wondering about recent positive indicators. The rise is so incongruous that one economics professor quotes the continuous increases as nothing more than a “sugar high” sure to bring a sudden fall.
In fact, there have been several indicators that knowledgeable billionaires are giving investing tips by dumping common stocks, in spite of, or because of, the recent 6.5% market increase. Moneynews.com recently reported that famous investors like Warren Buffett and John Paulson have sold tens of millions of shares in the past quarter. Buffet, always looking at value, points to disappointing sales and profits in some of his favorites, like Johnson & Johnson and Proctor and Gamble. He also heaved holdings in companies like Intel and other “consumer product stocks.” It is believed that they directed some of the funds gained into commodities purchases.
Paulson’s actions aren’t being ignored, either, particularly in light of how he called the subprime market debacle. He also dumped a number of consumer stocks, such as Family Dollar and Sara Lee, according to Moneynews.com. The investor also moved against holdings in banks, selling 14 million shares of JPMorgan Chase. Joining him in abandoning bank stocks was George Soros, another well-known investing billionaire.
The Lack of Current Bad News
Which again raises the question, what gives? It seems that we have passed the fiscal cliff without momentous disaster. Jobs, while not where we would like, are not in precipitous decline. Real estate prices have stabilized and even risen in some areas. Even the precious metals markets, where prices have steadily risen, are seeing some small degree of softness. Commodities prices are reasonably stable. So the finance news isn’t doom and gloom.
Perhaps the caution being shown is the wisdom of experience, knowing that all business cycles have ups and downs. With the current highs, there might be a sense that a decline must happen. There are even those, such as Robert Wiedemer, New York Times best-selling author of “Aftershock,” who predicts a catastrophic drop of as much as 90% in the Dow. Wiedemer is also not without crystal ball credentials. He was part of a group of economists that predicted the U.S. housing market collapse in 2006, along with the bursting of the consumer spending bubble.
The Devil in the Details
At the heart of Wiedemer’s concerns lies the same issue facing economists worldwide. Governments have simply built up too much debt, and these governments continue to spend at unsustainable levels. With the U.S. Fed presses running 24/7 with their global counterparts, the feared reckoning can only be delayed, not avoided.
In a follow-on editorial at Moneynews.com, the economist pointed out that these inflationary funds simply haven’t made it into the economy yet. When they do, he speaks of a significant inflation surge as a mathematical certainty. He points out that just a 10% rate of inflation — and many see much worse — causes Treasuries to lose roughly half their value. If we see anything close to the inflation of the 70s, entire portfolios of bonds will see liquidation. Even real estate, traditionally a reasonable inflation hedge, will see more price drops as the historically low interest rates we have today rapidly disappear. That leaves precious metals and commodities one of the few asset classes that can retain their value.
The Diversified Portfolio
This mix of good, so-so, and bad financial news has many financial planners and investors scratching their heads. Bottom line, no one knows what the future will bring relative to inflation levels, only that it will return. Just imagine, however, even if analysts such as Wiedemer are way off base, and a compounded rate of only 5% inflation returns. That significantly erodes any long-term retirement planning in place without inflation as a major consideration.
In turning to commodities such as silver and gold, investors are following an ages-old investing tip. These metals have proven to hold their purchasing power in times of inflation. As this economic curse destroys the value of paper currency and other assets, as long term spot gold and spot silver increase in value. As a balance to any prudent financial plan, they provide diversification in the face of very uncertain times.
There is one sure thing about the governments and their spending. There is no possibility that such spending will soon decline. That means whoever bets against a heavy round of inflation is taking very long odds, indeed.
In the current relatively gloom economy, precious metal investments have become quite popular due to factors such as their perceived low risk levels in comparison to other types of investments. Moreover, some investors choose investments such in the aforementioned commodities with the aim to diversify their investment portfolio and ultimately create a safeguard against economic uncertainty. Fortunately, there are different investment options in this space that willing investors can exploit. Here are some of those options:
This may be in form of physical gold, silver, palladium and platinum bars and coins. Bullion is a suitable investment option for investors that want physical ownership of their investments. Physical bullion is also a popular investment among investors who do not want to invest within the current unstable financial system. It is important to note that when one invests in bullion, one incurs additional costs of storing and securing their investment.
One can invest in valuable metal equities by buying and trading in stocks/shares in valuable metal mining companies. Ideally, the value of such equities depends on the price of physical bullion. This is because the stock of mining companies’ generally goes up when the value of minerals rises. Nevertheless, factors such as the financial management, labor market risk and mining laws/regulations also affect the value of such investments significantly.
This form of investment option is highly speculative and risky in comparison to other types investments in this space. Investors have to guess what the future price of their precious commodities would be when making a decision to invest in futures contracts of metals such as silver and palladium. A futures contract indicates the date of delivery of a specific quantity of a commodity for a specific price. If the price of these metals is high at the delivery date of the contract, investors can earn great profits. However, if the value of these metals decreases over time, futures contracts lead to great investment losses.
Exchange Traded Funds
These funds generally enable people who invest in them to gain access to global stock exchange markets that trade in physical bullion. This access enables investors to monitor the price of bullion so that they can buy or sell physical forms of the product.
Investing in mutual funds is probably one of the safest ways to invest in metals such as gold and silver. When one invests in a mutual fund, one provides funds that a qualified and experienced mutual fund manager uses to purchase the relevant stocks and bonds that have a good profitability potential. However, it is important for fund managers to consult with their clients before purchasing any stocks since there is always a risk level in any investment especially in the current economy and investors must be fully aware of the risk levels of all their investments. It is important to note that different funds normally have different objectives. For instance, some funds focus more on long-term growth while others concentrate on generating sufficient income for investors and others focus on a combination of income and growth. Therefore, investors must carefully assess the objectives of the mutual funds they intend to invest in order to ensure that their personal investments goals match those of the fund.
Why Invest in Precious Metals? There are several reasons why one should invest in these metals. Here are few of those reasons:
They are an effective means of protecting wealth
In an uncertain economic environment, it is important to protect ones hard earned wealth and assets from factors such as inflation of paper money and devaluation of stocks. Because the value of metals such as silver usually remains constant or rises during an economic downturn, investing in these metals is one sure way of protecting the value of your earnings and assets.
They Act a Hedge against Inflation
One can create an effective safety net against the repercussions of an economic crisis by investing in adequate amounts of metals such as gold. For instance, in the current economic crisis, one can guard against risks such as the devaluation of the dollar and inflation by substituting paper money holdings with valuable metals bullion.
They are an Effective Means of Protecting your Retirement Savings
In today’s economy, cash-based retirement plans are susceptible to multiple risks. For instance, every time the government monetary policy prints money as a means of solving economic crises, the value of cash-based retirement plans decreases significantly. By converting some retirement cash savings into precious metal investments such as physical bullion, one can exercise more control in managing the value of their retirement savings.
Overall, different investment options in valuable metals have different risks and benefits. Before investing in such metals, it is advisable for investors to identify their investment needs and identify a form of investment that fulfills these needs.