Holding Gold in Times of Crisis

From Buenos Aires, Argentina...

by Joel Bowman

We begin this week's reckonings where we left off the weekender...with some thoughts from our Fellow Reckoners. One email, in particular, garnered a slew of responses after we aired it in Saturday's issue. The topic - what to do with one's gold - is a simple though, judging by the amount of responses we received to the email in question, common enough quandary.

We'll get to your responses below, but first, in case you missed it, here's the question, from Reckoner Anthony:

"A question many people must be puzzling over.

"To buy gold seems logical; paper money has become a big con. So you exchange it for something that has stood the test of time, like gold. But then what? Say it goes to $10,000 an ounce. Or even $100,000. Do you turn it back into paper money? Don't think so.

"Do you use it to buy, say, land? If so, surely that would cost a huge amount as well. In the early 1930s, distressed land in England went for next to nothing. But we had returned to a gold standard then, so the same number of gold sovereigns now wouldn't make it a good deal; you might as well use paper money at paper prices.

"Or do we just wait for the return of a gold standard (official or de facto) and hope that it's going to create some bargains?

"I'm just throwing out some questions/ideas to see what others might think. Using the land analogy, is land massively over-priced or gold massively under-priced? I'm not inclined to sell any gold, or silver, for that matter; at least they've kept their purchasing power, plus a bit, for most things."

Replies one Reckoner, who goes by the curious name "Peter Rabbit (I love karats)"...

"Regarding Anthony's question of what to do with silver and gold in order to capitalize on having the foresight to get out of 'paper money'...

"He answered his own question by stating that 'at least his gold and silver has retained its purchasing power for most "things".'

"I say spend your 'paper' to whatever extent you need to for everyday living and when you come up short...convert a few ounces to fill the void.

"No matter what degree of dilution the fiat currencies dwindle to...your precious metals will always more than make up the difference.

"Remember, gold hasn't budged...it's still the same in every way. It is how gold is VALUED that has changed and will continue to change as long as most governments, (central banks) continue to generate 'money' out of thin air!"

And if gold reaches $10,000 per ounce, or even $100,000, as the question anticipates, how might we metal heads conduct smaller, everyday transactions?

Perhaps that's where gold's perennial bridesmaid comes in, as Reckoner RLB explains.

"That is why you buy junk silver coins, preferably dimes; pre 1965 of course.

"Silver won't be as expensive as gold when the brown stuff hits the fan, and can be used to purchase things. Ten gallons of gas for one silver dime, for instance."

Chimes Reckoner on the exchange value of smaller denominations...

"Why is it so difficult for those of the 'You can't eat gold' group to understand simple transactions with PMs? If gold is $10,000 per ounce, I'd take a tenth-ounce coin and exchange it for $1,000 in fiat currency to spend in a store which only takes fiat currency. When that $1,000 is gone, I'd repeat the process. This can be done with one-ounce gold coins, but the small coins are better if consumer price inflation is ongoing.

"The same style of dealing holds for US junk silver, of course.

"Many seem not to understand that if gold is $10,000, silver is likely to be at around $200 or more - but a loaf of bread might cost $20 or even $50."

Here's Reckoner GB, chiming in from the Lone Star State...

"One does not buy gold to get rich. One buys gold to avoid getting poor. If you are looking for a way to get rich, you will probably have to look outside the United States. Generators of wealth in the US have a big bulls eye on them inviting looting by lawyers or politicians.

"Eventually, things will become more hospitable to generating wealth. At that time, you turn your gold into wealth generation. If you can generate wealth by better managing a parcel of land, then buy land. If you can generate wealth by starting a business on land you already own, start a business."

And to that last thought, Reckoner BD adds...

"First, using gold to buy land is only half the picture. The land (or any other asset) must be productive, i.e., it must produce, or contribute to the production of, a commodity other people want or need - such as food. Thus the land becomes an ongoing source of wealth at a time when need is acute. In his essay 'Abundance and Scarcity' the French political economist Frederic Bastiat (1801-1850) said 'Wealth consists in an abundance of commodities.' He was absolutely right. Note that he did not say 'Wealth consists in an abundance of gold' even though gold is a commodity.

"In other words gold is simply a means to an end, it is not an end in itself. When we buy gold, we are simply storing the value of human energy we invest in producing a commodity which is exchanged for gold. We exchange it for gold because gold does not rot, rust, or otherwise deteriorate like other commodities. Its physical attributes make it an almost ideal store of value - it remains the same for thousands of years. We save it for future use, either by ourselves or our children. We do not buy it just to sit and look pretty."

Thanks to all our Fellow Reckoners who wrote in with thoughts on this obviously popular subject. Though we couldn't possibly publish them all, we hope those that did make it into virtual print, above, were of some help.

For those readers interested in getting their hands on some coins of their own, our friends at First Federal have made available to us a limited quantity of flawless 2011 Gold Eagle First Strikes AND a batch of 2011 Tenth-Ounce Gold Pandas. Be sure to check them both out before deciding which option best suits your investment needs. And, by way of full disclosure, please know that we are able to secure these deals for you because of an ongoing business relationship we have with First Federal, whereby we may be compensated for coins sold.

Also, if you're looking for more information on the nature of money, the future of gold or other such related topics, here are a couple of books you might wish to check out:

Nathan Lewis's Gold: The Once and Future Money, to which The Daily Reckoning's Addison Wiggin provides a neat introduction, and...

Ron Paul's excellent The Case For Gold, the first official US government investigation into the feasibility of a gold standard in more than 100 years. As a matter of fact, Addison has been trying to get a copy of Ron Paul's book in as many hands as possible recently, even going so far as to give them away.