Archive for September, 2008

The Psychology of Buying Precious Metals

September 29, 2008

I’ve been advising my friends, family, and neighbors to buy precious metals to protect their assets against inflation for several months now. A number of questions have come up.

  • How do I know that the coins I buy aren’t forgeries?
  • I looked at Franklin Sanders’ website and he seems a bit idiosyncratic; is he ok?
  • Once I buy silver coins, where do I store them?

These are good questions. But before answering them, I want to discuss the psychological factors behind the choice to buy precious metals. Buying gold and silver bullion as a safe haven presupposes letting go of certain beliefs about the way our monetary system functions and how that system is likely to fail in the coming years. Let’s take a look at them.

Belief # 1: Dollars and Banks Make Your Assets Secure

We all grew up believing that keeping dollars in a passbook bank account preserves our savings in the most conservative way. The bank protects the money from theft and even pays us a fee called “interest” in return for the right to lend our money to other people.

Most folks who buy precious metals challenge this assumption  for a number of reasons:

  • The Federal Reserve’s monetary policies have seriously eroded the purchasing power of the dollar;
  • Inflation makes the going interest rate effectively negative; and
  • Fractional reserve banking (the mechanism that allows a bank to lend 90% of its deposits) poses this risk: if the loans that its depositors financed default in large numbers, the depositors can’t get their money back (and yes, FDIC could easily go belly up if enough banks fail simultaneously).

The catastrophic collapse of the banking system during the Great Depression happened so long ago that few of us grew up thinking in these terms. And you wouldn’t be likely to ask why the U.S. Constitution explicitly mandates gold and silver as the national medium of exchange unless you knew about the numerous hyperinflationary disasters that befell many of the Colonies. Without studying some history and understanding some rather arcane concepts about our monetary system, questioning the safety of a good old fashioned bank sounds like lunacy.  You may as well try to convince a five-year old child that Santa Claus does not exist: either he won’t believe you, or he will be emotionally devastated.

Belief # 2: The Next Fifty Years Will Look The Same As The Last Fifty Years

The past fifty years of America brought a level of material wealth to more people than could ever have been possible at any other time in human history. It is natural to assume that things will continue as they have. The alternative view embraces the realization that this unprecedented level of wealth results from:

  • Unsustainable consumption of natural resources;
  • The availability of cheap petroleum;  and
  • The willingness of foreigners to finance our national debt.

There are good reasons to question the long-term viability of these conditions. The emerging industrial countries (most notably China and India) are competing with us for natural resources. And they are discovering investments more secure and lucrative than the US Treasury Bonds that finance our national debt.

The signs of decline are all around us: the rising cost of food and medical care; the growing doubt about America’s ability to ever repay its national debt; the rapidly rising price of gasoline, home heating fuel, and electricity.  The frantic pace of our lives makes it hard to notice the signs of deterioration and to understand what they mean for our economic future. Good old fashioned denial also plays a role.

The Hesitation To Dive In

A dispassionate examination of the facts and a lucid understanding of a few economic concepts easily expose the fragility of our monetary and banking system. The same goes for the material changes that will affect our standard of living in the coming years. This knowledge has motivated some of my friends and neighbors to explore purchasing precious metals.

But my informational answers to the very reasonable questions people are asking me don’t always satisfy them. A few days ago my wife and I answered the same question about Franklin Sanders three times in one day from the same person. So I think there’s more to these questions than the quest for information. There’s also a good deal of anxiety.

So let’s be clear. It takes a major shift in consciousness to make this chioce. One has to let go of some deeply held assumptions about the solidity of the monetary world in which we earn and spend. Psychological shifts of this magnitude always raise fear and anxiety.

So as I answer the specific questions about buying precious metals, pay attention not only to the information itself, but also to your reaction to what you are doing. You are giving concrete form to your preparations for an uncertain future. By doing so, you are demonstrating to yourself an acceptance of the great uncertainties that the future does indeed hold. Investing even a tiny portion of your total savings in silver bullion coins gives form and reality to your beliefs. Psychologically, that’s a big deal.

A Few Answers

With that, I’ll just say a few things now to address the specific questions that folks have asked me recently.

  • How do I know that the coins I buy aren’t forgeries?

The pre-1965, 90% silver U.S. coins that I recommend are miniscule in silver content (0.715 of their face value, to be exact). It just cannot be worth anyone’s while to counterfeit them. Forging 10, 100, or 1000 ounce bullion bars would be much more lucrative. Today’s relatively low price of silver (around $13 per ounce) makes the proposition even more unlikely. Moreover, if you put one of these coins side-by-side with a newer coin the difference will hit you over the head: the silver ones are bright and shiny while the newer ones look dull and grey.

To set your mind at ease, put in a minimum $100 MAP order with Franklin Sanders and then have the coins checked out at a coin shop. While you’re there, inquire about the coin dealer’s commission on the same coins. The answer will help you understand the value of the MAP.

  • I looked at Franklin Sanders’ website and he seems a bit idiosyncratic; is he ok?

Franklin makes no bones about discussing his political and religious beliefs on his website. I have found this to be the case for quite a few precious metals dealers (check out Don Stott’s website for comparison). No question about it, the precious metals community marches to its own counter-cultural drum.

More to the point, I don’t do business with Franklin Sanders because I agree with everything he has to say (though with an open mind I have learned a thing or two from him about the nature of our monetary system). I find Franklin Sanders to be an honest and ethical businessman. He created the monthly acquisition program to make the purchase of precious metals as affordable as possible: he believes that everyone has a right to protect their assets against the foolish and reckless monetary practices of the government. He also has a great sense of humor (don’t be surprised if he asks you for your “gulag number” when he’s getting your zip code).
I have no affiliation with or other reason to promote The Money Changer. Buy from someone else if you wish. Just understand that the Monthly Acquisition Program makes the purchase of gold and silver bullion coins as inexpensive as it can possibly be.

  • Once I buy them, where do I store them?

Some folks hide their precious-metals at home. Others prefer a safe deposit box. Storing them at home poses the risk of theft or of forgetting where you buried them (this can and has happened). On the other hand, if your bank fails, you may not have access to your safe deposit box during precisely the period of time that you need to get to it. And if, as happened in 1933, the government confiscates gold, it can supervise the opening of your safe deposit box to seize your assets.

The thought of storing my financial safety net at home makes me nervous and I’d rather not do so. The best bet, I think, is to use a safe deposit box until you start to see signs of potential bank failure or some similar disaster. At that point, the relative security of keeping your silver bullion coins at home would outweigh the risk of the safe deposit box. You must always keep a close watch on economic events as they unfold.

Finally, please remember that I do not recommend putting all or even any significant portion of your assets into any one asset class, precious metals included. All I recommend is buying some amount of precious metals on a monthly basis or as often as possible.

The Usual Disclaimer

I am not a professional financial planner and have no credentials in this area. You should always review your long-term financial plan with a qualified financial planner. I recommend finding one who understands monetary inflation and peak oil. My only purpose is to educate you about ways to protect your financial well-being in the face of the dark period of economic and social collapse that looms ahead of us in the next decade.

© 2008 Philip Glaser


The Big Bailouts: The Cure Could Kill The Patient

September 21, 2008

The unprecedented government intervention to save AIG rankles those of us who would prefer that the government refrain from intervention in the financial markets. Especially a government led by Republicans, who supposedly believe in free markets. But there is a good reason for the intervention: the size of AIG’s credit derivatives market is sixty-two trillion dollars, which exceeds the size of the entire world economy. Its failure would cause a domino effect of failures that would bring the world financial system to its knees. The infusion of $85 billion seems like a small price to pay to avert disaster.

And now Henry Paulson and Ben Bernanke want the government to shell out $700 billion to rescue the failing mortgage securities. Holy smoke!

Let’s assume for a moment that these interventions and others that may follow in the near future succeed in preventing a market collapse. The sight of the financial markets humming along with normal ups and downs would present a welcome relief to the precipitous drop that they took last week.

But should we all then breathe a sigh of relief? I’d say not. Even if the plan succeeds, the effects of the bailout on the monetary system will eventually come back to bite us in a serious way.

Consider this:

  • The multi-billioin dollar bailouts transfer ownership of the financial industry’s bad loans to the US taxpayer;
  • Since the government does not have the capital to finance this bailout, the Treasury Department will fund the transfer of private debt by issuing treasury bonds (in other words, taking on more debt);
  • The Federal Reserve will convert these obligations to dollars either by selling them to foreigners or through ‘monetization’ — i.e., by inventing the dollars out of thin air;
  • The net effect of this operation will be to erode the value of the dollar and effectively tax the US citizenry through inflation, or bring about a precipitous monetary collapse.

The net effect of these monetary machinations amounts to inflation. Governments that just print money willy-nilly to meet their debts (as happened to Weimar Germany in the 1920’s or, more recently, to Argentina in 1999) create hyperinflation. In the worst and most ludicrous scenarios, it takes wheel-barrows full of currency to buy a loaf of bread. In the end, the currency ends up having little more value than toilet paper as a medium of exchange. And as the example of Weimar Germany illustrates, the social and political effects of this kind of collapse can be horrific: it was this economic collapse that led to the rise of the Nazi party.

The value of the dollar has already fallen forty percent since the year 2000 when the Federal Reserve aggressively lowered interest rates to stimulate the economy in the wake of the tech bust and the economic effects of 9/11. Even without the mortgage bailout, the unending promises by politicians to reward voters with entitlements and pork barrel goodies ensure that the government will take on more debt and further erode the dollar. The current bailout only accelerates this process. When the dollar crisis strikes, it will make the value of dollar-denominated investments — especially passbook savings accounts and CDs — worthless. It might happen precipitously in a panic or it may happen over a period of time as it has been for the past eight years. It is the inevitable result of the government’s current course of profligate spending.

If the bailout plan does not succeed, and the financial system does collapse, it is theoretically possible a deflationary depression might happen. In that case, currencies or short-term bonds would be the best place to keep money because the value of everything (including the commodity hedges against inflation that I discuss below) would fall. Remember though that the only tool the government has to deal with financial crises is the monetary system. I believe with total confidence that all out market collapse would spur the government to print even more money than it proposes to print now.

Many of the authors whose articles you will find referenced below recommend buying commodities such as precious metals, land, oil, natural gas, and agricultural stocks. Such items maintain their value independent of the currency. When hyperinflation strikes, the price of these assets in dollars will rise, so that you to retain the purchasing value of your money. It is also possible that their relative value will increase as a result of their popularity when your next-door neighbor and brother-in-law understand what’s happening and start rushing to buy them. If you begin to accumulate these kinds of assets at a low cost (as you can now), you will even make a profit after inflation.

The complexity of navigating commodity investments can easily overwhelm the novice investor. They are not available in most 401k and state retirement programs. And their price volatility can give you quite a roller-coaster ride. In the past year, crude oil shot up to over $150 a barrel and then plummeted to under $100. A good deal of psychological preparation and technical understanding makes sense before plunging into this area.

I intend to elaborate on these topics in future articles. For now, I want to draw your attention to an easy and, in my view, sensible way to get into commodities: the purchase of silver coins. The cost of silver is denominated in the ‘spot price‘ per ounce. All forms of precious metals (specially minted one ounce coins or bullion bars) carry some premium over the spot-price. The least expensive silver coin is the pre-1965 US coins. Prior to 1965, dimes, quarters, half-dollars and dollar coins were made of 90% silver. When originally minted, a $1000 face-value bag of such coins contained 725 ounces of silver. Accounting for normal wear, such a bag today contains 715 ounces of silver. To know the silver content of such coins, you multiply their face value by 0.715. So three pre-1965 US quarters contain 0.53265 ounces of silver. At today’s spot price of silver, these three coins are worth $6.76. An advantage of these coins over the larger one-ounce silver coins or bullion bars is that when the currency collapses they can be used as a medium of exchange for small purchases.

You hear a lot about gold in the news, but silver represents a better value. Historically, when precious metals prices are high (like at the end of a bull market), the ratio of gold to silver is 1:16. That is, it takes 16 ounces of silver to purchase one ounce of gold. When the prices of precious metals are depressed, the ratio is more like 1:60. The price of silver, in other words, rises significantly faster than that of gold in a precious metals bull-market. Another way of looking at it is that silver relative to gold is much cheaper. And when the market is at its height, you can exchange your silver for gold and purchase significantly more gold than you could now.

There are many dealers of gold and silver The one with whom I am most familiar and trust is the The Money Changer. In times of ordinary uncertainty (times when a slow-burn on the value of the dollar is more likely than a precipitous collapse), I recommend that people start with small purchases of pre-1965 90% US silver coins in small quantities through the Money Changer’s monthly acquisition program. The advantage of this program is that you buy small amounts (as little as $100/mo.) at a commission level (about 3%) that would ordinarily require a purchase of thousands of dollars worth of silver. Think of it as a precious metals buying cooperative. If you can’t afford the minimum $100 a month, split the purchase two, three, or four ways with a group of people.

Since this is a time of extraordinary uncertainty (a collapse of the banking system or of the value of the dollar could happen rather immediately and precipitously), I recommend that you call Franklin Sanders immediately and purchase some amount of these coins. The amount you buy will depend on your means and on your level of concern about the current situation. You can then begin the process of regular purchases through the monthly acquisition program.

Some of you may have noticed that the price of gold, silver, and oil has recently undergone a dramatic drop in price. That’s ok because monetary inflation and shortages of energy supplies are part of a long term trend. By purchasing on a monthly basis, you apply the method of “dollar-cost-averaging” wherein the steady purchase of the item smoothes out the highs and lows of the market over time.

Finally, a few disclaimers. I am not a professional financial planner and have no credentials in this area. You should always review your long-term financial plan with a qualified financial planner. I recommend finding one who understands monetary inflation and peak oil. Also, I have no affiliation with or other reason to promote The Money Changer. Buy from someone else if you wish. My only purpose is to educate you about ways to protect your financial well-being in the face of the dark period of economic and social collapse that looms ahead of us in the next decade.

Suggested Reading:

AIG’s Dangerous Collapse: A Credit Derivatives Risk Primer, by Daniel R. Amerman
The Subprime Crisis Just Starting, by Daniel R. Amerman
A Day That Shall Live in Infamy, by Chris Martenson

© 2008 Philip Glaser