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Case for Gold and Silver

Updated: Aug 4, 2020

Would gold and silver hedge against a financial crisis and how to invest in precious metals?

Assalamualaikum Dear Brother/Sister,

We had discussed previously that we are looking at a potential financial crisis ahead of us. One of the ways we can hedge against potential hyperinflation is through having a portion of our wealth in asset classes that traditionally performs well in such scenarios. Even during times of less uncertainties, most adept financial advisors recommend about 5 to 10% of savings invested in precious metals to act as as a hedge. As well gold and silver have been used as stores of wealth and as money for millennia. As JP Morgan put it, Gold Is Money, Everything Else Is Credit.

This is the place where I add disclaimer to the fact that I'm not a financial adviser. You must do your own research before you make any financial decision. Without further adieu, I'll outline some reasons why precious metals like gold and silver should be have a portion of your portfolio.

Precious metals like gold and silver is one of the best performing asset classes during the time of crises. Below is reproduced the price of gold (USD/oz) corrected for inflation using Consumer Price Index (CPI). I am not going to go into the discussion whether CPI is the best inflation correction tool available. That would be a mere tangential discussion. Nevertheless, the trend is quite evident that the price of gold spike during and soon after a financial crisis. Pay attention to the spikes in the gold price during 1930s, 1970s - early 1980s and during the late 2000s. When Richard Nixon took US Dollar off the gold backing it had during the 1970s is when the biggest spike in gold price was observed.

Inflation corrected gold prices (Courtesy

Another investment tool which investors use to study whether it is more profitable/less risky to invest in stocks or in precious metals is called Dow-Gold Ratio. When the Index reaches a value over 15, the stock market is typically due for a correction and is best to switch to precious metals. The way gold and silver work are very different. Gold acts a store of wealth during times of uncertainties and silver provides barter-ability when systems crash and for hedging against hyperinflation. While gold is already close to its all time highs, it is still under-priced due to the current hyper-inflationary measures in place devaluing fiat currency.

The price of silver typically follows trends quite similar to gold except that it usually sees an increase at a rate 2-3 times that of gold during a precious metals bull market. Conversely, the price of silver crash at 2-3 times the rate of price of gold during a bear market. Silver also sees a little bit of a lag time compared to gold before it goes on its bull run. Investors play close attention to the gold silver ratio while deciding the ratio of gold and silver to hold in their portfolio. While historically the gold silver ratio has been about 15, the ratio hit about 115 earlier this year. This provided a huge buying opportunity for silver where it was highly undervalued. The gold silver ratio has since subsided quite significantly, however, there is an opportunity that silver has a longer way to climb and hence maybe a better buy at this point. Also at the time of this article, the current silver prices is about half of its all time high indicating its huge potential for growth. Silver production is significantly lower than gold in terms of revenue generated, this could potentially drive the prices a lot higher. However, the industrial demand for silver will have significant impact on how the price of silver would react to market conditions.

Major financial institutions such as central banks and JP Morgan et al. are stocking up on gold and silver. While their media outreach may indicate discouraging investors on hoarding up on these metals, their actions indicate otherwise. Huge contract deliveries on COMEX indicate that financial institutions are looking at hoarding the physical metals. Look at what they do and not what they say.

Now in shaa Allah, I will present some Islamic evidences for why gold and silver should be considered. Gold and silver have been considered an money for a long time in history. Islam has instituted zakaah on these metals for the same reason. Following is a hadeeth from Sahih Muslim which points to the fact that the price of gold would reach astronomical values in the future. Of course, only Allah knows when this will come to play. But this is a definite reason why one should consider having gold for wealth protection (at least in my eyes).

"Abu Huraira reported Allah's Messenger (may peace be upon him) as saying: The Last Hour would not come before the Euphrates uncovers a mountain of gold, for which people would fight. Ninety-nine out of each one hundred would die but every man amongst them would say that perhaps he would be the one who would be saved (and thus possess this gold)." (Sahih Muslim)

In Surah Al Kahf, Allah mentions that the people of cave used silver coins to barter for some food. This indicates that silver has been used as money since time immemorial.

"And similarly, We awakened them that they might question one another. Said a speaker from among them, "How long have you remained [here]?" They said, "We have remained a day or part of a day." They said, "Your Lord is most knowing of how long you remained. So send one of you with this silver coin of yours to the city and let him look to which is the best of food and bring you provision from it and let him be cautious. And let no one be aware of you." (Surah Al-Kahf 18:19)

Now, I am sure you are asking what is the best way to invest into precious metals. Well, there are several ways:

  1. Buy bullion coins or bars. There is no better way than to hold the physical metal under your ownership. Be prepared to pay high premiums in markets such as today's. Possession is 90% of ownership. So it may not be the best idea to store it in safety deposit box in the banks. I would also recommend that you look up what happened in 1930s, when it was made illegal to own gold and owners were forced to turn in their gold at a fixed rate unless you were willing to hide it.

  2. Buy gold and silver jewelry. In some countries, taxation laws may mean that owning jewelry makes more financial sense than owning bullion coins or bars.

  3. Buy ETFs such as GLD. This may have been a decent option at times when uncertainties weren't as high and the trust in the system wasn't as low it is now. The ETFs are not backed by as much physical metals as they would like you to believe and you do not get allocated physical metals. Additionally, you cannot request physical delivery unless you have a significant amount invested which is typically out of reach of an average investor.

  4. Mining stocks. Buying stocks in companies that mine for resources such as gold, silver, copper, uranium etc. is seen as lucrative during precious metal bull markets. Returns may be a lot higher than physical bullion or ETFs. However, you have to really know what you are doing in order to not loose significant amounts of money. Also, investing in companies over a certain debt to revenue ratios are not considered halal by fuqaha. This does limit your options quite significantly.

In short, the best way to own precious metals is through buying bullion coins and/or bars. However, you have to factor in the local tax laws, premiums, availability, risks of theft etc. before making such a decision. Also, do not forget to pay your zakaah on gold and silver.

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