Is It Time to Buy Silver?

Is it time to buy silver?

I'm going to preface this entire posting with a disclaimer -- in no way am I an expert on the economy, finance, precious metals, money, wampum, astrophysics, quantum mechanics.... you name it, I'm not an expert on it.  But I consider myself a fairly rational and logical person, and I was thinking about the current state of the economy and what the future may hold.  And this posting is the result of these thoughts, laid out as straightforward and simply as I could.  My hope is to create a dialogue amongst other people, and hear their opinions on the matter.

Current state of the dollar

It's no suprise that at the time of this writing (March 2009), the Unites States (and indeed, the world) economy is going through a once-in-a-lifetime type experience.  We have people losing jobs, consumers are fearful, the banking system is in shambles, and the U.S. Government is planning on churning out trillions of dollars in the coming years to try to ameliorate the situation.  It is this government spending that is the focus of this posting.

National Debt

The national debt currently stands at 11 trillion dollars and change.  According to the Congressional Budget Office, all the additional stimulus spending in Obama's propsed budget will nearly double the national debt to 20 trillion dollars over the next 10 years.  Assuming a 5% interest payment on that debt - we'd be paying $1 trillion dollars a year just in interest payments!

Inflation

So are the actions being taken by the Federal Reserve - flooding the financial systems and increasing money supplies - going to trigger higher inflation?  Many people think that once the economy begins to recover and there is growth again, inflation will rear its ugly head.  I have read that the Fed has plans to pull out the excess liquidity in the money supply as the economic recovery begins, and so should be able to control inflation that way.  I have my doubts as to their ability to walk that fine line of subduing inflation while also trying not to derail a future economic recovery.

There are also some conspiracy theorists out there that might say the government will encourage inflation -- that way they can pay back all these borrowed dollars with cheaper dollars in the future.  I'm not sure how true this is, but it sure makes you think.

Why silver?

So all this inflation talk got me to thinking of inflation hedges -- namely, precious metals.  Is it wise to put some money into silver and gold?  I think it makes sense, as part of a balanced and diversified portfolio.

Silver and Gold have always been a store of value.  And historically, the ratio of gold value to silver value was about 16:1 (1 ounce of gold would be worth about 16 ounces of silver).  In the 20th century, we've strayed from that historical ratio.  Today, the ratio is around 70:1.  This implies to me that relative to gold, silver may be undervalued (as compared to historical data).  In addition to silver being a store of value, it is important  in many industrial applications as well.  Demand should rise as the economic recovery progresses

Conclusion

It seems to me there are some pretty compelling reasons to make precious metals (specifically silver) part of a diversified portfolio of assets.  I'm sure there are many different schools of thought on this, and I hope to hear people's thoughts on the subject in the comments section below.

References:

http://www.brillig.com/debt_clock/

http://www.washingtonpost.com/wp-dyn/content/article/2009/03/20/AR2009032001820.html

http://seekingalpha.com/article/14922-is-the-old-gold-silver-ratio-of-16-still-alive-today

http://www.gold-eagle.com/charts/gegsr.html

http://en.wikipedia.org/wiki/Silver_as_an_investment

http://www.lewrockwell.com/north/north436.html