Answer to Cynthia Morales question about hedging for inflation using silver.

Answer to Cynthia Morales question about hedging for inflation using silver.
[Question] "I have a donut shop in Atlanta we sell a lot of donuts everyday. I recently purchased some equipment and the building we rent. I decided to raise the price by .10 to cover the additional costs plus the increase in ingredients. My sales dropped from an average of 20,000 donuts per day to 17,000. The price increase was nothing only .10 cents. Inflation is killing my business and I would like to buy silver to protect myself from inflation. Should I invest in silver or gold to hedge inflation? Should silver increase in value as inflation rises? Why are silver premiums so high right now?"
[Cynthia Morales ]

I am not in the donut business, but I suspect your sales dropped because you raised prices and not consumer demand or inflation. Your company, like mine, is affected by economic law. Just like the laws of gravity apply equally to both of us. The Laws of Price Elasticity also apply equally to both of us even though you are selling donuts and I am selling silver and gold bullion. Goods are either price elastic or inelastic, meaning some goods sales will drop with price increases and some will not. If medicine prices rise, sales will remain steady and consistent because we need medicine. Donuts and silver are not items we need.

In your case, there are unlimited competitive products to satisfy a sweet tooth. The increase of $0.10 per donut triggered a 30% reduction in sales. Because of price elasticity, if you lower the price of a donut $0.10, you will undoubtedly see an increase in sales, possibly as much as 30%. So you have to sit down and do some math. I am not sure what the profit margin is on a donut. If you think selling 30% more donuts would generate more profit at .10 less per donut, you should lower the price to increase the volume of sales.

For example, let's say you double your money. Your cost is $.50, and you sell for $1 at a profit of $.50. The Scientific Laws of Price Elasticity suggest you will increase demand by 30%. So lowering the price, more likely than not, will increase your gross by $400 a day which is $134k per year. When selling price-elastic products, you increase volume by lowering the price and generating additional profits. Not by increasing the cost as the consumer has many alternatives for donuts.

Now on to silver as a hedge for inflation; silver and gold are the number one hedge for inflation. The benefit is that consumers trade silver and gold between them for goods and services. Silver and gold trade hands without a sales pitch tax-free in a private setting. As inflation creeps higher, so does the value of bullion. You can borrow money against silver and gold and liquidate it for cash instantly, and the precious metals are easily accessible by anyone who wants to invest. Because of the ease of use, demand is exceptionally high for bullion and gold. There are alternatives you can purchase grain stocks and oil through exchange-traded funds (ETF); there are companies like Marathon and EXXON, SJM is food stock, SLV is a silver ETF, GLD is a gold share.. These are an example of ways to hedge against inflation. I'm not invested in any of these companies because I can't keep up with the stock markets on my own. Nevertheless, they are alternatives to physical metals like gold and silver. Now on to why premiums are high. For dealers to buy and hold silver we must hedge adequately to protect us from market drops. If a dealer holds 10000 ounces and the price drops $2 in 3 days, the dealer has 20k exposure if they do not hedge properly. The cost of the hedge is added to the silver price. Without that premiums, nobody would be able to bring silver to the market for consumers to buy. Premiums are not profits; they are additional costs that bring the goods to market. Dealers make $1 to $1.50 per ounce.

If you are interested in silver/gold bullion, we are here. I would be happy to sell you anything you need at a very competitive price. And my prices also reflect the laws of elasticity :)