As an introduction to this post, I highly recommending watching this 30 minute animated documentary The American Dream. It's a humorous and surprisingly accurate introduction to the history of money and how we've gotten to where we are today.
Gold and Silver is real money
Imagine a world without money where everything we possessed would need to be created through our own production or direct exchange, also known as barter. Despite my family heritage, I'm not much of a farmer, carpenter, or tailor, which leaves me with the option of bartering to obtain the goods I need to survive. It would be unlikely that I could find others in a unique situation willing or able to directly accept my IT consulting services in exchange for food, shelter, clothing, or any other goods I may desire. I would be left with few options and resort to producing these goods myself. In such a world my standard of living would decrease dramatically, assuming I could survive at all.
Fortunately we don't live in a world without money. Long ago, men in ancient barter economies realized that some goods were more readily accepted than others. These goods rose in value in the minds of their owners not for their value in direct consumption, but because they could be traded in the market to others in order to obtain the things the owner actually wanted. These goods became known as money, the medium of indirect exchange. The discovery of money enabled savings, lengthened time preferences, and the division and specialization of labor; all of which are necessary conditions to facilitate modern civilizations and the high standard of living that many of us are blessed to enjoy.
Examples of early money include cowry shells, ivory jewelry, iron nails, salt, rice, barley, tobacco, alcohol and livestock. The characteristics these goods generally had in common was portability, divisibility, durability, and acceptability. Obviously, some of these examples performed better in one category than another. A cow or piece of ivory jewelry isn't very divisible, and perishable goods such as tobacco or rice are not very durable. Over time, precious metals, particularly gold and silver, rose in the market place as the best goods having the qualities of money. No king decreed this to be so, in fact, no law could ever establish money out of a vacuum. Instead, individuals acting in their own self-interest realized that gold was portable, divisible, durable, and acceptable, and as this truth became widely accepted the 6,000 year track record of gold as money began.
Despite recent statements by Ben Bernanke, gold and silver retain the characteristics that define them as money and remain so today. Another crucial feature desired in money that precious metals posess is that they are finite and limited in supply. For a good to have the money characteristic of acceptability, you would not want something overly abundant like air or water. The limited supply and difficultly to counterfeit gold are the reasons it has maintained a remarkably steady value over thousands of years. For instance, it is widely claimed that in ancient Rome a 1 oz gold coin could obtain the finest toga, sandals and belt. Fast forward to the 1700's, 1800's, 1900's and today, that same 1 oz gold coin could purchase the finest men's suit of that era. More recent examples from the last 100 years illustrating gold and silver's ability to maintain purchasing power include a meal, a fine rifle, and a barrel of oil.
The history of fiat paper money is not impressive
Leaving aside the ethical questions concerning our modern system of giving privileged institutions the role of printing money under force of legal tender laws, side-stepping the history of how warehouse receipts of commodity money were turned into money substitutes, and ignoring the arguably fraudulent nature of that transformation and of fractional-reserve banking itself, a mere empirical glance at the history of fiat paper currencies should give us pause to consider the potential fate of the US dollar and its status as the world's reserve currency.
The attempt to by-pass the role of traditional savings to obtain the illusory "free lunch" with paper money has been attempted numerous times in many nations since the birth of the printing press. Some of the first examples of government issued paper money occurred in the American colonies before the revolution. For one excuse or another, virtually all the original 13 colonies experimented with their own state-issued paper money. While many assertions were made to only issue a certain amount of notes for a limited time and to redeem them back for silver at official rates, these promises were always broken under the force of economic law. The pre-revolutionary colonies' attempts to keep the newly printed money at par with existing commodity backed money drove many of them to attempt price controls, which only contributed to shortages of the very goods in highest demand. The continental currencies became so devalued that the phrase, "not worth a continental" was born. This hard lesson guided the writers of the constitution to permit the Congress the exclusive power to coin money and forbid the states from emitting Bills of Credit or making "any Thing but gold and silver Coin a Tender in Payment of Debt."
This restriction on Congress was quickly subverted by Hamilton and his ideological branch of the founding fathers. While hard money would be restored by presidents Thomas Jefferson and Andrew Jackson, the tide turned in 1913 with the creation of the Federal Reserve. Since its inception, the dollar has lost 96% of its purchasing power. The US is by far not alone in the unfortunate list of countries that have experienced high rates of inflation or even hyperinflation as they've failed to resist the temptation to print money.
|I bought some of these from ebay to use as bookmarks and teaching aids... That's right, I'm a Quadrillionaire.|
So what makes us different?
After World War II the United States was on a pseudo gold-standard where central banks, but not individuals, could redeem 35 federal reserve notes for 1 oz of gold from the US treasury. Under this arrangement foreign countries around the world were more than willing to trade their goods and services for dollars. However, the money printing that funded LBJ's guns and butter programs and the massive costs of the Vietnam war caused US gold reserves to drain at a frightening rate as foreign countries and their central banks attempted to redeem their reserves of paper money for the gold we promised. Hence, on August 15th 1971, under the excuse of protecting the dollar against evil speculators, Nixon severed the last remnant of the gold standard by introducing a new world of pure fiat paper money not tied to anything. The $35 dollars that would theoretically entitle its owner to 1 gold oz now could only be redeemed for a twenty and three fives.
Rather than suffer the inflation typical of a money that is de-pegged from its commodity backing, the dollar was able to continue as the world's reserve currency. This was possible due to the unique geo-political circumstances of the world's strategic energy resource, oil. 1971 saw the peak of US oil production, and the cartel created by the leading oil producing countries in the 60's, OPEC, traded their oil exclusively for dollars. Thus, the dollar made a relatively easy transition from being the strongest actor in the world gold standard to maintaining the world's reserve currency status due to every country's need for oil and the happy circumstance that required dollars to buy it. John Perkins, best selling author and former economic hit man, wrote that he helped facilitate a secret agreement between Saudi Arabia, the dominant partner in OPEC, and the United States, where oil would be sold exclusively for dollars at prices acceptable to American interests in exchange for military support for the Saudis and the understanding that the petrodollar profits would be invested in United States treasury bonds and other US interests.
Whether this conspiracy transpired as described or not, the result is the same: for 40 years countries that would otherwise have no interest in amassing reserves of US paper have been required to trade their goods and services for US money and bonds in order to buy oil from other countries. With Americans able to export inflation overseas, we have not had to exercise disipline over our money printing like other countries. Noting that the price of oil has fluctuated against the dollar in line with the trend of gold and silver over the last ten years, remember that the common denominator is their measurement against the dollar and its major driver, money printing. How much longer will this last?
|Gold, Silver, and Oil. The common denominator is US money printing.|
The US government will continue to print money to pay its debts
Using the patterns of history and the laws of economics as our guide posts, it is clear that there are only a limited number of ways the future could pan out. None of the likely options look good for the long term status of the dollar and the high standard of living Americans have grown to accustom. We know that money operates under the law of supply and demand just like any other scarce good, such that other things being equal, a rise in the supply of paper dollars would translate to less demand for those dollars measured in everything else including food, gas, and gold. So when we see gold, silver, and oil price graphs like those above and take into account the money supply chart below, it's clear that gold and silver pricing are not rising, it's that the dollar and other fiat paper currencies are actually falling. Similarly, if we expect massive amounts of money printing in the future, we can expect a concomitant rise in the price of goods including gold and silver.
|Increasing the supply of money is inflation, the rise in prices is the inevitable consequence.|
Now we have the elephant in the room, the unfunded liabilities of Medicare, Medicaid and Social Security. Using the Social Security Trustees annual report, one analysis shows the combined unfunded liabilities of these programs is over 100 trillion dollars. These unfunded liabilities are promises to pay money and benefits to our soon to retire baby-boom generation, many of whom have worked their whole lives paying their taxes and completely dependent on government promises for their retirement. Just like former clients of Bernie Madoff, they believed in a program that was too good to be true and are now victims of a grandiose Ponzi Scheme. The promised payouts are too large, the current workers are too poor, and the trust fund is just a briefcase full of bogus I.O.U's.
So what can we expect the government to do in such a situation? In the aftermath of the recent US credit rating fall, Ben Bernanke assured the markets by promising to add more fuel to the fire by leaving interest rates at 0% for another 2 years. Meanwhile, our Nobel Prize winning economist believes we haven't been printing enough money, and if only we could have a fake war with aliens we would get out of this slump in 18 months. While anything could happen in the short run, in the long run I think the US government is going to do exactly what Weimar Germany did when they found themselves between a rock and a hard place: money printing. If interest rates rise then all the banks that originally needed a bailout will go bust again, while keeping rates at zero prevent the malinvestments from being liquidated, ensuring a future of more recessions which will call for further "stimulus", rounds of quantitative easing, and bailouts. As Greenspan says, "we have 0% chance of default, because we can always print the money." A 14 trillion dollar debt, with 101 trillion in unfunded liabilities? We can always print the money! With words of wisdom like that from "the Maestro", I recommend you buy your gold and silver now and hold on tight, it has a long way to go.
Why / How?
If this is all new information and your head is spinning, I would recommend taking a step back and doing some research to validate the claims I've made. While the purpose of this post is to give high-level advice on the why and how to protect your savings with gold and silver, there remains other methods to protect yourself against the dollar, including foreign currencies, energy and agriculture stocks, and directly betting against the dollar by selling short or investing in an inverse long bond fund. These options carry different levels of risk, and two great books that explore these alternatives are Crash Proof 2.0: How to Profit From the Economic Collapse by Peter Schiff, and The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments by Charles Goyette. While both books give excellent overviews of where we are and how we got here, Schiff's book basically recommends you call his brokerage firm, Euro Pacific Capital, in order to get access to his worldwide selection of hand-picked stocks in mining, energy, agriculture, and emerging markets. Goyette's book gives specific recommendations of mutual funds and ETFs that provide similar exposure and are likely to be available options if you have a IRA or 401k.
Unfortunately I can't personally vouch from experience for everything I recommend, as this is the case with Euro Pacific Capital. Due to the increased rules and regulations governing the financial industry, Peter Schiff has had to move much of his business offshore catering to international customers. He has raised the minimum amount of money for US clients ranging from $25k for a brokerage account to $250k for a managed account. For those that want to get exposed to Peter's expertise but don't have that starting capital, you can start with his family of mutual funds at just $2,500 each. If you have the money for a EuroPac account but aren't familiar with Peter Schiff, I challenge you to watch him explain "Why the meltdown should have surprised no one" at the Austrian Scholars conference. Ask yourself who else you would want managing your fortune?
If you've done your homework and see things as I do: that the current economic crisis is only the beginning; that this is the chickens of October 15th, 1971 coming home to roost; that no matter what the Federal Reserve does in the short term, the dollar is dead as the world's reserve currency in the long run; that this experiment with paper money will follow the fate of previous fiat currencies in history with inflation and devaluation; and that these unfortunate circumstances leave precious metals as one of the few safe havens to protect your savings, then it sounds like gold and silver is for you.
The reason I focus on the why before getting into the how of gold and silver investing is because I think it is vitally important that anyone thinking about getting into precious metals has the proper expectations and the right long-term mind set. For instance, while Peter Schiff was able to predict the housing bubble bursting and the subsequent economic collapse, one thing he didn't foresee was the short term rally to the dollar. During the recession of 2008 many of the foreign stocks Schiff recommended went down as much as 80%. A client that didn't understand the why of Peter's strategy could have become scared and sold at the bottom, getting wiped out! Compare that to the clients that were confident in the fundamentals of their long term strategy and decided to use that decline as a fire sale buying opportunity and doubled down on those stocks. Needless to say, those foreign stocks that took such a beating in 2008 have now gone up 200% - 500%, blasting through their losses and making substantial profits for those confident enough in their long-term outlook that they could weather the storm of short-term losses.
|Make sure you're getting into gold for the right reasons|
Physical vs. Paper
I'll cut to the chase, physical gold and silver is the way to go. This means buying coins and bars from a local coin shop or from one of the online precious metals mints and dealers that I recommend below, or buying physical gold and silver coins through a precious metals IRA that performs a custodial service of storing it for you. In contrast, paper gold or silver includes certificates issued by banks or mints, futures accounts, and gold and silver Exchange Traded Funds (ETFs) like GLD and SLV. These products are either promises to obtain physical gold in the future, or instruments that merely give you exposure to the price of gold allowing you to make profits by selling those futures or ETFs to someone that wants to own them. Some of the drawbacks to owning paper gold include the high management fees of the ETFs, and the extreme improbability that a gold certificate will actually be redeemable for physical gold when you need it. The other risk is that in an hyperinflationary scenario those paper profits could be wiped out and you'll be left holding worthless paper when you could have been accumulating physical possession of gold and silver instead.
However, there are certain circumstances where paper gold and silver might be a good option. For instance, if you have a IRA or 401k that you don't want to cash out, and cannot convert to a precious metals IRA without leaving your job, then an ETF like GLD and SLV might be your only way to get exposed to the upside of precious metals. Another reason one might want to keep some exposure to paper gold and silver is if you have a substantial amount of debt from a mortgage or student loans, in which case you can allow inflation to eat away at that debt and use your easily convertible paper profits to pay it down.
Gold vs. Silver
The debate between gold and silver as being the better buy is another situation where I can't give advice that would apply to everyone indiscriminately, but it would depend on your situation in terms of your time horizon and risk level. On the one hand, gold has the 6,000 year history of being money, and you still see gold being stored as money by central banks, while silver is the younger brother along for the ride. However, silver's extensive industrial use and the gold to silver ratio make many speculate that silver has the largest percentage gains to come. The gold to silver ratio is the amount of silver it would take to buy one oz of gold, and its 200 year average is around 37 to 1, while the naturally occurring ratio in the earth is 17 to 1, and the last time it hit that ratio was in 1980. Looking at the 10 year chart below, we can see that the ratio recently hit a high of 83 oz of silver for 1 oz of gold, and with silver currently sitting at 43, it still looks like silver is the better buy with larger percentage gains compared to gold.
|How much further will it go? I'm not an expert, so I go with both.|
Bullion vs. Numismatic
Let's get something straight, I do not recommend collecting baseball cards or rare stamps, at least not from the perspective of protecting your savings from a falling dollar. Unfortunately, there are unscrupulous companies out there that advertise traditional gold coins like US Eagles, Canadian Maple Leaves and South African Krugerrands, but when you call them on the phone the salesman starts telling you about this great opportunity to buy rare 'numismatic' coins. They talk about how these rare coins outperform traditional bullion coins, and use high-pressure sales techniques to set you on this path. Don't fall for this scam! Your goal should be to get the very best price and pay the very least premium possible per oz. These numismatic coins cost hundreds of dollars more than bullion coins, ensuring a nice fat commission for the salesman. Many people that have fallen for this have seen gold double in price, and yet they are just breaking even on their numismatic coins.
For what types of bullion I recommend, in terms of gold there isn't much difference in price between American Eagles, Canadian Maple Leafs, or South African Krugerrands. For silver, however, I have decided to move towards privately minted silver coins and bars over government minted Eagles or Maple Leafs because of the much lower premium for the former. You can save even more on premium per oz by getting 5, 10, or 100 oz bars. I have found that Northwest Territorial Mint has a very low cost for their privately minted coins and bars, but their major downside is that the last few times I've ordered from them it took 6-8 weeks to get my order! I also recommend junk silver to make smaller barter transactions an option. Junk silver is pre-1963 US coins that are 90% silver. Buying a $100 junk bag means it's face value adds up to $100, so this could be 200 half-dollars, 400 quarters, or 1,000 dimes. Either way, this will add up to 71.5 oz of silver, and should definitely be part of your portfolio.
Time the market vs. Monthly accumulation
I have found that timing the market is very difficult and emotionally straining. When you have the long term perspective that the dollar is dead, and realize that many events could trigger a run from the dollar and all of those consequences could come much sooner than later, it's easy to see a sharp spike in the price and think the worst. Before I found the option of a monthly accumulations program, I would try to save my money and wait for buying opportunities, but unfortunately those moments rarely overlapped. I would see silver fall to $9, but I wouldn't have sufficient savings to make a large purchase. By the time I had enough money saved up, I would see the price increase to $12 an oz, and as I waited for it to return to $10 it would go to $14, and then $16, and then $18. Now that $12/oz price that I passed up looked great in retrospect, and I panic and buy at $18, only for it to fall back to $14!
Thankfully, I learned some good lessons from my first year in precious metals, and I have been employing a much more successful strategy in the last 2 years. I have been participating in a monthly accumulation program for both gold and silver, which allows you to select a pre-determined amount of money to be automatically withdrawn from a bank account on a monthly or weekly basis, giving you that amount of gold or silver at that day's price down to the 10,000th of an oz. I have been using Blanchard's monthly accumulation for gold, and Silver Saver for silver. I signed up for Blanchard's program before Silver Saver existed, and unfortunately their program is behind the times. You receive a mailed invoice once a month, your only option is American Eagle 1 oz coins, and you have to fax them to request your balance in whole ounces.
Silver Saver is the way of the future. You can set up a silver or gold accumulation account with as little as $50 a month, and you can set up monthly, weekly, or one time purchases. They have a website where you can see every purchase, that day's cost, the premium charge, your total amount of gold and silver saved, and its equivalent value in dollars. If you were so inclined, you could even sell back your holdings to silver saver and they would write you a check. However, that's certainly not what I would recommend, as you can take delivery of your precious metals with a wide variety of options, choosing between 1 oz Maple Leafs, American Eagles, Austrian Philharmonics, and Suisse Bars for gold, and $100 junk bags, 1000, 100, or 10 oz bars, privately minted 'Buffalo Rounds', Maple Leafs, or American Eagles for silver. Best of all, they have a rewards program where you can refer friends to sign up for silver saver, and you will receive half of the premium silver saver charges when they sign up with your share code. If you decide to sign up, I would appreciate it if you use share-code AX9GP.
The benefits of a monthly accumulation program are many. For one thing, you take the emotional toil and buyers remorse out of the equation. You also achieve dollar-cost averaging by buying in smaller amounts at a higher frequency to ride the wave as silver and gold go up and down. What I recommend is starting a silver saver account at a weekly or monthly schedule that you can consider your true monthly savings (I save 25% of my after tax income), and combine that with saving federal reserve notes on the side, so that when you do see large drops in price you are prepared for that buying opportunity. About the only time I have successfully timed the market in the short term was when I employed this strategy to pick up a $100 bag of junk silver at $33 right after it fell from $50. I couldn't see it going much lower than that, and fortunately I was correct, as silver now sits back around the $40 mark.
Home storage vs. Custodial storage vs. Safety deposit box
As a firm believer in holding your eggs in multiple baskets, I will outline the main options for how to store your physical gold and silver, as opposed to declaring that one method is the best and only way to go, as each method carries a different type of risk. First off, if you have an IRA that is not restricted by your employer, a great option is to convert it into a precious metals IRA. In this case you have the same tax deferment benefits of a traditional IRA, but you use that money to buy gold and silver coins of your choice, and your IRA custodian stores it for you. While a google search for gold IRA will present you with dozens if not hundreds of options, two companies that I have personally done business with that sell gold and silver for IRAs and offer assistance in setting one up are Blanchard and Northwest Territorial Mint. Peter Schiff's company Euro Pacific Precious Metals also offer this service, but they have a minimum order size of $10,000 for gold or silver.
Moving past the IRA option, there are other custodial services where a reputable company can professionally store and insure your gold and silver in a vault. One option is Euro Pacific Capital's Perth Mint Certificate Program. Under this program your gold would be stored out of the country, and guaranteed by the Western Government of Autralia, and further insured by Lloyds of London. The certificates are transferable, and while the program requires a high minimum purchase, it offers no mark-up, free storage, and a low service fee. Another company that offers storage services, but which I cannot personally attest to, is GoldSilver.com. Apparently they offer insured storage vaults in Salt Lake City, Hong Kong, and Miami, with a minimum monthly fee of $20 - $25. Finally, you can always store your precious metals in your local bank's safety deposit box. However, considering the United State's history of confiscating gold from its citizens, the potential risk is that something similar could happen again in the future. Maybe not outright confiscation, but given the close relationship between the government and major banks, it's not inconceivable that some kind of windfall profits tax could be implemented to punish the evil gold and silver speculators that help bring down the economy, and a government agent would be waiting at your safety deposit box to tax you accordingly.
Given those arguably remote risks, custodial storage of your precious metals does have the major benefit over home storage in protecting your investment from private criminals. As a collapsing economy triggers social unrest and increased crime, the risk of home invasion becomes a real threat. I have several suggestions to help mitigate this risk. First off, loose lips sink ships. All it takes is mentioning your gold and silver home storage to one untrustworthy friend or family member and your life savings could be at risk. So first of all, only one trusted family member should know the location of your gold and silver. While a safe bolted to your basement floor might seem like the ideal location for your entire stash, remember the philosophy of eggs in multiple baskets. Having a small amount of gold and silver in a traditional safe that serves as a decoy, while keeping other stashes in diversion safes that resemble books, surge protectors, and cans of shaving cream wouldn't be a bad idea. I've heard of some people hanging bags of coins in the drywall of their homes attached to their electrical outlets, and of course burying your gold and silver in a PVC pipe out in the yard is another option. While the more creative you get in stashing your gold and silver reduces the risk of a robber stumbling upon it, just make sure that you don't forget the location of the stash yourself!
To summarize this post, here are the bullet-point detailed recommendations taken from above:
If you have a substantial amount of money trapped in an IRA or 401k I would recommend you take a hard look at the consequences of cashing it out early, and at the least transfer it into a precious metals IRA, a Euro Pacific Capital brokerage account, or into the ETFs that track the price of gold and silver.
If you have a significant amount of cash available to make a one time purchase, I recommend you take physical possession of bullion coins from one of these dealers:
Blanchard: I have bought gold from them and they have good prices. I'd recommend any of their 1 oz bullion coins such as American Eagles, Canadian Maple Leafs, Krugerrands, or Philharmonics.
Bullion Direct: When I was looking for the best price I could find for a $100 bag of junk silver, bullion direct had it. They offer a wide variety of gold and silver coins, and I received my order in less than a week.
Euro Pacific Precious Metals: Peter Schiff's precious metals company, which has very low premiums, if you can afford the $10,000 minimum purchase.
Midas Resources: Ted Anderson, president and CEO of the Genesis Communications Network, is also a precious metals dealer. He often has good introductory deals on gold and silver coins as a loss-leader, especially if you refer to an "Alex Jones radio special". If you want to support his radio network of liberty-minded programs while investing in precious metals, give them a try.
Northwest Territorial Mint: I buy their privately minted bars because of the lower premium per oz over government issued coins. Their downside is that they have taken 6-8 weeks to process and ship my order in the past. They also offer custom engraved coins that I have given away for Christmas and birthday gifts. While I don't recommend those as an investment, they can be beautiful and thoughtful gifts that could inspire the receiver to start thinking seriously about getting into precious metals.
Regardless of your situation, whether you can afford to invest $50 or $1000 a month, I recommend you start a monthly accumulation program to achieve dollar cost averaging. I recommend Silver Saver over other programs because of it's online account management, variety of options for redemption, and rewards program.
Finally, I recommend that you save money in cash in addition to your monthly accumulation program, so that when you see 10-25% drops in price from the recent all-time high, you have the liquidity to either schedule a one time purchase through Silver Saver, or make a purchase from one of the bullion companies recommended above.
If you have feedback, comments, or questions, I would appreciate your e-mail.