Is It Time to Buy Gold and Silver?

The following is an expression of the opinions of the author and is not to be considered advice.

I've always been resistant to buying precious metals and I don't have alot of money to invest, but after reading a news article recently I've changed my mind. I have now decided to buy some gold and some silver each month and sock it away as a hedge against inflation. With commodities so high, why on earth would anyone want to buy silver and gold now? Read on.

Today, I read a news article from Reuters with the following headline: "Banks face a systemic margin call of $325 Billion". My eyeballs almost popped out and I had to do a double take when I read this......that's not a typo.....$325 BILLION with a 'B'! (A link to the original Reuters article is available at the end of this article) This figure is coming from JP Morgan Chase & Co. who essentially stated that Wall Street banks may be drained of $325 Billion in captial because of the deteriorating conditions in U.S. subprime mortgages. The article also stated that JP Morgan has sent a default notice to Thornburg Mortgage after the lender missed a $28 million margin call. Additionally, the "Carlyle Group's mortage fund also failed to meet $37 million in margin call this week". The lending institutions who borrowed money to make leveraged investments into the subprime mortgage market are now being told to start paying back some of that money due to the fact that there has been a dramatic plunge in the value of those investments. The collateralized debt obligation (CDOs) and other newly created debt instruments based upon these mortgages (which are very complicated but basically boil down to collecting thousands of mortgages, bundling them up into an investment package, slicing the package into pieces, then selling the pieces to investors) were based on the fallacy that housing prices would continue to rise and the American consumer would make payment on those subprime mortgages. Now reality is coming back, and those banks and lending institutions who were heavily vested in these subprime based investments are being asked to pay back the money that they borrowed to buy such investments. The piper is calling, but the problem is, the institutions are having trouble selling these securities to raise cash and pay their margin calls. After all, who wants to buy these garbage CDOs that are falling in value? So now, they're relying on the Fed to step in and buy up this garbage to prop the financial system up. The Fed has already printed hundreds of billions of dollars over the past year to deal with the 'liquidity' crisis and they're going to keep printing more money which will sink the dollar even further into the gutter!

According to a report from JP Morgan (released March 7, 2008) "a systemic credit crunch is underway driven primarily by bank writedowns for subprime mortgages" and that situation is characterized as a "systemic margin call". I'm not sure how you would interpret these statements, but my take on this is that the subprime mortgage credit crunch has deteriorated so such a great extent that it's going to have a widespread effect on the entire banking/credit system. Banks are trying to shore up as much money as they can to cover their reserve requirements and to remain solvent. JP Morgan also said that the credit crisis is also likely to get worse. How much worse is not known!

With the Federal Reserve printing so much money, inflation is bound to rise. In fact, we're seeing evidence of that already. The Fed intends to inject another $200 Billion into the banking system this month alone (March 2008). There is also speculation that the Fed will cut the Fed Funds rate by another 50 to 75 basis points which would bring it into the range of 2.25%-2.5%. Print, print, print more money! This is essentially shifting the burden to the average working person since it will make money less valuable. It's basically a bailout that is disguised as something other than a bailout but no matter how much lipstick you put on the pig....IT STILL STINKS!

Bear in mind, that there are some 500 to 700 TRILLION dollars (that's right trillion with a 't') of hedge funds in the world today which are not regulated and are very opaque with regards to how they operate. If just 1% of that goes bad that's a $5 trillion mess to clean up. The scary part is, we still don't know how deep this problem goes and how bad things will get!

That's why I'm buying a little bit of gold and silver each month (just whatever I can afford) and socking it away. I'm not speculating or buying more than I can afford. If commodity prices crash then I'll have some gold and silver coins that are pretty to look at. Hey, you can always pass on numismatic coins to your kids or loved ones. They'll always have some intrinsic value and will never go to zero. On the other hand if inflation flares up (and I think it will over the next couple years due to all the money being printed to try to save the banking system from collapse) then gold and silver will be a good hedge. At least gold and silver coins will always be worth something!