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When Yield is Non-Existent, Gold and Silver are In Play

Commodities / Gold and Silver 2011 Sep 09, 2011 - 02:09 AM GMT

By: Dr_Jeff_Lewis


Personal and institutional finance differ in the most important way; personal finance assumes a limited lifespan, whereas institutional finance operates on the framework of a perpetual life.  The lifecycle of an individual investor dictates that with each passing year, risk must be taken off the table to create a better trajectory for a coming retirement.

Years ago, the common line in the retirement planning business centered around the 4% solution to retirement.   Retirees could plan on drawing 4% from their accounts each year, a combination of dividends from stock investments, and yields from well-paying fixed income investments.

Unfortunately for individuals, neither the 4% solution nor the underlying returns on investment capital panned out.  Seniors who planned on four percent returns made out well in the 1990s, and only once had to deal with record low rates for a brief period following the burst of the tech bubble.  Today, however, it appears that the relatively sky-high yield offered in 2006-2007 may be long gone.

Central banks hope to keep record low rates in place to spur economic growth and liquidity.  Investors, tired of the volatility in domestic stock indexes, see fixed-income vehicles as charming solutions.  In a perfect world, fixed income investments would be the go-to investment for future retirees.  But now, with yields near-zero and inflation certain, investors will have to embrace more volatility to meet their retirement goals.

Bullion vs. Common Stock

Common stock investments were once even too volatile for retirees.  Annuities, bonds, and fixed-income products offered certainty of capital and excellent returns.  Now more than ever, future retirees, especially boomers, have to prepare for a world where inflation rises faster than gains on invested capital.  When central banks enforce record low rates through the bond markets, bonds are no sure thing.

Instead, the modern investor may want to seek out a 10% allocation to precious metals not just for protection against certainty, but also protection from what is certain—inflation.

Seeing as inflation eats away at all future cash flows from debt investments, it now makes sense to purchase inflation protection rather than yield.  Including food and energy, two inputs which every future retiree must consume, inflation runs at a lofty 3.6% per year.

Generating such returns requires an investment in dividend stock, or risky debt vehicles.  In either case, the possibility of long-term loss is not at all consistent with returns.

On the other hand, bullion offers no yield, but has performed better than inflation.  Given the manufacturing demand for both silver and gold, as well as their anti-inflation characteristics, gold and silver should outpace inflation, plus earn modest returns as supplies used in manufacturing and industry reduce total supply.

Of course, bullion can be volatile, but the possibility for a complete loss of capital is impossible, to say the least.  Both silver and gold have retained their value throughout any crisis and in every century since the creation of capitalism.

Investments should be structured wisely, of course.   Those who have still 10-20 years of retirement could very well afford a modest position in bullion to counteract the destruction of cash and cash equivalents to inflation. 

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of and

    Copyright © 2011 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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