Gold, Silver and the Value of Money

What I Think

# 008 March 11, 2009

Recently someone asked me what I thought about buying gold and silver, in light of the current economic conditions and the potential for the economy to get even worse. Gold and silver are excellent hedges against inflation, but just like stocks the value can fluctuate drastically.

Understanding why you are buying gold and silver is very important. Are you buying because you think the economy is going to crash and inflation will run rampant? Are you buying because you want a tangible solid asset that you can own free and clear and is basically untraceable? Are you buying because you think it is a good investment?

Gold has been under attack by the U.S. Government since the 1930’s when they outlawed the private ownership of gold. This was the beginning of the confiscation of the wealth of the American public. How is this so? The government needs to be able to devalue money in order to increase tax receipts and to cover up deficit spending.

As with any scarce resource, gold is sold to those who are willing to pay the most for it. The more people use gold as money, the more likely people will choose gold over government issued paper currency.

Gold reduces the likelihood of “debasement” of our money by the government.

Webster’s Dictionary defines debasement as - a: to reduce the intrinsic value of (a coin) by increasing the base-metal content b: to reduce the exchange value of (a monetary unit.

With gold a standard can be set as to the actual value of money. Even if a government goes bankrupt, gold coins will circulate at gold’s market value. This is true of silver, platinum or any other scarce resource used for currency. Our money today has no gold value and very, very little silver content.

A government can cease to exist, but money minted with a nominal, verifiable amount of gold or silver will still be exchanged for goods and services. You don’t have to base the value of money on the “faith and credit” of the issuing government.

Gold and silver’s independence from government’s whims and policies magnifies a political truth that governments hate to admit and refuse to acknowledge: governments are not the source of the value of gold or silver. If the currency of the realm is gold and silver, the government has no control over the money or the value of money.

This means the free market, not the state is the primary source of the gold and silver’s exchange value. This gives power to consumers and takes it away from the government.

If we have a true gold/silver based monetary system, the government loses the “control” over the people by tampering with the value of money. In the olden days, the king controlled the minting of money with the visual proof of putting his face on the minted coins. If the king wanted to increase spending (by raising taxes) there was resistance (he might be overthrown and hanged or beheaded). So he would recall the old coins, melt them down and re-mint them with less gold and silver content by adding cheap metal.

For example, he could take a $1,000 worth of gold coins, lower the gold content by half and PRESTO! He had $2,000 worth of coins. Talk about doubling your money!

The problem with this is that the people were not stupid. When the king (or parliament, or the czar, etc.) tried to spend this money into circulation, the new coins would always fall in value. As expected, this would upset the king, because he was not able to be effective with his “theft through deception”. Of course the market always spawns the intrepid citizens that realize the fraud before everyone else and trades the new (debased) coins for the old coins leaving the less perceptive, more trusting (of the government) citizens holding the bag of the depreciated money. When private citizens do the same thing the government is doing, the government is enraged because it is always the prerogative of the government to steal, but not the citizens!

Let me give you a real world example of how this works.

In 1965 the U.S. Government started debasing our silver coins. Prior to 1965, U.S. silver coins were minted with 90% silver. After 1964 the silver content was continually replaced with cheaper metals until today there is hardly any silver content at all in U.S. coins.

In 1964 you could buy a loaf of bread for a quarter (more or less). What does a loaf of bread cost today? Two to three dollars unless you buy day old or discounted bread. What is a 1964 U.S. quarter worth today? You can sell a U.S. Quarter minted in 1964 (or earlier) for 11 to 12 times face value. This means that a 1964 quarter is worth $2.75 to $3.00. Amazing! A 1964 quarter still has the buying power today it had 45 years ago! Now, if the U.S. Government had to back a quarter at those values, how in the world could we have a trillion dollar plus stimulus bill?

Now that the history lesson is over, let us get back to the original question… should you buy gold or silver coins? My opinion is yes. I think everyone should have some type of physical monetary hedge against hard times. Every financial advisor will tell you that you should have a minimum of three months or more cash reserves.

This is well and good, but if inflation becomes a serious issue, your three months savings could easily become one month’s worth of cash reserves. Another issue is financial turmoil. If you lose your job, get sued, or file bankruptcy the cash you have in the bank is an asset. This can be attached, confiscated and taken from you at a moment’s notice. If you don’t believe me, fail to pay the IRS in a timely manner and see what happens to your savings!

Everyone needs cash (or comparable) reserves. Having been completely flat, busted and broke in the past, I can state emphatically that when you reach that point, it is very difficult to generate cash for everyday expenses, and even more difficult for emergencies. Gold and silver coins are an excellent resource for cash reserves.

If you decide to buy gold or silver coins - do not buy anything for numismatic value. The significance is in the functional use of the precious metal and its perceived value when you need to use it. There is no reason to pay a premium for graded or rare coins. If you are buying silver, you want “junk” silver coins or “bag” coins – always pre-1965.

If people resort to trading 90% silver quarters for food or shelter, they won’t care how rare it is. All they will care about is if it’s real silver or gold. Buy coins not gold or silver bars. Coins are portable and already denominated so that people understand what they are. Will the average citizen know how to value a pound of .999 pure silver? Also it is heavy and hard to hide.

I would not buy gold or silver and have it stored for me by an investment company or brokerage in an “off site” location. Check the internet, you can find ads all day long for companies that will sell you gold and silver and “safely” store it for you in their private, secure vaults in New York City or Switzerland. I would not consider paying for gold or silver, then having it held for me somewhere else. To me, the concept is insane.

If you are buying gold and silver as a hedge against inflation and civil unrest, how in heaven's name will you go to Switzerland (or even New York) and pick it up? You can be assured, if it comes to that, you may not even be able to leave the country legally or safely, much less bring a precious metal back through customs. Our federal, state and local government officials already have a pesky habit of confiscating large amounts of cash they find on people, using the drug dealer or money launderer excuse... what do you think they would do with gold or silver that cannot be traced? Good luck with that!

Any asset that you purchase needs to be purchased quietly and confidently. Don’t tell anyone what you have bought, don’t send emails to your friends telling them what you have (emails are ALWAYS saved on a server somewhere).

Buy it quietly, hide it quietly and don’t discuss it. In times of peace and prosperity, theft is common. What will things be like if the walls come down? Where ever you store your gold or silver it needs to be safe and only your spouse or someone you trust implicitly needs to know where it is. If someone is holding a gun to your wife’s head or your child’s head, will you tell them where you have it stored?

You should have two locations –if you have a safe in your home, you should have two safes. One, as a decoy and one where your major tangible assets are held. The decoy safe should have some legal papers, cash, coins, etc. but not the bulk of your assets. They should be in the other safe (or safe place). If you have kept your mouth shut a thief, home invader (or the Sherriff) will have no idea how much you have stashed and will probably be happy with the decoy.

I do think even more inflation (devaluation of our money) is coming. I've stated in previous blog entries that I think we are going to have depreciation in fixed assets (stocks, real estate, etc) and inflation in the foods and consumables. Given the massive federal spending and printing of money, there is no other way around it.

As a matter of fact, I suggest preparing a cache of food. In upcoming entries I will discuss preparing food and water storage and offer additional information on how to survive disasters and economic turmoil. I am working with co-contributors to put together a series of e-books that will available for download to our subscribers on this (and other important subjects). Stay tuned!

I will close with a quote from “The Daily Reckoning” newsletter:
"Gold has history. Gold is to wealth as Sun Tzu is to the art of war. Gold is real. Gold is solid. Gold is nobody else's liability. Gold is quiet. Gold can be your own little secret. Many people even believe that gold is money! Archaeologists tell us that for about 8,000 years of human history, if you had gold, you could buy stuff. And if I owned a restaurant and you wanted to pay for your hamburger with a $50 U.S. Gold Eagle, I assure you that I'd take the coin and find a way to make change."

With warmth and regards (as always),
Allen
To reply or comment:
http://voicecafe.blogspot.com/

for more information or private correspondence:
AllenWells@mindspring.com