Silver Still Shines, but Can Metals Truly Serve as Hedges in a Debt-Laden U.S?

Silver, the poor man's gold, has made a nice recovery the past couple months, with the spot price up about 40% since mid-March. At that time, spot silver was trading at an 11-year low in the range of $12.50 per ounce, but it was a completely different story for actual physical silver, which was trading at a huge premium to the spot price. For instance, a $100 bag of junk silver (90% silver U.S. coins minted prior to 1965), which contained 71.5 ounces of silver, was selling for $1,475 or $20.62 an ounce, a healthy 63% premium to the spot price. That was assuming you could find any to buy.

That price for that same bag of silver actually has risen another 9% since mid-March, but has fallen since late March, when junk silver eclipsed $24.50 an ounce. However, not surprisingly, the spread between spot and physical silver has narrowed considerably. Currently at $1,609 per bag, which is the equivalent of about $22.50 an ounce, it still commands a 28% premium to the current $17.52 spot price, but that's a far cry from what we saw in March. 

With all the uncertainty from the pandemic, investors sought some solace in physical metals. It appears the shortages of physical silver for investors have abated somewhat since March, based anecdotally on availability on some of the dealer websites I've visited. 

However, the longer-term question about whether silver and metals in general can serve as effective hedges against uncertainty remains. In this case, with a national debt of $25.5 trillion, up nearly $3 trillion since September, and a debt to GDP ratio of nearly 120%, you've got to wonder how this will all play out. The pandemic-related economic shutdown has forced businesses to close and caused millions to lose their jobs, and the last $3 trillion or so added to the national debt was a Hail Mary spent in order to try and keep businesses and citizens afloat in order avoid a depression. But even prior to that, it seems that most of the deficit hawks had already disappeared. 

I am reminded of a talk given by Bill Dudley, former president of the Federal Reserve Bank of New York, back in October, when he was asked about the national debt. Seems that there are actually some people left who still believe that the debt matters, just seemingly not enough in our government, and that's on both sides of the aisle.

I know many believe this is not the time to be discussing the national debt, with the economy teetering on the brink. I get it. But it's real, and as investors we need to be prepared for the potential fallout. I know that precious metals are not the only answer, but perhaps one tool for the arsenal, if debt actually does matter in the end.

I am curious as to how my fellow Real Money contributors are approaching this issue, or if they don't believe it is anything to worry about.

At the time of publication, Heller had no positions in silver.