Precious Metals Questions Answered

With gold and silver tanking, I've had a few questions come in that I thought I'd cover off on.

When TEOTWAWKI hits, gold and silver will be nothing more than useless shiny metals--why would I want those instead of more beans, bullets and bandaids?

Precious metals (PMs) are a hedge against currencies collapsing, which has happened far more often than all-out-end-of-the-world, blasted back to the stone age scenarios. So if the US dollar collapses and you have, say, $10,000, that $10,000 would suddenly become worthless. But, if you'd taken that $10,000 and bought gold and silver with it, your investment would be preserved and you could eventually convert it over to another currency when that came along, and then use that to buy whatever you needed.

The principle behind it is that fiat currencies have a strong tendency to eventually go belly up, while the relative value of gold and silver stay relatively stable on a barter basis. A chest full of gold and silver was worth a fortune 3,000 years ago and it's worth a fortune today. Good luck finding a fiat currency that can say that.

Of course, the barter value of gold and silver depends on having a functioning economy/society. If you're alone on an island or in a Mad Max/Walking Dead, every man for himself apocalypse, then indeed, they're not going to do you much good.

But, history has shown that, typically, currency/economic collapses are far more common and likely threats than zombies or alien invasions.

But, I'd add, that there are numerous areas to focus on before worrying about PMs--food, defense, reliable vehicle, emergency cash, etc.

What is the difference between junk silver (or gold) and coins like American Eagles and Canadian Maples?
Junk silver and gold are typically old coins--the most common being old US currency, which had varying degrees of silver in it prior to 1965. But, the term can also refer to old jewelry, silverware, and so on.

The upside to junk PMs is that you can often get them for close-to-spot prices, whereas coins like American Eagles carry a premium over spot prices.

The downside being that they can be harder to sell/trade when that time comes. You have to "know" a bit about PMs to know that, say, an old Morgan dollar is 90% silver and has just over 24 grams of silver in it. They don't say their weight and metals content on the coin.

On the other hand, coins like American Eagles, Canadian Maples and Krugerrand are more well known and have their weight and metals content printed right on the coin. You pay a premium for these coins up front--for example, a silver eagle will usually cost $5-$8 or so bucks above spot, but you will usually recoup that same premium when selling off a coin anyways.

Personally, I prefer the minted coins like Eagles and Maples, but both kinds of PMs have their place.

Gold or Silver?
I don't think silver or gold make a massive amount of difference. Silver seems to be a bit more volatile than gold, and it's also much less compact, but it also can be purchased in much smaller quantities. I tend to like gold because you can fit a massive amount of wealth in a small, easy to carry package, which is just cool.

What role do you think PMs play in survivalism?

I think a holding of PMs has a place in your financial preparations, similar to a supply of emergency cash. Exactly how much that might be will be up to your individual circumstances, lifestyle, etc. I'd pick a time period worth of expenses or enough $$$ worth to do a specific thing, and then work towards that. So, a month or 3 months worth of expenses, or enough $$$ worth of gold to relocate you halfway across the globe. The idea being that, even if the economy collapses, you'd still have the PMs and their intrinsic value in-hand in order to pay those expenses or buy that thing.

Beyond that rainy-day/economic collapse fund and you're getting into investing territory. PMs are going to be more desirable when you think the market is going to go bust or inflation is going to run wild, and less so when the market does well. I think they certainly have a place in everyone's savings/investment portfolio, but how much will depend on your circumstances, outlook and financial goals.

What's your outlook on the PM market?
Personally,  I've felt PM prices have been too high for the past several years. The 12-year upward trend has been well known and a lot of people have bought into PMs...heck, watch any of the cable news channels and you'll see a handful of commercials for investing in gold and silver. We've passed the height of the market a while back, and I sure hope a lot of folks did not dump their savings into $50/oz silver or $1800/oz gold.

I'm not particularly shocked that we're seeing the prices drop as much as we are...the timing is a bit odd, as most of the market's fundamental problems (weak economy, QE4ever) remain. And I didn't think we'd see it drop so dramatically over the space of 2 days...but a big correction is not a big surprise to me.

That said, I think the panic is pushing prices below where they should be. We'll see where the prices of these metals bottom out...that would be the time to buy in. We'll bottom out, see a rally and then have things stabilize, at least for a while. 

4/16: Edited to add, it looks like PMs are bouncing back today as bargain hunting sets in.

Gold & silver down...way down

Gold plunged $84 an ounce today, 5.38%, closing at $1477 an ounce. By percentage, silver is down even more, down over 6.5% at the close of the market. Both closed at their lowest point in the past two years.


The sell off is being blamed on a variety of factors, mostly boiling down to two big uns:

1. Cypress and other countries perhaps being forced to sell their gold reserves in order to receive the ECB bail out - read more here. This would dump several tons of gold onto the market, increasing supply and theoretically driving down demand.

2. As the general investing public is gradually perceiving markets to be recovering from the crash and the Fed is starting talk about easing off the money printing quantitative easing train, there's been a slow move away from precious metals. Today's slide started as a more moderate down turn but then triggered off automated sell positions as it descended down past $1525 and $1500. As these price levels were passed and more sales book, more gold was dumped onto the market, further driving down prices. 

So, at the end of the day, an ounce of gold is worth fewer USD at the end of today than it was this morning.

What action you'd take depends on your long term view of the economy. If you think we've turned the corner, the economy is stabilizing and that we'll see some good growth in the stock market, you may want to think about selling some PMs and parking that cash elsewhere.

On the other hand, if you feel like the future of the economy still looks grim and the recovery uncertain, this weekend might be a pretty good time to jump in and buy some discounted gold and silver.

What are your thoughts?

Quick Thoughts on QE3

If you're wondering what the heck this QE3 mumbo jumbo is, here's my intro to the idea of quantitative easing and what it means at a high level. Written back in July, when QE3 was an uncertainty...but hey, if you were concerned about the Fed printing presses and sunk money into gold/silver you'd have got a pretty good little gain.

This new round of quantitative easing - QE3 - is a bit different from past rounds. This time, the Fed is buying mortgage backed securities (MBS), and there's no time horizon given...basically as long as they see fit to buy. 

An MBS is a different animal than a bond, which is basically government issue debt. An MBS is essentially purchasing the rights to principal and interest payments on a pool of mortgages - from everyday people. Yes, they send their payments to the bank, but the bank only takes a small part (servicing fee) and then the rest is forwarded on to the investors, who are technically the owners of the mortgage.

Now, when structured with good mortgages, investors can earn decent returns on an MBS for comparatively lower risk. When they are filled with crap mortgages, well, you have problems (see: 2008 collapse). 

So, this time around, the Fed is printing money to buy investments (MBS) instead of retiring .gov debt (bonds). It's not as bad...the investments should pay out and the .gov should earn some decent returns on its newly invented monies. 

The point behind the print & buy is to inject some liquidity into the market (indirectly force investment holders to re-invest) and help jump start the economy, specifically housing. The market was largely expecting QE3, which is why we saw a run up in August. There was a big bump the day of the announcement, and the market has been flat since. Of course, QE3 hasn't really started yet, so what/if further effect its has on the economy.

Of course, with the Fed printing out more imaginary money, the value of the dollar will suffer. The question is how much. The dollar index (a weighted index of various currencies vs. the USD) has fallen a point post-announcement, but 4 points since the rumors about QE3 started to gain momentum. The Consumer Price Index for August was up 0.6%, and that often lags behind the rest of the market - many price increases take some time to work their way downstream to the consumer.

We haven't seen any big bad moves yet, and I don't foresee any kind of world-ending hyperinflation here, guys and gals. Some moves, yes. Wheelbarrows of Benjamins to pay for a load a bread, no. 

But, keep an eye on things. Keep an eye on things as the program progresses, especially on how long the Fed keeps the program running. Don't expect the value of the dollar to do great things. If you've got a lot of 'em sitting around, think about investing them - wisely.

Will QE3 have positive effects on the economy? Let's hope so - because the Fed is rolling with it. Previous attempts haven't jump started the economy, so I don't have a ton of faith. But hey, I write a blog about the end of modern civilization...

Quantitative Easing 3 - What it means

There's been some speculation around a 3rd round of quantitative easing this fall, also known as "QE3." While the Federal Reserve hasn't announced anything, there's talk, and you'll probably hear more in the next while. Here's a quick run-down on what the heck quantitative easing (QE) is and what it might mean for the economy.

Junk Silver

There's a lot of interest around investing in precious metals (PMs) these days. I've talked about the pros/cons of PMs in the past--you can check out some of my thoughts by following the precious metals tag. While I am not a PM fanatic like some in the survival community, they do have their place, and even if you're not interested in socking some funds away in silver or gold, it doesn't hurt to know about 'em.

Why you need savings

After reading through Rawles' Survivors, I never thought I'd get my wife to pick up another prep/survival related book again. Luckily I married well, and she actually requested that we read Patriots a few days back. I think she's curious to see if it actually is better than the lousy Survivors (it is!).

Anyways, one thing that I noticed a few pages in is that the Grays (the protagonists) don't really have a savings account - their funds are depleted by paying some bills and taxes in advanced, maybe a couple thousand bucks - yet they have massive supplies of guns, ammo, precious metals, BOV, a well stocked retreat, etc. Of course, Rawles' TEOTWAWKI comes by way of hyper-inflation, so they may have just been wise enough to get out of dollars before they were worthless.

On the other hand, many others in the survival world speak very little of having any kind of savings beyond precious metals and preps. This is, I feel, a potentially dangerous and irresponsible message to send. You need savings!

An Emergency Fund is Essential
First off, having an emergency fund of cash is one of the best preps you can have. Cash is the solution for many of the real-life problems that we face, and not having a backup leaves you open to a variety of problems. I'd rank an emergency fund up there with just about any of the prep basics.

In good times, you may have to resort to debt to cover unexpected expenses/cash emergencies. Car breaks down? Need emergency dental work? Lose your job and need to pay rent? An emergency fund is recommended by pretty much any financial planners worth their spreadsheets.

We all have unexpected stuff happen and we want to be prepared for it -- that's what this is all about, right?

Yes, you can take precious metals on down to the local coin/pawn/jewelry shop and sell them off for cash if needs be. You can certainly keep some of your savings/emergency fund in precious metals, but there's a lot to be said for the immediacy of cold, hard cash on hand. And hey, under most disaster scenarios, precious metals buyers aren't going to be open for business and the credit card and ATM machines won't be working - cash is king.

We have an emergency fund that will cover all of our costs for about two months if we tightened up the budget sufficiently. We're working on adding to it slowly and surely. It is about 75% cash and 25% precious metals. We don't have a set amount that we're working towards.

Don't "Prep" Away Your Future
Secondly, we all need to save money, whether its for buying a car, a home or saving for retirement. And even if your cars and home are paid off in full, you should still be saving - your car will need replacing, your home will need repairing/updating and so on.

The retirement piece is a big one that many gloss over--I've heard people talk about clearing out the 401k or whatever and using it to buy preps. That's scary stuff. Don't do that! You can responsibly prepare for bad times without sacrificing your life/retirement savings. If TEOTWAWKI doesn't come and you manage to live to retirement age (likely scenarios!!!), then you will want to be able to retire or at least slow down.

Diversification
Third, we have something called diversification - basically avoiding putting all of your eggs in one basket. If you dump all your normal savings and investments in favor of preps and precious metals, you're essentially just betting on one eventuality - the end of the world. What happens if that eventuality never occurs? You've missed out on a lot of other opportunities and growth that could have happened elsewhere and potentially screwed over your financial future.

So, take a diversified approach to where you put your money. Yes, buy preps and increase your self sufficiency. But don't ignore other areas as well--retirement savings, investments and so on.

Anyways, I'm probably preaching to the choir here. Prep in moderation. An emergency fund is an important prep. Be responsible! Don't dedicate all of your resources to preparing for Armageddon. Plan for the future.

DJIA Down over 600 points, gold up to over $1720 - Crazy Day in the Markets

The stock market took a fairly epic dive today, with the Dow Jones Industrial Average plummeting 620 points to close at below 11,000. As a percentage, the dropped 5.5%, while the NASDAQ was slammed with a 6.9% drop.

Much of the craziness was driven by S&P's downgrade of U.S. sovereign credit rating over the weekend. This was triggered by the so-called debt crisis of last week, which we talked about here. The markets are seeing the same things that we've discussed here - -U.S. government spending is out of control and things aren't looking rosy. Of course, the markets get into panic mode and start selling like mad, which doesn't help the matter, either. 

During today's plunge, Investors looked to move to safe havens, which, in many cases, ironically took the form of the very U.S. Treasuries that S&P had downgraded. Gold, a safe haven in high-risk times, shot up $69 to over $1720 per ounce, a record high close. Investment firms are forecasting gold at between $1850 and $2500 before the end of the year.

Here's a great quote from WSJ.com:

"Everyone's running to the fiat currency, gold," said Dave Kavanagh, president of the Grant Park Fund in Chicago. "The market's telling [Washington] right now that we don't think that you can get your spending under control," he said.


President Obama did little to assuage investor fears Monday afternoon as he said that the S&P downgrade should provide a "renewed sense of urgency" to tackle the deficit. Indexes hit fresh lows while the president spoke, and again afterward.

I like how Obama speaking has a negative effect on the market. Good work, Prez!

Silver, meanwhile, was up 1.85%, closing at around $39 per ounce. If you're looking to buy precious metals, silver looks to be the bargain. Gold has skyrocketed over the past few weeks, while silver has remained relatively stable in the mid to high 30s.

We'll see how else this plays out of the next several days, but I'm fairly concerned we're in for another recession--that's if we ever really made it out of the last one. Interesting times ahead.

World Oil Reserves Tapped

WSJ has good coverage of this story.

The U.S. and allies tapped strategic oil reserves and released an additional 60 million barrels of oil in an attempt to manipulate the world economy in fears of a slowing recovery. In response, oil prices dropped almost 5%.

Now 60 million barrels of oil is a blip in terms of things; it's less than one day of worldwide consumption. And this is only a temporary measure, so if all else remains equal, we should expect to see oil prices return to previous levels shortly.

One interesting thing is that both gold and silver spot prices responded by dropping below what had looked to be "plateau" levels for the past few weeks. If indeed this oil price drop is temporary, we would also expect this price drop to be temporary. Could be a good time to jump in and buy some PMs, if you're sitting on the sidelines waiting for good timing.

Tip of the Day: Precious Metals Prices via Kitco

Precious metals have been all over the place lately. I habitually check prices and Kitco is the place to go. They update regularly throughout the day and have all of the popular PMs in one page.They even have an iPhone app. 

Here's their prices page >

Precious metals sliding back to earth

Gold and silver have experienced dramatic drops over the past few days, declining from record heights. Gold closed today at $1473.10 an ounce, while silver experienced a massive 12% drop to close at $34.66.As recently as May 2nd, gold was sitting at over $1567/ounce. On the 28th of April, silver was at over $49/ounce. Big drops for both, but especially in silver.

I was at the coin shop the other day, and it was literally standing-room only with people trying to trade in scrap silver and gold. In my view, both metals still have room for more losses, but we'll see what the market does. I would expect the sell off to continue.

Gold over $1500/oz, silver over $46

Precious metals have continued their climb into record territory. As of today, gold will fetch you over $1500 an ounce and silver over $46 an ounce. It's hit the headlines of major news outlets, here's a story from the WSJ.

For those of us who have been watching precious metals for a while, these  are both pretty amazing. Maybe not surprising to some, but certainly exciting to those who have invested in PMs.  It's probably not a good time to buy into either - they both feel artificially high to me, at the moment, but that's just my take, which may be completely off. We may see an adjustment in the next few days, or PMs may continue their march upward. A lot of it depends on continued uncertainty, which sees no signs of abating. There's also some speculation and hype building up the value of gold--its rise has been getting a lot of press, which has increased investors demand--it's just hard to know how much.

Meanwhile, fuel and other commodities are creeping higher. We're at almost $3.70 a gallon here...I'm worried we'll be back in the $4 gallon territory soon, as we were in 2008. Our economy is still in recovery mode; it won't take a whole lot to put us back in the death spiral. And Donald Trump is running for president.

Crazy times. Good luck.

E&E Barter Kit

Photo courtesy Naval History & Heritage Command
Source.

I learned something new yesterday--airmen in WWII carried a small barter kit amongst their bail out/survival gear. There are two different kits of kits that I know of--the "Barter Kit, Atlantic" and the "Barter Kit, Southeast Asia." Both consisted of small valuables (gold coins and rings in the Atlantic kit, a Swiss watch, gold rings and a necklace in the SE Asia kit), and were contained in a rubber case. The Atlantic kit is pictured on the right; in total, it has .9 troy ounces of gold, in a combination of gold francs, sovereigns and the rings.


Like a lot of the spy stuff from WWII, these kits are just plain cool. They also remind us of the role of valuables in an escape situation. 


Even in the midst of war, disasters or other SHTF situations, money (or gold) talks. Barter for items you need, bribe people, whatever. 


Yes, in an all out TEOTWAWKI situation, there will be a lower demand for gold and a greater supply (millions of dead who don't have a need for their jewelry collection). Cash will suffer a faster, more drastic fate...if the government no longer exists, it's just paper. But short of that, and in more likely disasters, regional instability, and other local troubles, gold and cash will still likely have value, and can be a valuable tool in getting you where you need to go. That may be the next state over, it may be the other side of the planet. And in normal times, there are few problems that can't be solved with a pile of cash. 


What would a modern E&E Barter Kit look like? I'd put cash in it--local currency--and enough to live off of for a while. $1000 cash is a good number to start with. With $1k, you can get yourself across the country, rent cheap hotels for a while and so on. If you live near a border or may bug out internationally, some of that foreign currency would be good as well, or just forgo currency and go all gold. As far as precious metals go, small weight (1/10 or 1/4 ounce), non-US gold is the way to go. Canadian maples, Swiss bars or Krugerrands. I'd avoid anything obviously American and the smaller denominations allow you flexibility in purchase. I like the coins because they are recognizable quality and content, versus a random gold ring or chain.


Total value of the kit will be determined by your budget, but this doesn't need to be an entirely separate purchase item. Most survivalists types have gold and a stash of emergency cash already. Keeping some in your bail out bag or in a ready-to-grab bag or wallet gives you the kit you need. You could also accomplish the same thing by just adding some extra cash and a few small coins to your EDC--a wallet kit, inside a Black Ops Belt, under the insole your your shoe and so on.

Precious metals: a prep or a waste?

So, lots of survivalists push precious metals, others say they're a waste of time. Who is right? Let's take a look.

Complete worldwide TEOTWAWKI
 
In a complete, worldwide TEOTWAWKI situation that knocks out all infrastructure, topples all governments and destroys all economies, will precious metals have value? To people who are starving to death or dying of thirst, not so much. You can't eat or drink gold, so yes - there's no demand and your metals are of little use in the initial stages post-TEOTWAWKI.

If, however, there is enough stability that young people are getting married or men are buying their wives jewelry, then hey, your metals will have some value. That is what people use gold for now, it's what they've used it for hundreds and even thousands of years. A token of appreciation and love and a status symbol. That's not going to change - when people get married, precious metals are involved, and they will work or pay a good amount to buy 'em.

Heck, you don't need a whole lot of stability for people to be marrying and gift-giving, and with higher mortality rates and the logistical need for a husband/wife unit, people will get married younger and more often. There may be a surplus of wedding bands to pull from the corpses of the unlucky, but I think your metals will have some value.

So, post-TEOTWAWKI, if you're out of the initial "everyone's starving" stage and living in some measure of local stability, your precious metals will have value to others.

Other SHTF Situations

Mankind hasn't had a complete, worldwide TEOTWAWKI situation yet, so we can place that fairly low on the list of probability. Higher on the probability list are things like hyperinflation, nationwide troubles and civil war.

Things like hyperinflation and collapsing currencies have happened time and time again, and precious metals are a hedge against that. Your local currency loses its value but your metals will retain their value.

Many people have needed to make a speedy exit from their native countries when dictators took power, mobs took over or war broke out. See Germany during and post-WWII. These are the real-deal bug out situations that we saw plenty of in the 20th century, where you've gotta bail on your homeland and head for somewhere more stable and safe. You can't stop by the bank on your way out. In this situation, precious metals, especially gold and platinum are a very compact and transportable form of wealth. A single pound of gold - sixteen one-ounce Gold Eagles currently has a melt value of $19,280, and the flat little coins can easily be concealed or sewn into clothing or bags.You can use your precious metals to get your family set up and safe in your new home.

Finally, precious metals, unlike most of the rest of your preps, have investment value. That means you can sell some off when you're old, TEOTWAWKI hasn't come, and you need to support your retired-self. At a minimum, gold gets you out of the fiat currency that you hold and the associated risks. Which is why, with the depression,  Buy smart and you'll make some money when the time comes to sell. Gold right now is high, pushed up by economic concerns, but it's $50 or so less than it was two months ago, and your guess is as good as mine as to where the value will go from here.

What's the priority?

Precious metals are NOT high on the priority list. Cash on hand, food and water storage, a reasonable firearms battery and ammo and many other things take a higher priority on your "prep list." However, as you get squared away with preps and/or start investing and saving, include some precious metals.

I am not a big fan of silver, because it fails at many of the things you need your precious metals to do. It is NOT particularly concentrated/transportable form of wealth. For example, silver is currently ~$18/ounce compared to ~$1200/ounce for gold; you'd need approximately 67 ounces of silver (over 4 pounds) to equal the value of ONE ounce of gold. Silver is not also in as great of demand for wedding band/jewelry/luxury purposes, so it will be lower on the barter totem pole during the "local stability" phase. It is an inflation hedge, but doesn't do this any better than gold. It is easier to make small-scale barters with, but I don't see $20-value exchanges being the key to anyone's survival. And if you find yourself needing some silver in a precious-metals driven market, I'm sure you could trade a gold coin for some.

I don't have any gold; we do have five silver Morgan dollars that my wife received as a gift, but otherwise we have zip in the way of precious metals. The point what we're ready to start buying them up is in the future, hopefully not too distant, but for now, there are many other things that take precedence. I suppose many of you are in a similar boat, but if you've got money to spend or are looking to get out of more volatile investments, gold certainly is a worthwhile preparation.