Protecting Your Assets: Cash, Silver and Gold

Many people ask “I’m concerned about my bank and the stock market.  What happens if everything really collapses?”  First off, the chances of a complete collapse are fairly small.  Everyone except the most hardened pessimist or plaid-pants wearing short seller has a vested interest in seeing the current system continue to function.   Governments have a huge incentive to see paper money continue to have value; without paper money, it would be very difficult to raise taxes without directly confiscating private property, something that usually makes citizens a bit testy. 

That said, you should be prudent and prepared for a few scenarios that have happened historically in many countries of the world, including the U.S.   The first and most likely event is some kind of bank holiday, caused by a “run on the bank”.    Bank runs are caused by depositors wanting their money back from the bank in a very short period of time.  Banks don’t keep that much cash on hand, since most of it is lent out to borrowers who pay the bank interest.  Today, banks are regulated much differently than in the past and there is insurance from FDIC.  That said, banks in the past never had exposure to derivatives and other exotic financial instruments the way they do today.   The biggest risk at the moment is that credit cards stop working and the banks close for a short period of time.

This means there is a chance that ATM’s are also temporarily out of service or there are restrictions on how much money you can take out of the bank.  You should keep at least a month of two worth of cash hidden at home.   Those readers who heard stories from the survivors of our last Great Depression know that people put money “in the mattress”, taped it to the back of drawers and hid it in books, among other places limited only by the imagination (btw, burglars are onto all of those, you’ll need to get more creative).  Because there might not be a lot of change in circulation, be sure to keep lots of smaller bills on hand.  If you need to buy a few dozen eggs with a $100 bill and there is no change, those eggs could become very expensive.

If things get worse, for example, if there is an international banking crisis where paper money becomes worthless, you will need to own some precious metals;  gold and silver.    For the sake of this discussion, we’ll ignore platinum and palladium, which are up and coming precious industrial metals because their markets are so thinly traded.  During WWII, Dutch people survived on their coins because the old paper money was worthless when the Nazis took power.  Most regions of the world have had this experience with their paper money at some point in time — it became worth the paper it was printed on!  In this scenario, ETF and stock exchange traded precious metals could also become worthless or seized by rapacious governments looking for assets to redistribute.  This is why you need some physical gold and silver.  If you don’t trust the government or banks, why should you trust a piece of paper that says “you own gold”.

In the U.S., you will want to own some pre-1964 silver dimes, quarters and half dollars (other countries have historically issued silver coinage).  A silver dollar, for example, is about an ounce of silver, worth about $13 in silver value as I write this article.  To put things in perspective, in 1964 a gallon of gasoline cost about a quarter.  Today, that quarter is worth about $3, pretty close to the current price of that same gallon of gasoline.  Certainly a few rolls of these coins would be a good start and if you can afford it, get $500 or $1000 face value (about $5000 or $10,000 in today’s money cost) of these coins.  Silver will be most useful in everyday trade, just a few coins will pay for a few groceries or some gas for the car.  Silver coins are widely available at coin dealers — be sure to ask for “junk silver”, usually circulated coins, or you will be buying coins with numismatic value that exceeds their silver value.  In a barter situation, the person on the other end of the trade probably won’t care about the rarity or condition of the coin, just the metal content.

Another way to buy silver is one ounce coins in the form of the Maple (Canada) or the Eagle (U.S.).  These carry a premium of $2 – $3 per coin — a very expensive way to acquire silver, but also useful for trade.  They come in boxes of 500 coins, though you can purchase smaller quantities.  You should probably own some of these coins, as well, once you have your cash and junk silver set aside.

Gold is much more valuable and portable than silver — historically a silver dollar (about 1 ounce of silver) was worth 1/20th of a $20 gold piece (about 1 ounce of gold).  Gold is valuable for larger purchases, since a one ounce gold coin is worth about $1000.  In dire circumstances, this might only be able to purchase a few ordinary items that can mean the difference between life and death.  During the final days of the Khmer Rouge in Cambodia, an ounce of gold bought two cans of tuna (this is a reason why you will want to keep some canned food around, it’s a lot cheaper to own than gold).  It is also valuable as a store of wealth in uncertain times, especially as a protection against inflation.  A seven pound box of gold is worth about $100,000 (at $925/ounce).  The same $100,000 worth of silver (at $13/ounce) weighs almost 500 pounds.  If you need to move a lot of wealth in a hurry, you’ll want more gold than silver.

Once you have cash and some silver coins, you should consider adding gold coins, which are minted by a number of countries.  The U.S., Canada, China, Australia, South Africa and a number of other countries are players in this business.  Your best choice could be buying those from the country you live in — for example, some of the coins like the U.S. made American Eagle 1 ounce coin is legal tender worth $50 nominally, even though the gold value is about $1000.  Countries with a good reputation will likely make coins that hold their value and are not considered “suspect” in a situation that requires gold money.  When you purchase these coins, there is typically a premium of $39 to $69 per coin over the spot price of the metal, so the price you pay is spot plus the premium.  You can get a lower premium with a larger order, it always pays to ask.    Gold dealers are strictly cash and carry; you wire in your money and they send you your gold, surprisingly using the United States Post Office (silver is heavier and usually shipped Fedex or UPS).  

Here are two reputable dealers (viewers are invited to comment about dealers they like):

www.tulving.com

www.apmex.com

If you are getting really serious about protecting large amounts of wealth using gold or silver, you might want to consider buying bars.  A good way to understand this is that coins are like your checking account, you’ll use them for transactions as we explained above; bars are like a savings account because they command a lower premium they are a more efficient way to own the metals, though they are less efficient in a transaction because you might need to have them assayed, a problem you will never have with coins.  

There are two types of bars; machined and cast.  Machined bar are precision made with the manufacturers logo and description of what the item is and there will be no question as to their contents.  Cast bars, which might need to be assayed, are more difficult to use in transactions that don’t involve a professional metals dealer and their actual weight can vary.  For silver, bars are readily available in 10, 100 and 1000 ounce sizes.   The larger the bar, the lower the per ounce premium — if you really want to own the silver cheaply, the 1000 ounce bars currently trade for a premium of about $.49 per ounce over spot, slightly more than what you might pay on the COMEX taking physical delivery and considerably cheaper than the $3.99 you could pay as a premium for 1 ounce American Eagle silver dollars.  

Gold is available in machined 1 oz bars, which are similar to coins, in fact, you should just buy coins if you are going this route because you won’t save that much in the premium by getting the bars instead of coins.  As for cast bars, gold is available in standard sizes of 1 kilo (32.15 ounces) and 100 ounces.  These should always be purchased from a reputable dealer — after all, it’s a lot of money in one metal bar and you want to be certain you aren’t getting a gold plated lead brick.  Many cast bars come with a serial number and statement of assay with their exact weight and purity from the manufacturer.  Quality manufacturers of gold and silver bars are Johnson Matthey, Credit Suisse, Academy and Amark, among others.