Doomsday investing and the metal mongers

Gold and Silver have been mediums of exchange for thousands of years.   I guess there are several reasons why people have been fascinated by Gold and Silver, but unless you are manufacturing something from them, they are simply a trade medium.   That said, gold and silver are fairly good survivalist trade mediums but only if you are in a social environment where people will respect them as trade mediums.  It is simply impossible to use metals as an outright replacement for cash and credit in our society.  

Update 12/12/ 02.  Well, perhaps some of the doomsayers of the current "debt" based economic system (we call it a forecast economy) are getting their cake and eating it too.   Gold prices have finally begun to rise.   My opinion is that it is rising not so much out of the "weakness" of the world economic system, but due to a longstanding logic that accompanies the rising costs of mining, storing and dealing with the commodity.    Simple logic would have indicated an upward adjustment in the price of Gold to reflect some inflation over the last ten years where the value has been largely flat compared to just about any other consumer commodity.    I  still do not think that the metal itself is a good enough investment to abandon other forms of investment, but it is a good indication that keeping wealth in the form of gold instead of low interest savings accounts and certificates of deposit can be a realistic option.   It also shows that stock market players will be able to play on the mining stocks with less downward manipulation from the major players than has been evident in the past.   

I think that perhaps a strong influencing factor on this whole trend is the increasing number of people worldwide who have recognized much of the banking system as a mechanism by which the wealthiest 2% control the other 98% of the population and how barter economies are springing up among bankrupted people in places like Argentina and Brazil.   Most economists will agree that gold often becomes a common trade medium in barter economies.    That alone is cause for an increase in the value of gold and reason for survivalists to use it as a trade medium, but I would still not advocate any sort of panic buying of gold in anticipation of hyperinflation or crazy values like we saw during the late 1970s.  

Call it a sore point, but in my youth, my grandmother was a semi-active investor and victim of numerous mail order coin and metal scams.   Being that it was a fair portion of my inheritance that was squandered away on overpriced metals, I feel it is necessary to warn people about some of what is out there.   Probably the two biggest pushers of metals to the survival community and survivors of the great depression have been Howard Ruff and Don McKalvaney.   Both men would circulate "newsletters" telling of impending economic collapse and the "wisdom" of buying whatever metals they were pushing at the moment.   These wolves would usually come out of the woodwork during a rising metals market and use their influence to help the silver and gold mining interests of their Mormon associates.   In the investment world, these are known as "Market Makers" or "pump and dump" artists.  They pump the value of what they are holding and then dump it on the market.   Lots of people do similar things as that is the sales game, but it is less than genuine to play like you are anything but a salesman when you are telling people to buy something.   Never buy more metals than you would feel comfortable holding on to since speculating on the metals market is usually a losing game.  

OK, so I will qualify my personal opinion with this.  Several well regarded investment advisors say that precious metals make a good investment because the value remains steady over time.  They say that in times of currency speculation, inflation, and runaway interest rates, that Gold is a "safe harbor".   The main selling point of gold and coin dealers is that the metals would have some sort of value during an economic collapse.   To the left is a common graph used by the metal dealers to explain their assertion.   If you look at the timeline in the graph, you will notice that the curve deals only in the very long term.  The reality is that a simple can of beer purchased in 1940 and left in your basement would have had better return than an equal amount of precious metal.   In fact, just about any EMPTY cone top beer can is worth more than the ounce of silver in a silver dollar that would have purchased it in 1940.   That is an example of why a survivalist must take the value of commodities into consideration when investing in them.   It can be better to have commodities that can be turned over for a healthy profit more than those which may "hold value".  

Now for the part that hurts.  Most of the people who are telling you to "invest" in precious metals are in the metals business and not only have an interest in the distribution, but in the mining of the metals also.  The reality is that in most hard survival scenarios, precious items have little value and their only worth is that they are portable enough to serve as a trade medium.  While I have had some difficulty finding the passage, I remember something in the book of Revelations about Gold and Silver being worthless in the end times.   If I were to be in the business of giving financial advice (and I have been) I would say that investing in Gold and silver are little better than stuffing money in your mattress.  Gold and Silver are also tolerable investment mediums for those who are not sophisticated enough to stash regular survival supplies since most survivalists will trade fair value for precious metals.  

I use metals in a limited manner as a form of savings and exchange but I would never bet my financial future on it.   If you do invest in metals, also invest your time and efforts into re-introducing them as a medium of exchange rather than just amassing a hoard.  If people don't get used to using metals as a medium of exchange, then they will probably continue to lose popularity to the point where they will be relatively worthless because of the difficulty of using metals in the modern digital money world.  

Much of the world's Gold reserves are in the United States, but more processed gold probably resides in other countries where hoarding Gold is seen as a means of ensuring wealth in the face of unstable currencies.  This includes India and much of the Middle East.   Traditionally, it used to be possible to use Gold as a form of international currency, but now it is more difficult.  It is a little easier to travel internationally with Gold than large amounts of currency, especially if the gold is in the form of jewelry.   In fact, you can easily carry several thousands of dollars worth of Gold in your pockets through customs in just about any country by simply mixing the gold coins in with relatively worthless brass coins from countries like Mexico.  

I have carried Gold and Silver as an emergency survival currency in several countries.  One major factor in the relatively low value of Gold these days (it is so worthless that most of the world's mines run at minimum capacity and are losing money) is manipulation by the World Bank and the US government.  While I do not pretend to understand all of the intrigue involved, I do know that great efforts have been taken by the US and British government to depress the value of Gold and Silver.   I am told that a big part of this is some economic threat posed by huge gold reserves held by Russia.  Apparently, several East European countries and "former" Communists are in possession of huge amounts of gold and if that gold is allowed to go up in value, they would become an economic power overnight.  This is compounded by the fact that the current Russian government owes several billion dollars to the World bank and they want to be able to pay it back when Gold reaches a higher value, not now when gold is worth so little.   You might think of it as a pawn shop game on a massive scale with Russia being the debtor who holds something of value and the World Bank holding the debt and looking for repayment under the most favorable of terms.  

Personally, the more developed the country is, the harder the Gold is to spend.  The only places where it is worth anything to anybody is where it is commonly bartered.  Just try this test some day.  When you go to a gas station to fill up the tank on your car, pull out a 1 oz Gold Eagle and see if they will fill your tank and make correct change out of it.  Chances are that they will not.  What's worse, people will often "negotiate" the exchange rate of the metals to below their "cash value" if they really do not value the metal.  If you are lucky, the metals will carry fair value with those who are accustomed to bartering.   Fortunately, many in the survival community do place high value on metals as a purchasing exchange.  It costs money to put metals into circulation.  This is usually in the form of premiums paid on the coins and bars themselves.  For example, four quarter ounce gold bullion coins will always cost more money from a gold dealer than a single one ounce gold bullion.   Silver usually carries an extra buck or two of cost per ounce in the one ounce bars and rounds from the dealers, but the premium drops a bit on the ten ounce bars.  Ok so here is the common easy breakdown on the values as exchanged in the real world I have seen:

Silver Eagles display a modern rendition of "Walking Liberty." One ounce Silver ingots (a slight premium for Englehards because they run heavy) - $5+ The cost from a dealer runs $5.50 to $7.   The one ounce ingots were popular in the 1980s but the great majority of one ounce silver bullion are put out in the form of coins.  They look very similar to older silver dollars, but are made from a more refined metal.  Always favor modern refined silver over old circulation coins.  

Ten ounce Silver bar $50 Cost from a dealer runs around $55 This is always refined metal.  The fact that it is hard to break up is made up for in part by the fact that 10 oz ingots tend to run a few grams heavy. 

Obverse carries modified version of St. Gaudens' famous Walking Liberty and year minted. One ounce Gold Eagle $300+- depending on current exchange.  Sometimes it drops to $270 and then it is time to buy.   Other times it creeps into the $320 range.   All US gold coins carry the same basic design but will have different (and nearly irrelevant) "dollar" amounts on them.  The pictures to the right show Paulus Kruger, first president of Republic of South Africa (1883-1900.) the 1 oz coins at actual size on a 17" monitor.  Other coins of equal value are the Canadian Maple leafs and the Kugerrand.  One thing about the Kugerrands is that they are alloyed with a small amount of copper in order to preserve the hardness of the coin.  This detracts from the value in the eyes of some sellers, but it is a minimal detraction.  Part of the reason is that Jewelers have to refine the copper out of the gold if they are to use it in jewelry.  

Half ounce Gold coins are worthwhile when the gold takes a drop on the market, otherwise don't buy them from a dealer but do take them in trade.   They are about the size of the 50 cent piece. 

Gold quarters come in a convenient size but are an oddball to deal with.  The reason for this is the premiums that go into the coins themselves and the odd calculations that have to be done to translate silver value.  If Gold reaches closer to $400, then the quarters will be a good substitute for the $100 bill.   Right now (March 2002) they are "worth" around $75 but cost closer to $90 because of the premiums assigned to them.   If gold values are way down like they were in early 2001, then it is a good time to try and get the quarters in bulk and see if you can beat some of the coin premiums.  

1/10th ounce Gold coins are probably the best survival coins out there, but you have to pay a high premium to get them from the dealers.  Once they go into circulation, they make a very convenient way of handling transactions without the bulk and weight of silver.   The game is to beat down the premium on the dime sized gold coins once they are in circulation.   This means keeping them away from the dealers who will rarely pay more than the gold value, but will jack the price per coin another $15 when they are selling it.   That means if you are trying to get an ounce worth of tenths, you end up paying nearly double what the metal itself is worth if you buy it someplace where you are also stuck with sales tax on the purchase.  

Six 10 oz silver bars makes one Eagle.  

A ten oz gold bar is hard to break up, but it is good for larger purchases.  Here the premiums drop a lot closer to the spot value of the metal.   Be careful since the "fudge factor" on the spot price can skew a transaction.  Where the five to fifteen bucks of fudge factor from spot price to the ounce coins can be irrelevant in a smaller transaction, a larger transaction involving 10oz bars can play a $200 difference if you are.  The same goes for the 100 oz silver bars.  Personally, I would not get the 100oz silver bars for any practical reason as the value is better carried in Gold.  

Another factor in precious metals is numismatic coins.   These are gold and silver coins that derive value due to condition and rarity.  This is perhaps the worst possible investment for the survivalist.   The great big problem with numismatics is that you have to argue the condition every time you trade them and you can be assured that the professional coin trader will manage to screw you every time.  In fact, even if you are careful, if you are stuck "needing" to make the trade, you can easily be screwed out of half the value of your rare coin.   I would steer clear of any such rare coins unless they are graded in such a way that their value is indisputable.   One way to do this is to have the coin sealed by a professional grading service.   This usually costs money, but it is definitely worthwhile for the more rare and valuable coins.    

Never get suckered into paying a premium for "numismatic" versions of bullion coins because they are represented as being more or less "confiscatable"  than bullion gold.   Most honest gold and coin dealers understand the use of the metals as a survival currency and not play games with one type or the other being a "reportable" transaction.  That said, it might be wise to buy gold in transactions smaller than $10,000 at a time.   It is not illegal to buy larger amounts of gold and if you can fully account for how you got the money to buy the gold, you can probably actually be better off buying it in one huge purchase and allow it to be reported rather than being a frequent buyer.  The form used by the government for reporting cash transactions over $10,000 specifically states that there is no reporting requirement for transactions which originate from the buyer's personal bank account.   That means if you write a check for the purchase which from your own account and over $10,000 the transaction is not reportable to the IRS.    If you make several small transactions in the same period of time, especially with cash, traveller;s checks or cashier's checks, then it may still trigger provisions of form 8300.  

The purchase of foreign gold in the US triggers an IRS report for the purchase of the gold, but such triggering does not happen if you buy US gold eagles.    Technically, it is supposed to happen if you buy pre-1964 silver coins in bulk, but such reporting is rare when these coins trade among casual collectors and dealers.  

Avoid European coins since they not only come in non-standard sizes, but they have non-standardized gold content and often do not have the gold content stamped on them.   Such coins are better for jewelers to use as alloy material in 14k gold.   

The real trick to using metals as a survival currency is to get in the habit of using them for a medium of exchange in your normal day to day transactions.   Once you get used to using gold and silver in your more common transactions, enough of it will go into normal circulation that the premiums get dropped from the equation.   In fairness to the bullion dealers, they have a right to some exchange fee when changing cash into metals and vice versa.   These exchange fees are very common at national borders where people exchange currencies.  

Buying bullion:

By far the best way to get bullion is in trade for your own goods and services at straight spot value, generally rounded up or down a bit to make the math convenient.  Second to that is to purchase the gold privately at straight value.  Another halfway decent option is from one of a number of mail order or Internet order places, but here you start getting nailed on some surcharges for credit card fees and shipping.  Some of these dealers will cut you free shipping in order to get your business.  

One novel way to get bullion is to circulate a "buy" ad in local papers.   You advertise that you are buying gold and silver bullion and you will generally get people calling frequently enough for the ad to pay off in saved premiums and shipping fees.  

Lastly, if you have no other choice, buy from a local coin dealer.   These guys may have lots of the gold and silver on hand, but they are usually not rich men.   They have a right to their markups, but realize that a fair amount of your purchase goes into supporting the guy, not getting your metal.   One good reason to develop at least a passing relationship with your local coin dealer is to have an outlet for the occasional numismatic coins and items you will likely encounter from people who answer your ad in the paper.   One really major problem with dealing with storefront metal dealers in many states is that sales tax applies to the transactions.   Sales tax is like the Government's last kick in your ass when you pull value out of their system and go on your own gold standard.  

Some good online gold resources:

Certified Mints - an information and sales site for bullion.   I have not done business with them, but they are very informative and straight up.  

In the spirit of getting people into the habit of using metals as an exchange medium, I have decided to accept metals at fair spot value in all transactions at   

Metals may be shipped insured by priority mail, preferably to a PO box.  When sending gold by mail, always insure at maximum value.   If shipping to a street address, it is wise to use a service like UPS or Fedex where a person must sign for the package to receive it.   Use a secure package like a cardboard envelope with the metal taped inside in order to avoid the metal coins or bars from beating their way out of the corner of the envelope.   I have found that placing the bullion in a small ziplock bag and then taping the bag to a piece of thin cardboard is a good way to protect it for shipping.  

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