Defining Intrinsic Value in Precious Metals Investing

The mainstream financial media touts a variety of 'anti-inflation' investments that can be used to protect wealth against the ravages of inflation. These typically range from buying commodities like oil and coal to more sophisticated instruments like inflation-protected treasuries and annuities.

While such investments may appear to be inflation-proof on paper, none of these investment vehicles have the solid intrinsic value of gold, silver or any of the other precious metals.

Intrinsic Value is Everlasting

Intrinsic value does not mean that the product may have value for some time, or even for a long time. Instead, intrinsic value signifies that the item has value forever.

Unlike the steadily declining value of intrinsically worthless paper fiat currency, the worth of an item with true intrinsic value remains relatively unchanged over time and is roughly worth the same amount today as it was thousands of years ago.

Gold and silver are some of the few products with intrinsic value, which would also include necessities of life such as food and shelter. Furthermore, these metals have been in demand for thousands of years for their natural beauty and use in jewelry.

In addition, these metals can still be used to purchase the same amount of goods today as they would have bought in ancient times. For example, the price of items such as a custom made suit, a loaf of bread and an average day’s work have stayed relatively constant in terms of the amount of precious metal they cost to purchase.

Intrinsic Value is a Must in a Truly Effective Hedge Against Inflation

In order to be a truly anti-inflation investment instrument, the item invested in must have intrinsic value itself.

Gold and silver have each produced returns that compare to inflation rates. This makes them suitable as investments to protect wealth against rising prices.

In contrast, oil has not been used at all until the last few centuries. It was only in the 20th Century that producers stopped discarding gasoline and instead began using its stored energy in manufacturing and for transportation purposes.

The prices of other commodities — like coal, coffee and pork bellies — may also rise with inflation. Nevertheless, their low stock to flow ratio means they are more challenging to use as a long term hedge against inflation.

Paper Inflation-Protected Products

Some of the most “practical” anti-inflation investments are also often the biggest shams in the investing world. Although inflation-protected securities require no storage space and can be readily bought and sold, what intrinsic value do these paper investment instruments have?

Treasury Inflation-Protected Securities or TIPS are one of the most popular of these products. TIPS are unlike other U.S. government debt since their yield is indexed to the inflation rate so that they always provide a return greater than inflation.

Nevertheless, TIPS are only indexed to the change in inflation as measured by the Consumer Price Index, which almost always lags the true inflation of the country’s money supply. The CPI results are also hedonically altered.

In addition, TIPS involve counterparty risk. Basically, the value of these paper instruments is only guaranteed by the agency backing them, which is the debt-laden U.S. government. TIPS therefore lack any real intrinsic value, since more of them can be created just by running the printing presses.

The Real Value of Precious Metals

When it comes to safety and security, no other inflation hedge investment instrument compares to owning real physical gold or silver.

History suggests that the prices of gold and silver have generally accurately reflected broader changes in prices that contribute to inflation rate measures. They have also consistently protected investors’ wealth against poor economic conditions and have provided a safe haven in times of financial turmoil.

In addition, unlike the potentially empty promises backing inflation-protected paper notes, gold and silver coins are tangible items of real intrinsic value that can easily be held in your hand.

These considerations all support the ownership of precious metals over paper assets when it comes to protecting your wealth against the negative consequences of persistent, long term price inflation.

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