“What do you know about gold, Moneypenny?” – Goldfinger
Why don’t pirates travel on mountain roads? S’curvy.
A reader writes: “. . . if you could explain to me the rationale behind buying gold or silver as a hedge against economic collapse, I would appreciate it.” I answered by sending him bikini graph after bikini graph, but yet he persisted in wanting to know an actual answer.
I don’t think anyone will complain that this one is a repeat . . . .
He had me cornered. I wrote to him (embellished for this post and clarified for readability):
Thank you for the question. I promise to answer, just as long as you give my dog bag safely. He may be old and one-eyed and have diabetes and alopecia . . . we call him, “Lucky.”
It’s good that he’s not a dinosaur – he’d probably be called an eyesaur.
I thought that I had already answered this question and looked for the post.
As I’ve got over 1,000 up, I couldn’t find it after I looked for about 22 seconds. Maybe I developed notes on it and never posted? Maybe I’m just lazy at searching. In the worst-case scenario, a previous version exists, and everyone just has to deal with this new, superior post.
The question is a subtle one. The first part of the answer is the degree of collapse. I’ll start out with this idea: how bad does it get?
- Another Boring Wednesday: Would I rather have a ton of gold on a Wednesday morning than not? Of course. But I’d probably worry about George Clooney and his wisecracking band of thieves breaking into Stately Wilder Mansion.
- Personal Economic Problems: Again, in a sequel, having that ton of gold is still great, but I still have that pesky George Clooney problem. In reality, gold is somewhat less liquid than cash, but having a bunch of it is still nice. Also, if you bought gold in 1990, you would have had zero profit on it until 2006. This was mainly due to sane economic policy and high-interest rates that tamed inflation.
Or is this why they were always after his Lucky Charms®?
- Recession: What’s going on in the economy? If you look closely, silver and gold actually dropped in value at the start of the Great Recession in the 2000s. As people liquidated their “stuff” so they could still buy the G.I. Joe® with the Kung Fu™ grip for their kid at Christmas, the price actually dropped. For a while. Then the price jumped up when it became clear that the Fed® would print as much money as required to choke every person on the planet. In the fiat world, gold and silver are something I’d look to have.
- Depression – 1930s Style: This is a hard analogy – back in the 1930s, the dollar was backed in gold, until FDR (press S to spit) stole the gold from the American people. Now? The dollar is nothing more than, to quote Aerosmith, “a lick and a promise.” (See below)
- Weimar-Style Hyperinflation: I don’t think we’ll get here, until there’s a lack of faith in the dollar. Brandon is doing his best to make Jimmy Carter look like a master of economics, so, if hyperinflation hits? Gold is awesome, and you might be able to repay your mortgage with five or six pre-1965 silver quarters. So, yes, gold and silver make sense. A lot of sense.
In a Leftist world, everyone is a Billionaire. And also starving.
- Country Collapse: What happens if the country ceases to be? It has happened again and again through history, especially with large “empire-like” countries that don’t have any sort of ethnic commonality. Japan will always be Japan because there are Japanese and it’s a nation, not a country. China, likewise. Without a functioning country, there is no nation to fall back on. This is where we add another precious metal: So, yes, gold and silver, but understand that it might be some time before it’s useful again.
- International Collapse: Rome provides a powerful example here. In Great Britain, they’re constantly finding hordes of money – including silver money, and gold. Why? Because people stopped using it, and you can’t eat it. Did that last forever? Of course not, but 100 years is nearly long enough. Lead is nice here, too.
Who sang “Can’t Touch This” for Caesar? 1100 Hammer.
- Civilizational Collapse: What happens if there’s no oil for the cars – anywhere? What happens if we don’t have phosphorus for fertilizer? Bad things. Gold and silver might be helpful, but lead is much better here. If the warlord wants your stuff and you can’t keep it from him, welcome to no longer having that stuff.
- A Kamala Harris presidency: Looks pretty much like number 8, but with more makeup.
- A Neutron Star Eating The Earth: I suggest investing in SpaceX®.
I think that we underestimate the likelihood of things getting really, really bad. To give an example, I once worked at the headquarters of a big company. They asked me to look at disaster recovery. I looked at all of the natural hazards that might hit the company. The most likely disaster would hit the headquarters once every three hundred years.
“Huh,” I said to my boss, foreshadowing future writing endeavors, “a new civil war is far more likely than that . . . I mean if the company lasts that long. Companies go out of business all the time.”
He was not amused. Corporations tend to not like actual reality to interfere in their projections. But, I maintain I was right. How many companies have ceased to exist – big companies – since 2000? I’ll leave that work to the reader. Enron®, anyone?
Country music and calculators are both produced by Texas instruments.
Listen, I don’t mean to sound paranoid, but banks are giving mortgages out at 3.3% and inflation is at 6%, which means that banks will lose money every year as long as inflation is a thing. How can they do this? Volume!
No, I’m kidding. The Fed® is giving them tons of money to lend cheaply to keep housing prices up. When mortgage rates go up? Then the housing bubble bursts. So, we could end up in Scenario 3., 5., or 6. very, very quickly.
Gold and silver (in my NON FINANCIAL ADVISOR) opinion are awesome in most scenarios. If it devolves past the point where order matters at all, then it comes down to weapons, political connections, preps, and sheer dumb luck. If nothing happens, then my kids will get to enjoy some shiny metals after I pass away.
What’s the best way to tune a bagpipe? A pitchfork.
I would, however, not want to put all of my eggs in any one basket. I will personally limit the amount of gold and silver I own to about 10% of my net worth. Why? Random number – not bad if things go well in the rest of the world and gold and silver don’t go up in value. If things go really south, it’s a decent enough hedge to act as a parachute as the plane goes down in flames.
So, that’s my answer: it depends. What do you think? What Scenario above is the most likely? What’s missing?
Ohhh, Lucky, come here, boy . . . oh, wait, he’s deaf, too . . . .
(Appended Graph)
