Silver Sell-Off Doesn’t Change Fundamental Reasons To Invest In Precious Metals

As hedge funds recently ran for cover by selling off their paper precious metals investments, nothing else has really changed on the economic front. Previous declines in equities and other commodities brought out the courage in fund managers to bolster their cash reserves at a time when precious metals prices were high.

Despite the frenzy of profit taking by many equities funds, which caused precious metals prices to plummet, deflation is still a major concern. No matter the level of cash injected into the monetary system, central banks are coming to the realization that Wall Street may not respond with leveraging of assets.

Although consumers are accelerating their spending when compared with 2009 and 2010, they are still unwilling to borrow on contracts that require installment spending. This year’s jump in credit card borrowing is evidence that the supply of devalued paper money could yet grow higher.

The increase in installment lending, so far this year, remains at a negative number, but deflation is never permanent. As consumers balance their assets, equilibrium will be achieved and borrowing will, once again resume. When credit begins to flow, it typically experiences an accelerated wave, sometimes cresting in a flood.

When credit flow increases dramatically, the Fed will need to coax banks into keeping reserves. The only tool available to the Federal Reserve is its ability to pay a steeper rate on the reserves that it holds. Precious metals investors will be sitting pretty as the tide turns. The resulting outcome of increased reserve premiums is another acceleration of growth in the money supply.