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Tue 12 Apr 2011 01:22 PM

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Stagflation's metallic lining

Rising inflation, high oil prices, and a tanking US dollar are driving the need to hedge exposure to silver and gold, says Paul Hayward

Stagflation's metallic lining
Gold bars

Google “stagflation threat” and you will find dozens of articles that herald the impending return of this dreaded economic situation. No wonder. The so-called “new normal” of the global economy means high oil prices due to ongoing conflict in the Middle East and North Africa; rising consumer inflation coupled with high unemployment; US and EU central bankers printing money to stave off debt problems; and liquidity at risk of being sucked through a vacuum into the next potential bubble.

When you throw unpredictable “Black Swan” events like the Japanese tsunami into the mix, our still-tenuous recovery from the 2008 global recession seems beset on all sides.  The result is a recipe for stagflation – and a bullion bull market.

Investors seek a save haven

With crude prices skyrocketing from supply concerns, more wealth is accumulating in the GCC region and investors are looking for places to park their money. Precious metals – especially gold – are proven reserve assets. Those with liquid capital are flocking to precious metals as a hedge against inflation and market volatility.

Meanwhile, gold and silver are trading at record prices – a response to the market uncertainty created by geopolitical challenges and slack monetary policy. At the time of this writing, the yellow metal was priced just under $1,460 and silver was just under $40.

Though many predict gold will trade at $2,000 an ounce by the year’s end, the fast run on prices could indicate a correction is due. Yet those who buy-and-hold gold or silver can minimize their exposure to a price swing by trading spot metals on the foreign exchange market.

Similarly to trading currency pairs, trading spot metals lets you capture the price in either direction and take profit whether it is moving up or down. This ability to take a long or short position in gold or silver – while concurrently taking the opposite position in the US dollar or other major currency – appeals to speculators as well as investors seeking to hedge risk.

Spot the benefits of forex gold trading

There are other ways to hedge your gold exposure besides trading in the spot market: gold-related exchange-traded funds (ETFs) – pools of investments traded on an exchange like stocks – futures, and options. Yet these vehicles are more complicated and expensive due to contract requirements, administrative fees, and commissions.

Spot gold forex trading offers a simpler, more flexible solution. Forex is a 24-hour over-the-counter market and trading is done via online trading platforms that users can access any time with a computer connected to the internet. Most online forex brokers eschew commissions and charge only the spread – the difference between the buy and sell prices.

As the global economy is buffeted by the forces of stagflation, investors who buy gold or silver to preserve their wealth against inflation should remember that the precious metals market can be volatile. Trading spot gold and silver is a way to hedge the hedge.

(Paul Hayward is Managing Director of OANDA Middle East Corporation. The opinions expressed are his own.)


Louie Tedesco 8 years ago

Financial advice of this nature in a public forum should be banned, or, at least, filled with so many disclaimers of responsibility by the editor that the "common man" is frightened to death to invest his money in such schemes.

Anyone who Google's the increase in precious metals will discover that these aren't rising overnight, rather the price has been rising constantly for over ten years. There have been some short term downward trends, but the metals have consistently recovered to ever-higher levels.

Buying precious metals without taking delivery is dangerous - the piece of paper one is given is just that, a worthless piece of paper stating "I promise to give you X amount of gold or silver". The reality is that the speculators selling these promises are not able to fulfil their deliveries and that premiums are offered to investors who decide not to exchange their paper for actual metals. Does this not send off an alarm bell?

THE FX MAN 8 years ago

@ Louie
Finally! A sane comment! absolutely agree! perhaps this is where we also warn everyone about JP Morgan's silver short position held for july?!!!! ie perhaps another big hit ready to shake the markets if silver continues to increase and JPM can't physically deliver?!!!