Trimming the Hedges: Precious Metals and the Economic Recession

Precious Metals have always been used as a hedge, or insurance plan against poor performance in other markets. Inflation, stock market losses, and a slumping economy are all typically good for precious metals, driving demand and commodity prices higher as other investments turn sour. With the recent global recession, platinum, gold, and silver as physical holdings as well as precious metals stocks have become more and more attractive to a growing cadre of investors as the demand for luxury goods has fallen steeply in the same period.

The underlying idea of a hedge is as old as money itself. People purchase insurance for a variety of property, and Lloyd’s of London will ensure just about anything you can think of. So why aren’t more people hedging precious metals against their stocks? It seems like a smart thing to do in a market where the DOW can lose almost 4500 points in the span of less than a year. It also makes sense when the US and other large governments are talking about rebuilding and rebuffing their infrastructure with environmentally friendly refits of many old technologies. One of the only things that have stayed relatively stable value wise in this tanked economy have been precious metals yet we see no great migration to them from more traditional investments. Perhaps this unique and potentially explosive market needs a closer look.

Many gold and silver stocks have gained between 15% and 50% over the past 3 months due to fears about a deepening recession and a lack of confidence in the stimulus bills that were recently passed by the Obama Administration. This market sector is one of the only ones still shining during the recession. Precious metals prices have fluctuated about +/- 10% in the same period, but have rarely left that window with massive gains or losses. Mining companies are also slowing or even halting their production in some cases, reflecting a slowing demand for precious metals related luxury goods. This means that with precious metals production slowing and demand staying about the same, we will likely see a supply hiccup somewhere in the near future. This supply hiccup will occur when the stock market begins to solidly rebound and people can again afford luxury items made of precious metals. Even with the obvious advantages of investing in precious metals as an insurance plan against a weak economy, not enough people are taking advantage of the precious metals hedge to put a dent in the supply and demand curve. Translation: now is still a great time to get into precious metals and precious metals stocks.

People will always hedge against a slumping stock market with precious metals, but due to the performance of these metals and their related stocks, as well as a slouching economy and falling immediate demand for luxury goods, it’s only a matter of time before the precious metals market explodes. What better way is there to both hedge against inflation and low stock prices as well as get in near the ground floor of the next big boom in metals values? Supply disruptions and a growth in demand for products containing precious metals is bound to catch up to itself in the next 6-12 months and make some investors very happy with the choices they are making right now.