Sunday, January 23, 2011

Gold and Silver

“Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”
Warren Buffett

However the run up of gold over the last two-three years and the huge run up of silver over the last one year have proved that not every one agrees with Warren Buffett.

US Dollar is currently the global standard of value. However when dollars can be easily created on a whim, it becomes a phony standard of value. Gold has been the store of wealth since Alexander’s time and continues to endure. Gold is the asset which cannot be inflated, yields nothing, and is no one’s liability. Hence gold and silver is the ultimate standard of value.

In the US, where interest rates are close to zero, the case for holding gold (which also gives no income) increases. Also when real interest rates (after inflation) become negative, which is happening in India too, the case for gold and silver becomes irresistible.

Hence keeping at least 5-10% of your portfolio into gold and silver is a must and would act as a “chaos hedge”, when the equity markets, inflation, etc are uncertain.

1. The gold silver ratio, slumped to a 40 month low of 46.1 with the more than 90% rise in silver prices in the last one year. It has dropped below 45 times only twice in the past 25 years.
2. Disappointing economic news will continue to drive gold in the coming year.
3. The sharp rally is likely to be over, but further high could be seen in the coming year ahead.

1. Silver has more than 35% of its demand coming from industrial uses.
2. The run up in silver is likely to continue in the current year.
3. India’s demand for silver is just starting to pick up, and this can boost silver prices more