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Precious metal prices have been rising fast. It seems both gold and silver are setting new highs with each passing day. Gold is now at $1,620.00 per ounce; silver at $41.00 per ounce. Just 10 years ago, the respective prices on gold and silver were $270.00 and $4.40 per ounce.
People have turned to precious metals for various reasons. Fast economic growth in emerging countries like China, India, Russia, and Brazil have created a new class of high net worth individuals who need some shiny jewels. Some are looking to hedge their bet against potentially high and ruinous inflation. Some are just mistrusting of countries. Europe is shaky, with Greek debt default near certain and Portugal, Italy and Spain getting a possible downgrade on their sovereign debts. The United States is fighting default as well over the raising of debt ceiling. Then where is the safe haven? Naturally for some, it is in precious metals – globally recognized store of value, scarce, and easily portable. It may turn out to be a prudent decision or people unfortunately may be buying at the peak.
Simple math says that silver prices may be running ahead a bit fast. Both gold and silver prices should hold relative value to each other unless there is a sudden increase in industrial use for silver vis-à-vis gold. To my knowledge, that is not the case. But gold prices, which use to command 50 to 70 multiples against silver prices in the past 30 years, are now at multiples of 40 multiples. That is to say, the gold to silver price = $1640/$41, or 40. This means either gold is underpriced or silver is overpriced. I am not an investment advisor, so it is hard to say which reasoning is more correct.
One thing I do know is that another traditional good hedge against inflation and a store of value in times of economic crisis had been real estate. But this time around real estate values are holding low, perhaps due to fresh memories of the harsh painful bubble crash of recent years, or simply inaccessibility of mortgage funds. If inflation fears or global economic uncertainty drags on, however, then one wonders whether people will seek out real estate for investment purposes.
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