Why Jim Rogers chooses silver over gold to beat inflation
Posted on 10 November 2008 with no comments from readers
Legendary investor Jim Rogers, whose conversion to commodities as an investment class back in 1999 preceded the end of the 20-year bear market by a couple of months, is backing silver over gold as an asset class to beat inflation.
He recently told journalists that if pushed to choose between the two precious metals he would choose silver. Rogers has moved to Singapore and is in the process of selling all his dollar holdings because he believes the resumption of the US dollar’s long term devaluation is imminent. He is even shorting US treasury bonds.
Buying precious metals is clearly linked to Rogers negative stance on the US dollar which has an inverse correlation to gold and silver which have indeed suffered from dollar recovery over the past couple of months. Gold is down around 12 per cent to silver’s one-third sell-off.
Silver No1
Rogers admits that silver has been particularly battered down, and perhaps that is why he likes this precious metal. Silver is leveraged to the gold price, so when gold goes down, silver goes down further. But equally when gold prices rise, silver will rise even higher.
Why then should the fortunes of gold change in the near future? Rogers is surely right that the dollar is the key. President-elect Obama is currently putting his new executive team together, and we will have to wait-and-see its policies but the omens are not good.
We have already seen how economic circumstances have forced a Republican administration into a multi-trillion dollar bank bail-out plan. The follow-through is a fiscal spending package, and state bail-outs for the US car manufacturers. All this is going to require funding at a time when rising unemployment and falling company profits mean tax revenues are falling.
A huge increase in borrowing is therefore inevitable and flooding global capital markets with new dollar paper will be inflationary and devalue the US currency. How to profit from US dollar devaluation? You buy an inversely correlated asset like gold or silver.
Rogers leads the pack
Now if Jim Rogers is right – and he was the first major investor to call the commodities boom – then he is unlikely to be alone for long. Others will hear his call and act on it. Actually, markets are going in that direction whatever he says or does.
And why is silver leveraged against the gold price? It is simple really. Both are precious metals but the available supply of silver is less than one-tenth the size of the gold market, and the dynamics of supply and demand in such a situation are obvious.
Rogers has never been a gold or silver bug himself – and ridiculed long-term holders of precious metals in his classic book ‘Hot Commodities’ – so his conversion to this asset class is all the more significant. Perhaps he has also noted the pressure growing in the silver futures market where a call for physical delivery could shortly break the spot price mechanism and lead to much higher prices.
Even one rich Arabian investor would be able to buy enough silver futures and break the market by demanding physical delivery, as is the right of any contract holder. It is a one-way bet that somebody is bound to make very soon.
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Consider this comment from Daily Wealth’s Chris Weber, a very successful investor himself:
“I remain unconvinced that the banks will lend again to the average borrower. They may start lending to other banks, but this is not the same thing. Thus, the immediate danger is still for a deflation, and even a possible deflationary depression, as credit continues to dry up and people and companies that have borrowed too much continue to be in trouble.
But further out, the vast inflation of money and credit that has been going on by the world’s central banks will, after some time lag, start to cause price inflation to soar. Gold and silver look relatively weak now, but in time they will rise.
I’m not really worried. I continue to take the long view on both metals and urge you to do so as well. Indeed, I am worried that the massive inflation and government intervention we are seeing will bring back a rush into these two inflation hedges.
I think we will see a plunging value of paper currencies in the future, with prices of gold and silver soaring. I don’t like to say this because this could come along with other forms of instability. It looks like we are entering a period where people will become much less wealthy than they thought they were.
These are certainly interesting times. They are also dangerous… which is why I continue to urge my readers to buy protection in the form of gold and silver.”
In my grandfather’s time, the Great Depression occurred in the late 1800s in the United States, and today’s predicament is similar, I think. My father was protected from the next Depression of the 1930s because his father had learned well from previous generations. Land, gold, silver, agriculture: these are the great wealth preserving components of the wise investor, and family. Perhaps now, oil can be added to that list.
Peter, I hope you are right. Wouldn’t it be a very 21st century denouement if a petro-dollar citizen broke the fraud of Comex, and freed all commodities from the illegal manipulation seen daily in gold and silver – the worlds’ true safeguards for sound money; the alternatives to the U.S. dollar; the metals being considered by Asia and others as backing for their currencies. Quite right, too. No fiat currency survives without inducing the theft of inflation. The dollar is no exception. I hope the mistake is not repeated in the older, wiser East.
‘The moving hand writes, and having writ, moves on…’ (The Rubyat of Omar Khyam).
Jim Rogers Interview: This or That?
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Tyrone,
Thank you for the link to Jim Rogers’ interview. Fascinating.
Good luck.
c
Traditional short term indicators seem to be continuing to trend down for silver, no? Any advice on timing for small investors… or jewelry designers? Was surprised to read use of silver declining in jewelry over last 7 yrs. reference: http://www.technicalindicators.com/silver.htm – discusses concern for major increase in supply vs. decrease in demand?
What’s your opinion on Palladium? Seems like a good time to buy – haven’t researched fundamentals for that or Platinum, but huge uhm, … adjustments… in those markets… shocking even. Kind of interesting.
Thanks, keep writing…
A.
Well you might be lucky and buy silver cheaper, if you can find it. But the leverage to an upward gold price will return when gold spikes up again and that could happen anytime. Timing precious metals is for idiots, hold long and without margin. Palladium and platinum carry similar wealth warnings – but the upturn from current depressed price levels is going to be big.