How precious metals can hedge and insure against inflation [Video]

Out of the handful of countries where hyperinflation skyrocketed, making national currency worthless, Zimbabwe is perhaps the most infamous. Headlines have pegged the economic issues plaguing the nation north of South Africa squarely on the late President Robert Mugabe, but playing political scapegoat doesn’t change the fact that numerous macroeconomic factors have contributed to Zimbabwe’s plight.

Even if the world and even its neighbors have written Zimbabwe as a failed state, a recent headline in a major media outlet points just how valuable precious metals are. Russian and Zimbabwean investors behind a $2 billion mining project got some great news as African Export-Import Bank has cleared their Great Dyke Investments (GDI) mine project to participate in a $500 million syndicated funding program, Bloomberg reported Sept. 22.

If the scope of the GDI project and Russia’s involvement doesn’t pique your interest and raise the upside for precious metals as investment, not much else probably can.

For comparison sake, GDI’s access to bank money is just $100 million short of the $600 million being pumped into the U.S.-based trading platform Robinhood.

Those are huge financial commitments and you bet they are the signals to what investors see on the horizon to produce handsome returns. Equities and commodities, such as gold and platinum, may be prioritized differently depending on which nation you live, but the place of both as safe haven assets is assured.

How exactly do precious metals work as a hedge against inflation or hyperinflation?

Hyperinflation is uncommon in the West, but in a besieged nation such as Zimbabwe, it’s the reality on the ground. With 700 percent inflation, rendering the local currency useless, foreign exchange is conducted in precious metals and diamonds. 

Gold, silver, platinum and a host of other precious metals may not serve as the de facto exchange means in the European Union, Asia or North America. Gold is in a league of its own, and so is silver, since they have both cosmetic and industrial uses.

Many investors have traditionally seen precious metals as a hedge against currency debasement and a downturn in equities. Risk is omnipresent due to potential dollar debasement or even removal from its perch as the peg as the top currency reserve asset. I’ve written about this before, and it’s a topic of concern discussed in financial circles worldwide. It’s unlikely to happen, but it’s one of the reasons to consider taking inventory of your portfolio and pulling the trigger on the decision to diversify with precious metals.

Research backs the status gold and silver status

There’s a historically quantitative approach to grasp the role of precious metals as a hedge, or insurance, against equities or other investments. Writing for Seeking Alpha, the director of research for St. Louis, Missouri-based Buckingham Asset Management Larry Swedroe cited the study “Hedging Geopolitical Risk with Precious Metals” published in the Journal of Banking & Finance August issue.

The authors of the study, Dirk Baur and Lee Smales, produced a timely and comprehensive study that links geopolitical risk and precious metal prices. 

What they found was what I’ve known for years.

Gold and silver “have some ability to hedge geopolitical risk,” they concluded, writing that it is “worthwhile for investors” to buy and hold the yellow metal and silver as a hedge.

That any professional researcher will leave room for the unknown, even if it means second-guessing their own conclusion, is a given.

This is why in Swedroe makes sure to include this inconclusive quote from the study: “Given the results of the tests of trading strategies, which did not even include trading costs, it does not appear that one can use signals on geopolitical risk to shift allocations.”

If there was ever a splash of water to the face when you’re thirsty, this is it.

Ultimately, it doesn’t take an empirical researcher to look up the historical price charts for gold and silver, watch and learn from YouTube videos, read mainstream and business media, and conclude that precious metals are commodities that have served investors well in the past, and will continue to do so well into the future.