Please excuse my ignorance.

[ArrieS]

I don't understand why people are advocating for gold/silver as a hedge for the next collapse.

I hope someone can please explain this to me. Precious metals are a safe haven for currency depreciation. As with all stock market crashes, it erases wealth, I.E. money. If money is erased, how does that lead to inflation? To further expand, the last crash hurt the housing market. Trillions in value was wiped out. It wasn't transferred to someone else. It existed on banks’ balance sheets and when the home was foreclosed the banks had to write it off, so the value of money the fractional reserve banking system was using was erased from existence. It wasn't moved to someone else's balance sheets, it was gone.

How is it that a stock market crash that has the ability to wipeout trillions, erasing it, leads to inflation? You can argue the FEDs response by shoving money back into the system will, but that is not instant, and more to the point wouldn't be a trillion instant dollars just enough to insure liquidity in the banking system.

So wouldn’t a constriction of the money supply by the removal of such a large amount lead to deflation? Which was seen in the Great Depression.

This excludes the possibility that the next crash ends the faith in the dollar which every fiat currency requires. So let's please avoid the doomsday scenario where the belief in the dollar is gone. Because then gold and silver would be worthless, bullets will be exchanged and most likely not in a friendly way.

[wwwtractor]

Gold, like all precious metals, may be used as a hedge against inflation, deflation or currency devaluation.

The value of a goat in gold has been the same for a 1000 years with some fluctuation over time of course.

[RKresearch]

hmmm... Goat to Gold price ratios are constant? Do you have a reference to support that?

[ArrieS]

Gold, like all precious metals, may be used as a hedge against inflation, deflation or currency devaluation.

The value of a goat in gold has been the same for a 1000 years with some fluctuation over time of course.

That doesn't really make sense, how can something be a hedge against deflation and inflation? Holding physical dollars would be the hedge against deflation because hold anything else would result in a loss of value as the dollar would be going up so you would receive less dollars latter.

[Aitrus]

Lots of good questions, ArrieS. I'll see if I can answer them as best I can.

If money is erased, how does that lead to inflation?

If money is suddenly erased one of two things can happen, depending on how the money is erased. I'll cover what happened during the Great Depression and what happened in Argentina in 2001.

If market prices suddenly fall like they did during the Great Depression, it causes companies to lose real value, which means they downsize or pay their workers less. Runs on banks clean them out, so they close up shop and any deposits are lost forever. With banks out of business, no money at home and no business hiring or paying very little, it means less money is in the system to spend on goods. Sellers have to start lowering prices just to get something for their goods. A gallon of milk that was $1 is now selling at a dime because getting a dime is better than pouring it down the drain. It takes years for money to slowly start flowing back into the system, beginning at the banks and businesses. Now we have the FDIC to somewhat stop the bleeding at the level of the banks, but it's never been tested so we don't know if it'll work.

Long story short, in the Great Depression it was the businesses and banks that dropped in assessed value (stocks), so their leverage to take out loans (based on the assessed value of their holdings) and move money around to conduct business was severely curtailed. In Argentina 2001, it was different - money lost it's value.

First, a little history to help paint the picture better. The Argentine peso was pegged to the US dollar, and from the end of WWII up until the late 90s was on par with America as far as affluence and wealth building. From the end of the war until the 1990s the US grew on manufacturing for nearly 50 solid years. Argentina did likewise, but grew on agriculture instead. It was nicknamed "Europe's Breadbasket" because it has a small population but a huge amount of usable farmland. After WWII, Argentina almost single-handedly fed Europe in grain and beef for 50 years. Think about that for a second - one country feeding an entire continent. It got so good that Argentinians vacationed in the US because prices were cheaper here, even though the peso was matched to the dollar. Life was good. Then the smelly brown stuff hit the rotating oscillator in December 2001.

What happened was that continual corruption since around 1990 in their government finally took its toll. The backing of the peso collapsed, and within about 2 or 3 weeks the peso went to a 1:3 ratio with the dollar. One peso bought you 33 cents where before it bought you a whole dollar. A couple of weeks later it went to 1:4. The effect was immediate - within the course of about a month somebody with $100,000 in pesos now could effectively buy $25,000 in US. The money disappeared, but the way it happened is that the agreed upon value of the money in hand was suddenly worth less. That's inflation in a nutshell. And Argentina is still trying to recover today. As of this morning, the peso is at almost a 1:9 ratio to the dollar. Inflation is still happening down there - almost 14 years later.

How is it that a stock market crash that has the ability to wipeout trillions, erasing it, leads to inflation?

You're right in what happened about the housing bubble. Ditto with the dot-com crash. The money disappeared. The difference is that this time the government tried to fix the situation by pumping dollars into the system. Since more dollars were available, prices naturally go up. Value didn't really increase. A new car is still worth about a year's salary to a middle-class person. That's also why raising the minimum wage doesn't fix anything - prices will just increase because there's more supply and businesses can get away with charging more for products. It's a supply and demand thing.

But what happened with the 2008 crash was that the money that disappeared wasn't real. It didn't really exist in the first place. It's simply a number that parties agree on as the assessed value of a stock. Now if you were to take all those numbers and make them of real value, you'd find that there wasn't enough to fill the order unless we said that one sheep wasn't worth $100, but instead is worth $1,000. The sheep didn't change, a sheep is still a sheep - it's what we agreed to change it's worth in the number form. As a consequence, everything else goes up in price too. That's how trillions can disappear - they're not real, just a representation of the agreed value of a good / service / company / sheep.

And that's why some people advocate gold and silver. Not stocks or ETFs, but actual bullion, coins or metal in usable amounts. If you purchase gold stock or the like, it's all just more not-real money. The actual on-hand metal and bullion is what's worth value. It's true that the agreed value of the metal goes up and down, but it's also on hand and won't go away like the electronic bits and bytes in the market's databases. Gold and silver have always held at least some value and can be used in trade or to back a business or repay a loan. The last silver coins minted in the US were in 1964 (except for collector's editions). Those silver coins still hold intrinsic value far above their face value.

The advice to buy gold and silver as a hedge isn't to keep your retirement investments intact, but to be able to weather the daily living situation in the case of economic collapse. In Argentina purchases can be made for almost anything using gold and silver, and haggling is an art form. Cut a couple of links off a gold chain to buy groceries for a couple of weeks. A couple silver coins buys you lunch. Even though their economy has collapsed, gold and silver are still used daily in trade. If you doubt me, research a guy named Fernando Aguierre. He's a "modern survivalist" that has weathered the storm down there very well since 2001, and a part of is is because he had a lot of usable gold on hand before the crisis happened. He runs a pretty good blog and wrote a fantastic book about living in Argentina. http://ferfal.blogspot.com/

But if you do get some of the metal, don't stick it in the bank. During the Great Depression the US Government ordered all banks to hand over all gold in their vaults, even the stuff owned by private individuals. The dollar was backed by gold at the time, and the government wanted all it could get its hands on to keep the government functioning.

[ArrieS]

Even though their economy has collapsed, gold and silver are still used daily in trade.

So it seems the only example of precious metals being useful for a stock market crash is if it is a doomsday scenario. It would have to be a cataclysmic economic event to make it so I could go into Target and pay with gold.

http://www.macrotrends.net/1333/histori ... year-chart

As the chart shows, gold lost value during the great depression even before the government seized it. So gold is only a hedge if you think everything is going to fall apart.

However, in truth, I doubt its value then because with todays just in time stock resupply, most major cities would be out of food and supplies in a week or less. Gold has no value if you can't trade it for what you need to live.

[Aitrus]

Easy fix: don't live in a city.

Yes, you're right in that it takes an economic collapse to get this to happen, but not as deep of one as you might think. It doesn't have to be a doomsday scenario. After 2008 I found a couple of farmers at a local Farmer's Market that would deal in gold and silver and that helped me stretch my savings quite a bit. I know a friend in Kentucky who was stuck in an ice storm in 1994. His area was without power for weeks. The local store managers would open to let only one person in at a time, guard the front door with a shotgun while another attendant walked around with you as you shopped. You had to pay cash or gold/silver, no credit, debit, or checks. They went through it all again in 2003 and 2009.

Target wouldn't be the place you use gold. You'd use it in the black / grey / flea markets that spring up. You'll trade with your neighbor down the street for some of their potatoes and one of their rabbits, and maybe a couple of books for the kids. You'll buy a used car from a car lot with some gold and hard bargaining. The more official chain stores usually don't deal in silver or gold unless the manager is willing to deal.

Yes, precious metals do lose value, but not nearly as much as the stocks you hold. Hence the "hedge" qualifier, and so serve for one more use. In a crash, you'll lose a lot, just not everything if you have gold / silver. You'll still have something worth value to tide you over in groceries and the like. If you have enough left over you'll have a source to use in rebuilding your retirement / business / whatever. During the Great Depression there were people who put every dime into stocks. And I mean everything, to the point where they only had a week's worth of spending money in their bank accounts and everything else in stocks. They had no cash / gold reserves. The smart time to buy stocks wasn't in the months and years before the Depression. It was when the prices hit bottom, then you bought in and held on for dear life until things went back up. Gold keeps at least some value, and you can use that to buy at rock-bottom prices.

[crondanet5]

My view on gold and silver is different from the people who use it as a hedge against economic collapse. I follow a web site run by an MIT engineering graduate in Switzerland who follows gold and silver on a daily basis around the world. An important feature of his web site is a list of suggested articles to read from various sources on various subjects. This particular web site believes that paper gold assets are highly inflated and as physical inventory of precious metals move East the price of gold and silver will rise as traders scramble to buy gold to cover positions. Now an interesting tactic this past year has been the conversion by Russia of foreign currencies from oil into gold that is placed in their central bank in anticipation of a rise in metal value perhaps as soon as the year 2016. If that in fact happens can you imagine the financial gain they will reap? If you agree with their idea it might be wise to buy a bit of gold. But make it quality stuff you can sell.

I took a look at the ferfal web site and he clued me into an idea I had not considered. I always looked at a piece of jewelry as something to be left complete and intact. He suggests gold links are removed from bracelets and necklaces and used for trade when necessary AND they are accepted in trade. Never thought of jewelry that way. You? So that could be another way to use a piece of gold jewelry if economic collapse were to take place. I don't think we are anywhere near economic collapse so I am not going to go out and buy a bunch of expensive jewelry. But it could be a way to hedge against such a catastrophe if it were to occur. The rest of my money is in the markets. Thanks to all who posted here, very interesting read.

[aev]

Correction about:
"The last silver coins minted in the US were in 1964 (except for collector's editions). Those silver coins still hold intrinsic value far above their face value."

65-69 circulated halves were 40%.

[Aitrus]

Ah, thanks for that catch, aev. I thought I had included those. Much appreciated.

[philmiec]

People can, and do, use gold and silver to transact business every day in this country. I have purchased items myself, just within the last 60 days, using gold and silver coins and bars.

I just bought a dining room table last week from a craigslist seller who indicated he was willing to accept gold/silver for trade. My wife nixed my trade because she didn't want to use our PM for a used (albeit, very nice table!

[LoGiK]

This may be a dumb questions...but how do you physically trade gold and solver? Everything I good is showing investing, I'm actually talking in person. I mean an ounce of gold is worth over $1,000. And then you have the 10, 12, 24, etc karat gold...

does anyone have a good explanation or link to a good site that explains it?

Thanks

[Aitrus]

These are a couple of sites I use for keeping up on silver coin values as well as researching what coins are and aren't silver.

http://cointrackers.com/
http://www.coinflation.com/silver_coin_values.html

For scrap gold (jewelry) and scrap silver (silverware, etc.) calculators, I use these sites:

http://www.silverrecyclers.com/ - calculators are on the left-hand side.
http://www.goldcalc.com/

There're also apps and calculators you can download for current access of prices. I keep my eyes open at garage and estate sales for good deals. Most people don't know the current spot price of silver and gold, and it's really easy to score good deals. Especially at estate sales where the kids who inherited mom and dad's house and goods just want to get the selling done and over with so they can move on with life. I keep a small gold testing kit with me to test jewelry and trinkets I think might be gold. For sterling silver I've gotten good at judging the weight of silverware, plates, etc on the fly by hand. Having a small mail scale helps a lot. Just takes time and practice.

For coins, go to your bank and ask to buy rolls or bags of half dollars. Look through them for anything minted in the year 1970 and earlier. Keep the silver, spend the rest as normal (or use them as stocking stuffers to delight little kids). It's a free way to build your silver stockpile. 1965 - 1970 are all 40% silver by weight (sorry aev, we both missed 1970 - I had to double check that one myself). 1964 and earlier are all 90% silver. You can dig through other coins if you like, but quarters, dimes and nickels have been pretty well picked through by now, and finding silver in those is pretty slim these days. If I buy $100 of halves, I'll usually get one or two silver coins in the batch, sometimes more.

If you don't want to do coin searching or the like, the other way to get silver is to buy bags of junk silver from online sellers. It's called "junk" because coin collectors don't value the coin very much, so it's "junk" to them, but it still maintains it's worth in silver weight. Buying bags of junk silver will cost you a small premium plus shipping, so wait until silver prices drop to a low before ordering them.

As to how you use gold and silver in trade, it takes a bit of networking to get it all set up in advance as well as paying attention to metal prices. I have a list of local farmers, shopkeepers, store managers, and others that have agreed to accept silver and gold for services. Some will buy the metal from me using their personal dollars, then I spend the dollars in the store. Knowing a retired doctor that's willing to accept some gold or silver to do some stitching or splinting has come in handy at times. Then there's pawn shops or coin stores. They will give you 5 or 10% below spot price, but in hard times it's a way to turn your metal into cash. The guy in Argentina talks a lot about how to use gold and silver for purchases in his book and on his website as well.

[aev]

No..
I was only talking circulated halves. 1970 was only in a mint set as well as 1776-1976 and starting back up in 1992 mint sets. So if you are "sorting" from boxes and rolls from the banks don't ever assume someone didn't cash in a mint set silver coin. I find mint set halves all of the time and I sort a few 100k a year, yes you read that correctly, a few 100k a year in pennies, nickels, dimes and halves. I don't do quarters. I have a few machines that do the small coins and I do nickles and halves by hand. Normally in about $35-40k in nickles I find about 10 or 12 rolls of war nickels (35% silver). That only takes a year to do. About every $1000 in pennies I'll find an Indian head or older. and wheats are still easy to find sorting in volume and I make a few $50 bags a year from doing that. Halves are a volume game. largest recent score was 542 silver halves out of one $1000 bag. So you can see it's not that they have been picked over, it's you always have to go through what is being cashed in. That's the secret.

Best part. I really don't spend that much time on it. I have it down since I've done this for 35+ years.
My 18 year old daughter paid for her first car before she had her permit by doing this and is currently working toward paying cash for a house. It may be a retirement house but over time it will not cost all that much.

other good web sites
mineweb
kitco
goldsilver
silverdoctors


and here is one tip for free
Banks are where you order coins. Most (not all) credit unions do not order coins.
ok.. one more free tip
never ever cash your ordered coins in at the same place where you bought them.
"pickup banks and dump banks"

This is a wonderful hobby

[Aitrus]

Yes, it is. And it doesn't cost us anything more than gas.