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February 27, 2009

Silver in a Deflation
by David Morgan

How does silver perform during a deflation? A question many of our readers have asked.

Today, most investors are fairly convinced that gold does fairly well during a deflationary environment. Since gold has held better than all asset classes these past several months, many mistakenly believe that gold does best during inflations, but they are not sure about gold during deflations. The fact is, from times past, gold actually does best during deflations, rather than inflations.

The seminal work on this topic was produced by Professor Roy W. Jastram of the University of California at Berkeley when he penned the book called, The Golden Constant. Jastram stated that during the preparation of his book, he found that, throughout the centuries, the history of silver was intertwined with gold. The two metals were found together in nature, were combined in the artifacts of man, and were held precious throughout the world when used as coinage. Both became the means by which wealth was measured and commerce carried out. However, where gold maintained its value over long periods of time, even centuries, silver's movement in the monetary history was erratic and volatile. So, Professor Jastram asked the fundamental question you are asking, "Just how does silver perform during inflations or deflations?"

Precious metals have a long-standing reputation as hedges against inflation. Jastram writes, "This is not valid based on evidence of a century and a half in the United States and more than three centuries in England. The truth is, in most cases, the two metals, yes, both silver and gold, gained operational wealth in deflations." From a long-term perspective, gold has held its purchasing power very well in the United States.

His report went on to say just how silver fared in relation to gold, and the findings are quite significant to those in the silver community. As stated previously, silver has a history of being much more volatile than gold and remains so to this day. There were periods where silver actually outperformed gold and periods when it underperformed. This is historic fact and yet might give a serious student pause to reflect upon the presumptions and beliefs held about silver.

If only one metal had to be chosen to protect your wealth, the answer from history would be the gold market. However, the most recent timeframe studied by Jastram, which was inflationary, revealed a significant out-performance of silver over any other commodity, including gold. But I must emphasize that the timeframe covered a long period when the price of gold was still fixed by government edict.

Regardless, the facts from the past cannot be refuted. The average price for silver in 1978 was $5.40 and the average price in 1979 was $11.09. But between 1978 and January 21, 1980, silver increased nearly tenfold.

As I have stated many times, the easy money has been made in the precious metals but the BIG money lies ahead, because if you think like I think, once this "disinflation" turns into a dollar collapse people will be looking for anything that will hold value, and that certainly includes both the precious metals.

Remember there is no fever like gold fever, and that will ignite the silver market, as those looking to gold might be priced out of the market and, thus, willing to buy silver!

It is an honor to be,

David Morgan
Silver-Investor.com

Mr. Morgan has followed the silver market daily for over thirty years. Much of this Web site, www.silver-investor.com, is devoted to education about the precious metals.

Mr. Morgan has been published in The Herald Tribune, Futures magazine, The Gold Newsletter, Resource Consultants, Resource World, Investment Rarities, The Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava. Mr. Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver Investing is available on Amazon or the link provided. His private Internet-only newsletter, The Morgan Report, is $129.99 annually. To suscribe to the Morgan Report click here.

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Because individual investment objectives vary, this Summary should not be construed as advice to meet the particular needs of the reader. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice. Any action taken as a result of reading this independent market research is solely the responsibility of the reader. Stone Investment Group is not and does not profess to be a professional investment advisor, and strongly encourages all readers to consult with their own personal financial advisors, attorneys, and accountants before making any investment decision. Stone Investment Group and/or independent consultants or members of their families may have a position in the securities mentioned. Investing and speculation are inherently risky and should not be taken without professional advice. By your act of reading this independent market research letter, you fully and explicitly agree that Stone Investment Group will not be held liable or responsible for any decisions you make regarding any information discussed herein.

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