Opinion and Commentary

Why Silver?

Our current-day dollar is no stranger to depreciation, having seen over an 80% decline in purchasing power since 1971. Much of this decline is attributed to the sharp rise in the total currency in circulation. In comparison Silver has seen strong gains (in terms of dollar value) over the same period.

The U.S. government does not print and distribute dollars free of interest or obligation to anyone. Instead, it borrows dollars from a private bank - the Federal Reserve Bank (“Fed”) - as an interest-bearing loan. Under this controversial system, U.S. citizens ultimately pay interest to a private bank for the dollars that they use every day.

The Fed controls the number of dollars it puts in circulation and sets the baseline interest rate for borrowings within our economy, such as for home loans. The Fed’s monetary policies have been widely blamed for the dropping value of the dollar, and for triggering crisis after crisis – in housing, in stocks, in banking, where common U.S. citizens have suffered greatly.

In response to this steep erosion in the purchasing power of the dollar, informed investors are increasingly flocking to precious metals such as Gold and Silver as a reliable hedge against inflation.

Federal Monetary Policy Pushing Value Investors to Gold and Silver

Since the sub-prime mortgage and banking crisis of 2007, the Federal Reserve has printed over $2.7 trillion in new money (summer of 2011). In parallel, Federal Government debt has increased at an alarming rate - from $8 trillion in late 2005 to more than $14 trillion in 2011 – and considerably weakened the dollar.

As U.S. Senator Ron Paul puts it: “The real truth is that the dollar is very, very weak. The only true measurement of the value of a currency is its relationship to Gold. In the last 10 years, our dollar has been devalued 80% in terms of Gold. I am really concerned about what is going to happen because a currency crisis is much worse than a financial crisis.”

As of May 2011, U.S. national debt stood at $14.36 trillion and U.S. GDP stood at $14.7 trillion. This steep escalation in U.S. national debt and the Fed’s questionable monetary policies have sparked concerns about the dollar across the globe, with many analysts publicly predicting a fall in the dollar in the years ahead.

To prop up a falling dollar, the Fed will likely have to eventually raise interest rates on all manner of borrowings.

What does this mean for all of us?

If interest rates go up, borrowing costs go up, which dampens business investment and job creation. In parallel, U.S. consumers will have to pay higher interest rates on loans for appliances, cars, tuition, houses, etc., while also collectively struggling with reduced money flow due to high unemployment. Therefore, consumer spending will go down, as will business profits – in a vicious downward spiral. Demand for homes will drop, as will their prices. Consumers will no longer have the luxury of cheap borrowings against their home equity, because if prices drop substantially – in a worst case scenario – a lot of their home equity would also have gone up in smoke.

An Ounce of Silver vs Paper Assets

Many experts are warning investors to steer clear of paper assets and move into tangible physical assets such Silver.

Nassim Taleb, author of The Black Swan, foresees a “very bad day” when government bonds will just have no takers and governments will have to hike interest rates, perhaps dramatically, which could trigger runaway inflation.

Will silver provide safety and protection from "irrational exuberance" of governments and their printing presses? Examine the recent and historical price performance of silver and decided for yourself.