What will be the value of gold and silver in a crisis?

[Björn Toulouse]

From time to time I encounter the Chicken Littles of the world who always admonish people like me to hoard gold and silver for the long predicted troubles to come. Okay, I suppose that if the sky does fall some day that our current paper, plastic, and coins will have little or no value. What I don't understand is why gold or silver will.

I would imagine that, depending on what exactly made the sky come crashing down, we might be plunged straight into a barter system of goods and services. I would rather be trading either of those for the things that I need without fooling with shiny metals. The price of gold fluctuates daily. Do the CL's believe that the value of gold and silver will remain constant in a true crisis or will it be what the supplier demands at the moment, because it seems that in the "sky is falling" scenario, the supplier will most certainly have the upper hand. And how does one "make change" for gold or silver? Would we ultimately pay more than we should for a good or service with precious metals? Should we not instead hoard water, comestibles, gasoline (uh-oh -- evaporation) tools, batteries or the crank type flashlights/lanterns, firearms and ammo - how about thousands of Bic lighters (uh-oh--more evaporation) or matches? Wouldn't these be better for trading than some old wedding band?

I'm sure some CL's would recommend the hoarding of food, etc., as well as the metals. Personally I would rather my limited resources be applied to the hoarding of goods as a means of commerce.

Can someone explain to me a logical reason to buy gold or silver for a coming crisis?

[Puppycow]

I generally agree with you. In some situations, things like food may be even more valuable than gold, but that is a dire situation indeed. In a situation of economic turmoil, gold is considered to be a "safe haven" that can preserve wealth.

Imagine a situation like Zimbabwe, where inflation is a gagillion percent. That is a situation where gold is probably the best way to keep your wealth (if you can protect it).

[Puppycow]

Also, I think the value of gold is more scalable. Most goods become less valuable per unit the more you have of them. But not gold. A person can only wield one or two weapons and carry so much food.

[Bob Blaylock]

The price of gold fluctuates daily. Do the CL's believe that the value of gold and silver will remain constant in a true crisis or will it be what the supplier demands at the moment, because it seems that in the "sky is falling" scenario, the supplier will most certainly have the upper hand. And how does one "make change" for gold or silver?


Gold and silver and similar metals are actually much more stable in value than any fiat currency. That “the price of gold fluctuates daily” is not a reflection on the gold itself, but the instability of the currencies in which its value is measured. When the price of gold goes up, that doesn't mean that gold has become more valuable so much as it means that the currency in which you are trying to measure its value has become less valuable.

[rjh01]

Gold and silver make good materials for jewelry. They are soft, do not corrode easily (c.f. iron), melt at a low temperature and are rare. Best of all they look good. This will mean that in any pre industrial society or better, gold and silver will have some value.

[Francesca R]

Gold and silver and similar metals are actually much more stable in value than any fiat currency. That “the price of gold fluctuates daily” is not a reflection on the gold itself, but the instability of the currencies in which its value is measured. When the price of gold goes up, that doesn't mean that gold has become more valuable so much as it means that the currency in which you are trying to measure its value has become less valuable.How is that more correct than saying "When the price of the currency goes up, that doesn't mean that the currency has become more valuable so much as it means that the medium of exchange in which you are trying to measure its value has become less valuable."?

Seems to me that the numeraire is the measure that most people will identify as having the "value" or purchasing power. And for most people that is, practically, fiat money.

[Francesca R]

[Harold Wilson]"The ounce of gold in your pocket has not devalued--it's just worth 10% less in terms of money"[/Harold Wilson]

[timhau]

I think I'll start hoarding glass beads and brightly colored buttons. When the economy crashes, I'll buy Manhattan.

[Björn Toulouse]

I generally agree with you. In some situations, things like food may be even more valuable than gold, but that is a dire situation indeed. In a situation of economic turmoil, gold is considered to be a "safe haven" that can preserve wealth.

Imagine a situation like Zimbabwe, where inflation is a gagillion percent. That is a situation where gold is probably the best way to keep your wealth (if you can protect it).



But that's what I am speaking of, that hypothetical "dire situation" where everything breaks down. I'm engaged in one of those eternal discussions with a religious nut who sees the USA attacking Iran thus provoking Russia to nuke us and so forth. I'm trying to see the point of why these people say to hoard gold and silver. I can't see of it being of much use during a dire situation but perhaps they mean to have it after the dire situation has ended and some stability has been restored.

[Darat]

In that sort of situation the value of everything will be governed by how useful it is for day-to-day survival, you can't eat gold and anyone foolish enough to swap food for gold is not going to last very long!

Slightly longer term and you can expect a feudal system to arise so how much gold or silver you have will not matter once your Lord has taken it!

[madurobob]

In that sort of situation the value of everything will be governed by how useful it is for day-to-day survival, you can't eat gold and anyone foolish enough to swap food for gold is not going to last very long!

Slightly longer term and you can expect a feudal system to arise so how much gold or silver you have will not matter once your Lord has taken it!

Either way, hoarding brass, lead and gunpowder would be more useful. I think.

[Puppycow]

But that's what I am speaking of, that hypothetical "dire situation" where everything breaks down. I'm engaged in one of those eternal discussions with a religious nut who sees the USA attacking Iran thus provoking Russia to nuke us and so forth. I'm trying to see the point of why these people say to hoard gold and silver. I can't see of it being of much use during a dire situation but perhaps they mean to have it after the dire situation has ended and some stability has been restored.

Yes, its value depends to a large degree on the existance of a society governed by law. So its value would be greater once stability is restored.
I can't say I recommend such discussions, but of course your highest priority would be survival-related goods like food, weapons, etc. However, once you have these, if you wanted a way to store excess wealth, gold might be more efficient than more food and weapons. These are valuable property but wealth is something you can store. People have always valued gold, so it has a certain utility. Still, I'm for enjoying life and not for worrying about an apocalypse that will probably never come. If it does, and I survive, I'll deal with it then.

[geni]

Gold and silver and similar metals are actually much more stable in value than any fiat currency. That “the price of gold fluctuates daily” is not a reflection on the gold itself, but the instability of the currencies in which its value is measured.

Are you trying to claim that the silver bubble and it's later collapse was a currency shift rather than an instability in the price of silver?

[Darat]

Either way, hoarding brass, lead and gunpowder would be more useful. I think.

Well I suppose that would put you in your new Lord's good graces...



And before anyone tells me that they won't be subjugated - tough you will be. You've more chance of winning the jackpot in the lottery 3 times in a row than not being a serf. :)

[Hellbound]

Actually, assuming a catastrophic, complete breakdown, your most valuable commodities will be knowledge. Books on survival, medicine, herbalism, agriculture, a good set of encyclopedias, manufacturing instructions, knowledge of metallurgy and blacksmithing, mining, smelting, leatherworking, animal husbandry and veterinary medicine, etc.

I'd choose these over gold (after immediate survival needs are covered). These types of things will teach you skills that you can then sell over and over again. Think about it, what's going to be more valuable: a pile of silver, or the guy who knows which plants will keep your people from dying from wound infections? A gold bar, or a guy that can make wagon wheels, horse shoes, and muskets?

In the Fuedal scenario, it also makes it more likely that A) you won't be a forced farmer and B) give's youa route into your Lord's good graces (maybe a court appointment).

[geni]

Gold's main use is when the breakdown is less than total are there are localised patches of order or other countries to trade with.

[ponderingturtle]

Actually, assuming a catastrophic, complete breakdown, your most valuable commodities will be knowledge. Books on survival, medicine, herbalism, agriculture, a good set of encyclopedias, manufacturing instructions, knowledge of metallurgy and blacksmithing, mining, smelting, leatherworking, animal husbandry and veterinary medicine, etc.

I'd choose these over gold (after immediate survival needs are covered). These types of things will teach you skills that you can then sell over and over again. Think about it, what's going to be more valuable: a pile of silver, or the guy who knows which plants will keep your people from dying from wound infections? A gold bar, or a guy that can make wagon wheels, horse shoes, and muskets?

In the Fuedal scenario, it also makes it more likely that A) you won't be a forced farmer and B) give's youa route into your Lord's good graces (maybe a court appointment).

I wonder how much gold a self sufficient machine shop would be worth...

[Chaos]

Gold and silver make good materials for jewelry. They are soft, do not corrode easily (c.f. iron), melt at a low temperature and are rare. Best of all they look good. This will mean that in any pre industrial society or better, gold and silver will have some value.

But in the kind of crisis that would be necessary to make the current economic system collapse, you can count the number of people who have the spare resources to commission jewelry on the fingers of one hand - even after that hand was amputated at the wrist.

[Eddie Dane]

I must admit that I'm susceptible to "goldbuggery".
My family got hit hard during WW2 (almost wiped out on my mothers side), so I've always been brought up not to take stable society for granted.

It is no coincidence that many Jews ended up dealing in something as valuable, concealable and portable as diamonds.

When I first learned of the Peak Oil problem, I dove deep into Disastafary Woo Woo-land. It was a most unpleasant time in my life that was marked by fear and depression, all made worse by the fact that my wife was pregnant with our first kid.
During that time I bought gold (and a gun, and canned food- go on, you can laugh at me).

I sold it (the gold) with considerable profit to help pay for our new house. (having come to much less catastrophic conclusions about the oil crisis).

the "buy gold" meme is pushed by the lunatic fringe as far as I can see, but I have not quite detached from it.
My question: Without going for the hilarious Mad Max 2 scenario's: are there situations where owning gold is a way of preserving wealth through a crisis?

How would this have played out during say...
The great depression
World War 2
Russia in the nineties

Is it really such a ridiculous idea?

[theMark]

You might want to consider that a rudimentary society, devolving after a severe crisis, will most likely be governed by superstition, magical thinking and acts of random violence - if only because the non-reality based people far outnumber the skeptics in any case, and the woo-heads tend to blame the thinkers for all the evil in the world.

Given the mystical values usually associated with gold, it might be something worth trading with after all, even if the next microchip fab might not be around for another five hundred years.

Silver might go up in value too if you're able to convince the natives that you've seen werewolves in the haunted woods just outside the tent camp...

[madurobob]

I wonder how much gold a self sufficient machine shop would be worth...

I wonder about this. Its a great need and that makes it valuable. But, wouldn't that "valuable" aspect also keep the large regional machine shops in business? Sure, they may be surrounded with guards and the workers paid little more than slave wages in exchange for some security. But, if there is value in any machine shop, then there is surely value in keeping a large regional machine shop/foundry in business.

Just because there is a global collapse it doesn't mean we forget how to pool resources, exploit economies of scale, subjugate the weak, etc... I have great confidence in our entrepreneurial spirit to right the ship fairly quickly. There is too much power at stake for it all to go **** up and send us back to the stone age.

[GreNME]

the "buy gold" meme is pushed by the lunatic fringe as far as I can see, but I have not quite detached from it.
My question: Without going for the hilarious Mad Max 2 scenario's: are there situations where owning gold is a way of preserving wealth through a crisis?

How would this have played out during say...
The great depression
World War 2
Russia in the nineties

Is it really such a ridiculous idea?

First, let me say I can sympathize with your family's plight from WWII. One side of my family had a crisis of wealth loss as well, though much more recently (about two-and-a-half generations back) and they even had acres and acres of land owned by the family. I point that out because your most sure bet in any crisis isn't going to be in a commodity like precious metals or oil, it's going to be in land-- and sometimes even that won't be good enough.

The problem with the current "gold fever" by the woo crowd and the fringe 'economists' is that they are banking on gold as it is graded according to our own fiat system of banking. Sure, gold has a pretty steady climb in value and tends to maintain that climb, but while gold can be a good place to sock away emergency fungible wealth it is not a smart vector through which to actually increase your wealth. The value of gold has held pretty strong the last 6-8 years or so, mostly because the economy has gone to pot with a bunch of bad investment problems and the imbalance that the credit bubble created. The reason this is a problem is because that bubble is bursting-- though it appears the federal government is more interested in it staying a slow-but-steady leak-- and the market is going to reallocate and then continue to chug forward again. Historically, when this happens commodities quickly get overtaken by a bunch of other types of investments as a solid place to put your money.

Aluminum is a good example of this. In the 1980's aluminum was being bought into by companies like Alcan and Alcoa, who obviously had a stake in the commodity itself and had a lot to gain. Well, after the market crash in the late 80's and the subsequent recovery and surplus through the 1990's, those who bought into aluminum took a financial beating as the commodities stagnated while everything else grew. This happened to a smaller degree to things like gold and silver, but it happened to them nonetheless. That doesn't mean that those metals were a bad place to stick the money, it was just that sticking the money there didn't give it the same kind of growth had more of it been placed elsewhere, and growth is important to keeping the market going and in keeping your investments increasing in value.

Basically, gold and other commodities are a bad place to stick some of your money-- I think the last suggestion I hear was something like 15%-20%-- but you should keep in mind that when the economy is bad that's a good place to sock away cash in a "sure thing" sort of way, but in a good economy it's about the fiscal equivalent of stuffing money in your mattress compared to storing it in a bank.

[Beerina]

A precious metal is more stable than an inflating currency that isn't even nominally based on actual metal anymore.

However, barring government intervention, and over the long run (10 years minimum) the prices of commodities will decrease (http://www.juliansimon.com/writings/Ultimate_Resource/TCHAQ01A.txt). The reasons are counter-intuitive (http://www.juliansimon.com/writings/Ultimate_Resource/TCHAQ02A.txt), but so what? It's a theory that makes successful predictions (http://www.juliansimon.com/writings/Ultimate_Resource/).

[dudalb]

In a total collapse, I suggest that Brains Gremlin's investment advice in "Gremlins 2" is correct:
Canned Food and Shotguns.

BTW I keep expecting dash to show up in these discussions.....

[Chaos]

*snip*
During that time I bought gold (and a gun, and canned food- go on, you can laugh at me).
*snip*

I´m not laughing at you at all - least of all about buying a gun and canned food. Either would be much more useful in any crisis severe enough to collapse the current economic system. Or during temporary disruptions such as natural disasters.

As for the rest of your question - the way I see it, gold and silver are valuable mainly for the same reason that fiat currency is valuable: because people agree that they are valuable. Buying gold is probably no better or no worse an idea that, say, buying Pound Sterling, depending on how far-reaching you expect the crisis to be. Any crisis severe enough to have a world-wide effect will be severe enough to render gold useful.

Oh, well, not quite useless. You can find the really bad god bugs, and use the gold to buy guns, ammunition and canned food from them.

[The Central Scrutinizer]

Can someone explain to me a logical reason to buy gold or silver for a coming crisis?

There is no logical reason. Unless you like putting your money into lousy investments.

[GreNME]

There is no logical reason. Unless you like putting your money into lousy investments.

I wouldn't call it lousy. I'd call it ineffectual. When someone pointed out the allegory to stuffing your money into a mattress for safe-keeping I thought that was the best analogy, which is why I use it today. It's not that you'll lose the money, but you don't actually manage to increase your wealth.

[AvarianParakeet]

Anytime I hear about the value of gold in a crisis, I think about a scene in the show "Jericho." After the big disaster at the beginning the annoying kid tried to sell a bunch of fine silverware his rich girlfriend gave him. The traders just laughed and told him to throw it away. No one wanted soft metals because they were afraid of latent radiation.

In any real disaster you need something real. Salt, canned food, general skills, weapons, etc. Pretty useless metals won't come in hand, especially if you lack the general ability to defend them.

Even if there isn't a true disaster, you're still hoping that there is a big currency recovery. In the Zimbabwe example, gold would only be worth something in practical terms if someone locally wanted it. Otherwise you're just waiting to ride out the inflation. Having a usable barter item or skill would be just as good if not better.

[geni]

I wonder about this. Its a great need and that makes it valuable. But, wouldn't that "valuable" aspect also keep the large regional machine shops in business? Sure, they may be surrounded with guards and the workers paid little more than slave wages in exchange for some security. But, if there is value in any machine shop, then there is surely value in keeping a large regional machine shop/foundry in business.

Just because there is a global collapse it doesn't mean we forget how to pool resources, exploit economies of scale, subjugate the weak, etc... I have great confidence in our entrepreneurial spirit to right the ship fairly quickly. There is too much power at stake for it all to go **** up and send us back to the stone age.


The problem is that such things require very large scale organisation. Your large regional machine shop needs roads, power, raw materials and a constant supply of customers. It also has the problem that if the wrong people die the who thing colapses.

By comparison a one man machine shop can effectively be mothballed between use (don't need a constant income to pay guards or whatever) and if it is useable and maintable by one man they can probably teach their son or aprentice how to keep it going.

[madurobob]

The problem is that such things require very large scale organisation. Your large regional machine shop needs roads, power, raw materials and a constant supply of customers. It also has the problem that if the wrong people die the who thing colapses.

By comparison a one man machine shop can effectively be mothballed between use (don't need a constant income to pay guards or whatever) and if it is useable and maintable by one man they can probably teach their son or aprentice how to keep it going.
I see your point.

I guess I'm leaning a bit heavily on my view (certainly not mine alone) of the Y2K panic at the time: Too many large multi-nationals have too much at stake to let something so simple collapse the economy.

I rely on that same driver to keep things going in all but the most extreme circumstances. If we're talking major economic meltdown, then our infrastructure remains more or less intact. There would be a time of confusion and anarchy, but stability would return relatively quickly (though it may not look entirely familiar). I don't think a one-man machine shop brings too much to the table in this scenario. Though, perhaps more in the immediate aftermath.

If we're talking global nuclear war or something similar that kill millions and destroys infrastructure, then, yes, that same machine shop becomes invaluable.

And I still say brass, lead and gunpowder would be more valuable than gold in either scenario. A good store of whiskey may be even more valuable ;)

[stilicho]

Okay, I suppose that if the sky does fall some day that our current paper, plastic, and coins will have little or no value. What I don't understand is why gold or silver will.

The argument normally follows along the lines that metals contain some sort of intrinsic value. This isn't true.

I was just beginning a so-called career in finance when the 1987 "crash" occurred. One of the things a friend told me that stuck with me since was: "McDonald's is still making hamburgers".

When the sky fell in 1929, nobody was making anything. Capital dried up as credit shrank and trade almost stopped. You could have had Fort Knox under your mattress but you wouldn't have been able to buy anything with it because GDPs dropped out of sight.

In worsening times it's actually preferable to sell gold (if you have any) because buyers far outweigh sellers. You can always buy it back cheaper in the future when markets are doing better.

And, my personal investment advice to all the gold-bugs and "libertarians": Get rid of your IRA's, 401(k)'s and RRSP's and put it all into shotguns and canned food.

[Cuddles]

One question I never seem to see addressed by goldbugs is - where is the gold? Unless you're actually stuffing gold into your mattress, it's being stored in a bank or a safe or something. If civilisation suddenly collapses, how exactly are you better off than anyone else? Your gold is still in a bank vault somewhere, and the bits of paper you have saying you own it are exactly as useful as any other piece of paper.

There just seems to be a rather big piece of logic missing. If the sky does fall, you basically lose everything that isn't in your own home. If you can't actually hold it in your own hands, you don't own it. And in that situation, your much better off being able to hold food, medical supplies or a pointy stick than you are holding a shiny inert lump.

[Hellbound]

And in that situation, your much better off being able to hold food, medical supplies or a pointy stick than you are holding a shiny inert lump.

But what if it's a gold-plated pointy stick? Eh?

Didn't think of that one, didja?

:D

[e-sabbath]

I don't think it's ever a bad idea to have an emergency kit ready. Food for a week, water for a few days, a few thousand bucks in Kruggerands for _emergency_ travel money, batteries, radio, flashlight (LED hand powered) and so on. Some of it sorted for 'we got stranded for a week thanks to snow' and some of it sorted for 'The house is on fire, take this and run like hell.' I even have a small survivalist bookshelf. You know, US Military wilderness survival training manual, that sort of thing.

But more than a few thousand is probably worthless... because you can't run with it. If the world's gone to hell badly enough that you can't access the bank for more than a week, you got bigger problems than gold.

[Eddie Dane]

I just remembered that the US army found a golden AK47 in one of Saddam's palaces.

I think we can all agree that this is the all-in-one solution.

Just think about it: It's a beautiful, subtle and tasteful decoration for your trailer home during peacetime. You can even rent it out for use in rap video's.
Then, when chaos breaks out you can use it to pump people full of hot lead.
As society begins to stabilise again you trade it for a Manhattan penthouse, a couple of slaves and a Bentley (horse drawn). :D

[The Central Scrutinizer]

I wouldn't call it lousy. I'd call it ineffectual. When someone pointed out the allegory to stuffing your money into a mattress for safe-keeping I thought that was the best analogy, which is why I use it today. It's not that you'll lose the money, but you don't actually manage to increase your wealth.

Fair enough, but with gold, you actually can lose the money. Those who invested in the early 80's, at an inflation adjusted $2200 and ounce are still waiting to break even. I suspect they will be waiting a loooooooooooooooooooooooong time. I call that a lousy investment. ;)

[The Central Scrutinizer]

I was just beginning a so-called career in finance when the 1987 "crash" occurred. One of the things a friend told me that stuck with me since was: "McDonald's is still making hamburgers".

This is actually the reason Mr Buffett teaches us to ignore the stock market. Yesterday's 500 point drop has nothing to do with how many 8 oz servings of Coke that Coca-Cola will sell today. Focus on the business, not the market.

[GreNME]

Fair enough, but with gold, you actually can lose the money. Those who invested in the early 80's, at an inflation adjusted $2200 and ounce are still waiting to break even. I suspect they will be waiting a loooooooooooooooooooooooong time. I call that a lousy investment. ;)

Very good point. Interestingly, times like those in the early 80's are exactly when the peddlers of the "golden" solutions come out of the woodwork to connive people out of their money, too. I'm seeing a resurgence of such advertisements on television lately.

[The Central Scrutinizer]

Very good point. Interestingly, times like those in the early 80's are exactly when the peddlers of the "golden" solutions come out of the woodwork to connive people out of their money, too. I'm seeing a resurgence of such advertisements on television lately.

Precisely! That how you know there is a bubble - when the promoters and hucksters show up!

[ponderingturtle]

First, let me say I can sympathize with your family's plight from WWII. One side of my family had a crisis of wealth loss as well, though much more recently (about two-and-a-half generations back) and they even had acres and acres of land owned by the family. I point that out because your most sure bet in any crisis isn't going to be in a commodity like precious metals or oil, it's going to be in land-- and sometimes even that won't be good enough.

This is precisely the thing, there is no perfect place to put your money for every kind of disaster.

[geni]

This is actually the reason Mr Buffett teaches us to ignore the stock market. Yesterday's 500 point drop has nothing to do with how many 8 oz servings of Coke that Coca-Cola will sell today. Focus on the business, not the market.

Market impacts the business in that the more you are worth the more you can borrow to invest.

[GreNME]

Market impacts the business in that the more you are worth the more you can borrow to invest.

But the market isn't the beast that must be fed, it's a vehicle to feed the beast. The beast is consumers and consumer confidence-- without that there is no market. You feed the beast through business, which is the market. So, essentially, what the market is (I'm way over-stretching this analogy) is the acts of feeding the beast.

The reason Buffet is so successful (according to him) is that he doesn't let the market dictate his business, he lets his business dictate his approach to the market. In all honesty, I think that makes sense.

[The Central Scrutinizer]

The reason Buffet is so successful (according to him) is that he doesn't let the market dictate his business, he lets his business dictate his approach to the market. In all honesty, I think that makes sense.

Correct.

"The market is your servant, not your teacher" - Warren Buffett