Archive for October, 2008

Physical Versus “Paper” Silver And Gold

October 29, 2008

A few days ago I began writing a very different piece. With the concept of Limits to Growth as background, I introduced Financial Permaculture and The Great Turning. These ideas can inspire us to envision and work towards a future in which communities, at the local level, manage their resources to foster reasonable and sustainable prosperity for themselves. Such a vision can be a comfort in times like these when the world’s anonymous mega-economy heads into a terrifying collapse, dragging many innocent bystanders down with it.

But the cosmos did not want me to write such an article this week: Despite having carefully saved the draft of the piece in my blogging service Monday evening, the content had just disappeared when I went to work on it on Tuesday morning. And of course I did not have a backup on my own hard drive. The cosmos is probably right. The chaotic busyness of October burnt me out and I needed a little bit of a break. I’ll do the Deep Thinking next week. Or whenever.

So now I shall, instead, write rather briefly about what to do if the idea of holding physical silver or gold makes you uncomfortable. I also need to give you an update on the latest precious metals market gossip.

A relative of mine, nervous about owning and storing silver bullion coins, recently began purchasing shares in SLV, an Exchange Traded Fund  that you buy through a broker like a regular stock. I do not trust SLV and similar instruments (e.g., the gold ETF, GLD) because I don’t know for sure that they really own the metals that they say they do. Funds like these also purchase futures and other paper proxies that follow the official market price of gold.

Without ounce-for-ounce backing in real silver and gold, these funds have some characteristics in common with fiat currency. In particular, at some point the market may figure out that they do not actually own the metals and downgrade their price.

However, having done some research into this question, I can confidently recommend two alternatives to physically holding silver and gold.

  • Central Fund of Canada: This fund has only one purpose: to own physical gold and silver (roughly half of each). You buy shares of this fund (ticker symbol CEF) on the stock market just like any other stock. Unlike the ETFs, it employs rigorous and redundant third-party accounting mechanisms to ensure that the shares traded on the exchange do represent real ounces of silver and gold.
  • This company’s propieter, James Turk, contributes frequently to the Financial Sense Newshour and is endorsed by Catherine Austin Fitts. The operation runs very differently from CEF. You open a personal account with and purchase a specific amount of gold or silver. holds the physical metal, also under redundant third-party accounting mechanisms, in vaults in London and Zurich. It is an easy and cost-effective way to secure precious metals.

I personally use both of these mechanisms — I trust no one else to hold precious metals on my behalf.

I have already discussed the price volatility of precious metals. Let me reiterate: I do not advocate that you put all of your savings into precious metals. I advocate putting some percentage of your savings into precious metals as a hedge against inflation, counterparty default, and currency collapse. Their price volatility makes them a poor choice for money that you need to use in the short to near term.

I believe that silver and gold are real money. The fiat currency system enables the banking system to manipulate the economy in ways that, over the long term, penalize people who live within their means and spend only what they can afford rather than what they can get credit for. So the sharply dropping price of precious metals in the official commodities markets lately leaves me disheartened.

But actual transactions of physical gold and silver tell a price story rather different from the official spot price on the COMEX (the official commodity exchange). Bullion dealers and mints cannot keep up with demand for physical gold and silver. Consequently, buyers are paying a premium of 100% for some types of silver bullion coins on ebay. In essence, buyers are willing to pay double the spot price for some coins. In a recent article, Jim Willie describes a gold transaction of conspiratorial proportions. Last week in Toronto a multi-million dollar purchase of gold took place at $1075 per ounce, while the COMEX price of gold last week was around $300 per ounce less.

In other words, good old fashioned supply-demand dynamics are pushing up the price price for physically held precious metals. The disconnect between the official market price and the physical price can only mean that the paper representations of the metals (futures, certificates, etc.) do not really represent the metals themselves. But the official market price is bound to catch up with that the physical market.

Jim Willie’s article also observes, by the way, that the foreign entity purchasing gold at $1075 per ounce settled the transaction in Euros. He also draws our attention to similar transactions over the past several months where foreign entities settle transactions for large amounts of gold in foreign currencies. For example, a few months ago a sovreign entity moved four hundred metric tons of gold into storage with the Royal Canadian Mint. Might some central bank in Europe or elsewhere be taking steps to back its currency with gold? Willie thinks so. If he’s right, the official metals markets would have quite a reaction!

Please review my 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. Also, I have no affiliation with or other reason to promote the Central Fund of Canada or

© 2008 Philip Glaser


The Trashcan Root Cellar

October 20, 2008

The comments on last week’s entry brought to mind a disturbing moment in my evolution as a bloger. A really nifty feature of my blog publishing service shows other sites linking to this blog. Imagine my delight, after only a few posts, to discover such an “incoming link.”

The Neo-Patriarch And Me

My delusions of grandeur faded as I read the title of the link: Wealthy Investors Hoard Bullion. I find myself resonating with many of the topics on the Neo-Patriarch’s home page: homesteading, gardening, cryptography, conspiracies — this is all right up my alley!  (I’m not so sure about his interest in Christian Polygamy, although I have to confess some fascination with another piece to which his site led me, this one about Orthodox Jewish Polygamy). My affinities with the Neo-Patriarch make it all the more painful that he believes my blog’s financial views to be directed towards “the wealthy.”

The mis-impression stems, no doubt, from my exclusive focus on money for the past several weeks. But of course, as Valorie and Crystal rightly observe, and as I’m sure the Neo-Patriarch would say, saving money does not tell the whole survival story. Material survival depends very simply on food, clothing, and shelter. Whether you view it as a medium of exchange or as a store of value, money does nothing more than enable you to procure these things. So why not just secure shelter and the means to produce food and clothing? Once you have those, your need for money diminishes significantly (especially if you have goods you can barter for the goods you can’t produce yourself).

Setting The Record Straight

But I just have to say a couple of things about money and “the wealthy.” The government’s fix for the credit crisis lets the wealthy who beneifted from and created the credit bubble get away with their misdeeds and places the enormous cost on the rest of us. Through inflation, it will penalize those of us who spend modestly and save diligently for the arrogance and greed of those who lend and borrow profligately. One of my intentions is to rectify this situation by offering information about sound money.

I also made it clear that Franklin Sanders’ Monthly Acquisition Program makes it possible for people of just about any means to invest regularly in silver bullion coins as a means of protecting some portion of their savings from the ravages of hyperinflation. The purchase of silver bullion coins through this program can help anyone, especially folks  with little money to save, protect their savings. This advice is not for The Wealthy — it is for you, Joe The Plumber!

Putting My Money Where My Trashcan Is

The great problems that face us today — peak oil, deflationary depression, monetary collapse, and climate change — point towards the same solution: self-sufficiency. The low-cost petroleum that has made it so cheap to buy food in grocery stores cannot last forever. But getting off the food production grid takes quite a bit of effort. You have to develop a number of long-forgotten skills to grow and store your own food.

Meaningful change of any sort must proceed in small, manageable, and measurable steps. That’s why I suggest moving some portion of your savings into precious metals in small increments. Baby steps towards self-sufficiency ought to follow the same pattern.

As a simple example, I offer the trashcan root cellar. Before the invention of the refrigerator just about everyone had a root cellar. A root cellar preserves food in the constant, below-ground temperature of 50 to 55 degrees Fahrenheit. Many foods can survive all winter long in this temperature range. A cursory google on the topic of root cellars will reveal a wealth of designs.. However, the drainage and ventilation mechanisms for a traditional root cellar made from a framed structure require quite a bit of forethought and knowledge about such matters. And the affair can become rather expensive.

The Joe-The-Plumber, trashcan root cellar, provides an inexpensive and simple alternative. The instructions go something like this:

  • Procure a 25- or 30-gallon galvanized steel trashcan;
  • Dig a hole;
  • Put four inches of gravel in the bottom of the hole for drainage;
  • Bury the trashcan, leaving about four inches of trashcan above the surface;
  • Cover the trashcan with straw or hay and a plastic cover;

Digging Our Root Cellar

Remember to place the trashcans somewhere that you can get to easily when there’s a lot of snow and ice on the ground. You’ll also need to understand which foods are compatible for root cellar storage (see Root Cellaring by Mike and Nancy Bubel for further details). You can make additional trashcan root cellars for different food varieties, such as apples and vegetables.

Positioning The Trashcans

In our case, the greatest expense turned out to be digging equipment — $50 after we split the rental six ways with neighbors who dug root cellars the same day. If that exceeds your budget, you could form a root cellar digging party with some neighbors and take turns on a series of weekends or weekday evenings digging each others’ holes. It can be a great opportunity to get to know your neighbors — a grand social affair. Or dig it yourself at your convenience.

The Root Cellars

The Root Cellars

The trashcan root cellar will take you far in your journey to self-sufficiency. Increasing your capacity to store food makes you less dependent on the grocery store and thus less dependent upon the petroleum-based transportation grid. Even if you don’t grow your own food, you can buy from local growers and store it for use throughout the winter. You will be in a better position to weather the economic storms that lie ahead. And it’s good for your carbon footprint, too!

© 2008 Philip Glaser

It’s Time To Hoard Some Cash

October 12, 2008

In constructing an intelligible picture of the unfolding global banking crisis, I came across a useful piece by Axel Merk, whose voice I have come to appreciate hearing on the Financial Sense Newshour. Aside from his typically clear (if rather technical) explanation of events, Axel suggests hoarding some cash along with precious metals. Notwithstanding the U.S. Dollar’s future as toilet paper, current events make me inclined to agree with this suggestion.

We need to understand the gravity of what might happen to our banking system.

In my discussion of counterparty risk last week, I touched upon the technical workings of the fractional reserve banking system. You tend to think of a bank as an institution that keeps your money safe and rewards you with interest.  A more useful description takes into account that the interest constitutes your share in the bank’s profit from lending your money. Really, the bank functions as a broker that lets you lend your money out to counterparties.

All of this works just fine as long as:

  1. You and the other depositors in the bank agree not to demand all your money all at once (remember, the bank’s borrower’s hold 90% of the bank’s assets); and
  2. The counterparties to whom the bank lent your money make payments on the money you lent them reliably until they pay the bank back.

In other words, the financial health of a bank depends upon the reliability of the creditors whose loans make up the lion’s share of the bank’s balance sheet. For this scheme to have integrity, the bank must be able to count the money owed to it as a viable asset. The credit crisis now in progress stems from point 2 above: The counterparties to a massive amount of debt cannot make their loan payments.  As creditors fail, the banks’ balance sheets look more and more precarious. Sub-prime mortgage holders make up the bulk of today’s failed counterparties. But the amount of this debt pales in comparison to the mountain of credit default swap “assets” that will fail as the recession deepens.

To avoid putting themselves deeper in the hole, banks have stopped lending. In our credit-driven economy, Axel Merk points out, many otherwise sound businesses depend heavily on short-term loans known as commercial paper in order to run their businesses. Unless the credit starts flowing through the system again, many companies risk going out of business. A wave of such failures could cause a downward spiral into a depression.

This past week, the central banks of the US and Europe lowered interest rates to make it easier for their member banks to get access to cash. The central banks want their member banks to use the inexpensive cash to compensate for the failing debt in their balance sheets. But the banks, rationally, have not taken up the central banks on their offer: Taking on more debt just makes their position more precarious.

In the solutions now being undertaken, the treasury departments of the United States and Europe would recapitalize the banks directly: rather than lend money to the banks, they would give them the money in return for an ownership stake.

This nationalization of US and European banks has a nauseating and unavoidable ring of socialism. Having grown up with the world’s two superpowers threatening to anihilate each other over a disagreement about distribution of wealth, I find this development hard to swallow. But preventing a cataclysmic failure of the banking system has to take precedence over ideology, for the moment. The global financial system has been breaking for a long time, but you don’t rearrange the deck chairs when the ship is sinking.

No one can predict the outcome of this crisis. But the risk of systemic bank failure should not be ignored. In the long term, the hyperinflation resulting from the governments’ attempt to save the system or to revivie it after it crashes will make precious metals the most reliable safe haven. But hyperinflation has not yet arrived, and an immediate and systemic bank failure would make it difficult to get your hands on plain old cash to buy basic necessities.

So, as Axel suggests, it’s a good idea to go to your local bank and get some dead presidents. Bury them under the proverbial matress or, preferably, in a more original hiding place. It would also be wise to stockpile some canned food and bottled water.

I apologize for sounding apocalyptic. But this is serious business. I’d rather act a little panicky now than end up unable to feed my family. I hope that in a few weeks you can justifiably accuse me of being a drama queen today. I’d prefer that embarassment to the outcomes that seem a bit too plausible at the moment.

© 2008 Philip Glaser

Price Volatility of Precious Metals

October 6, 2008

Something rather strange happened to me just after publishing last week’s article. You’ll recall that that article dealt with purchasing precious metals. After the dramatic 700 point drop in the Dow, a neighbor stopped me outside my house and said: “You were sure right about the market!” Something similar happened a few years ago: the stock market dropped sharply, shortly after I had sent out an email to my circle of friends and neighbors about monetary inflation. A different neighbor at that time said the same thing: Oh, you were right about the markets!

I have the sinking feeling that my recent advice gave the impression that precious metals mitigate the risk of stock market investments. Yikes!  I’d  be happier if my neighbor had complained to me about the drop of silver prices from their high of over $20 per ounce in March to under $11.00 on September 11th of this year. A Maalox-moment if ever there was one!

The decline of silver and gold prices in the past several months illuminates some important points about the volatility risk of investing in precious metals. To begin with, let’s reiterate the risks that precious metals do mitigate: loss of principal value due to inflation, monetary collapse, and counterparty default.


Inflation results from an increase in the “velocity” of money. That is, when the supply of money in the economy increases, spending also goes up. The increased demand then drives prices up. Money supply grows primarily through expansion of credit. For example, the housing bubble now in the process of collapsing came about because the Federal Reserve dramatically lowered interest rates in 2000 and 2001 to deal with the recession of those years. Low interest rates make credit less expensive and thereby increase the velocity of money. The dramatic rise in the price of energy and food in the past few years result from the increased money supply. (The supply-demand problem of petroleum and natural gas is a whole other problem that I shall take up at some point in the  future.)

Precious metals protect purchasing power against inflation because its price rises with everything else. Thus the rise of silver from around $5.30 per ounce in January 2000 to its highs of this past spring. Gold prices tell the same story. Holding silver and gold since the year 2000 would have compensated for the 40% drop in the value of the dollar during the same period.

Monetary Collapse

The dollars in which we transact business have no backing by precious metals or any other real commodity. Our legal tender laws force us to accept dollars as payment for business transactions. History shows that  “fiat” currencies like ours follow a particular pattern of decline in which the government overproduces money in order to cover its debts: the examples include Wemar Germany following World War I and Argentina in the late 1990s. The increased money supply causes hyperinfaltion, a situation in which the highest face-value bill has more value as toilet paper than as a medium of exchange. At that point, the populace turns to other media of exchange. Precious metals provide a reliable store of value when the currency reaches the hyperinflationary state.

Counterparty Risk

I mentioned last week that, in our fractional reserve banking system, a savings bank can lend out 90% of its deposits. By definition, a bank cannot satisfy a demand for all of its deposits at one time. It relies on most people leaving most their deposits in the bank most of the time. The borrowers to whom the bank has lent the depositors’  money indirectly owe that money to the depositors. The bank’s borrowers, not the bank itself, holds most of the despitors’ assets. If these counterparties default on their loans in great numbers, the depositors’ money disappears. When large numbers of people and businesses default on their loans, as in a severe economic downturn, depositors loose confidence in the balance sheet of the bank. In a “run on the bank” a large number of depositors demand their deposits at the same time and the bank has to close its doors. FDIC insurance protects depositors against this kind of scenario. But a massive banking meltdown could easily overwhelm and bankrupt FDIC itself.

When you physically hold precious metals, you avoid counterparty risk entirely.

So What’s The Catch?

Like any asset class, precious metals do not perform well in all economic situations, the worst situation being deflation. In the typical deflation scenario, a credit bubble reverses itself into a credit contraction. Interest rates rise and banks become reluctant to lend money even to each other. The decrease in money supply reduces the velocity of money, causing the reverse effect of inflation: the price of everything drops. The drop in the prices of stocks, energy, agricultural commodities, and precious metals in the past few weeks exemplies the kind of deflationary pressure that occurs when credit tightens. Deflation may be the only situation in which cash and short-term bonds have an advantage over other asset classes: as the price of everything drops, the relative purchasing power of cash increases. The deflationary crisis of the Great Depression presented great buying opportunities to anyone who had cash to spend: real estate, for example, could be purchased at bargain basement prices.

Other factors affect the price of precious metals. Many hedge funds hold precious metals in the form of paper-based obligations. That is, they do not hold physical precious metals, but hold various kinds of financial instruments that represent precious metals. As shareholders in these funds demand redemption of their shares, the hedge funds dump their precious metal holdings (along with other commodities) to raise cash.

Intervention in the markets by central banks to undermine gold as the primary competitor to fiat currency also plays a role. The Gold Anti-Trust Action Committee has for years chronicled interventions of this sort.

If any of this seems counter-intuitive, take note of the the fact that precious metals dealers today have difficulty fulfilling orders — gold and silver bullion are flying off the shelves faster than the refineries can produce it, and it can take several months for the backorders to be filled. Based on physical demand the price of precious metals should be much higher right now. The disparity between the market price and physical demand suggests either deliberate market manipulation or the short-term effect of hedge funds dumping their paper proxy holdings of precious metals.

My belief in the long-term outlook for inflation remains firm. The recent spate of bailouts have increased the Federal Reserve’s balance sheet dramatically. And as the default credit swap crisis enlarges the circle of credit problems from the mortgage sector to the economy as a whole, more bailouts will come.

But that’s not all. In the next few years, the retirement of the baby-boomer generation will put tremendous pressure on government entitlement programs such as medicare and social security. The government will have no way to meet these obligations other than borrowing more money. Through the machinations of the Treasury department and the Federal Reserve, the government debt will further increase the money supply and inflation will run rampant.

Precious metals will do well in the long term as our monetary system unravels. But, as we see today, the volatility of precious metal prices make them a poor choice for money that you need to access in the short-term.  Holdings for more immediate use are better held in the short-term bonds of foreign countries that follow more conservative monetary policies. One mutal fund to consider, the Prudent Bear Global Income Fund (ticker symbol PSAFX), holds a diversified portfolio of short-term bonds in a number of such countries. You will need to figure out the right mix of physically held precious metals and something like PSAFX for your own personal asset protection plan.

A Slightly More Useful Disclaimer

This is the point in my post where I have been saying “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.” That of course is true. But this time I would like to offer you the view of Chris Ciovacco, who is a professional financial planner and does have excellent credentials in this area. In his recent article Investing Now: The Big Picture, Chris observes:

While there is no question gold still has very positive long-term prospects for a variety of reasons, risks remain in an environment where there is open trader talk of possible U.S. dollar intervention by global central bankers. . . . Gold’s lower lows and failure to make a new high during a very serious financial crisis, tells me the following:

  • For the moment, the markets are more concerned about economic weakness rather than inflation (the focus will change in the months and years ahead).
  • Dollar strength is curbing the demand for all commodities, including gold.
  • Central bankers and policy makers do not want to see high gold prices. High gold prices put a spotlight on excessive money creation and government intervention into the free markets (all related to debt and currency debasement). Central bankers and policy makers still carry a heavy hand in the financial markets. They can crush the little guy in the short run. They can alter markets in the short-run. Gold’s 28% drop between July 15, 2008 and September 11, 2008 is a painful illustration of this concern.

In the interest of brevity I have left out the parts of this section of the article in which Chris advocates for reducing one’s exposure to gold (and by extension we would say silver as well) during this period of uncertainty in asset values. That would not be my personal approach because I have more of a buy-and-hold orientation. But please take a look at his article for further and more technically detailed insight into another view of how one might proceed in this market environment.

© 2008 Philip Glaser