The Case for Precious Metals as a Store of Value against Hyperinflation

Storage of Value, Not Necessarily an Investment

Facing hyperinflation, what would one do with one’s money to save it’s value?  Fifty years ago the cost of a gallon of gas was 25¢, yet today it’s $2.50 to $4.00.  Food has faced similar increases.  Gold was $40 per ounce and silver was about 75¢ an ounce.

First of all, be aware that one is not truly investing here.  One is storing value in something that will retain that value.  Of course it may also serve as an investment if one is willing to take some additional risk.  The viewpoint here is primarily to maintain value of one’s wealth, not to necessarily increase that value.

Nor should this article be taken as an advocacy of a gold or silver or bimetallic standard.  There are better solutions to establish currencies, but that is a subject for another article.

Consider the following data, taken from Casey Research article, Gold’s “Slingshot Effect”.

In 1935, when an ounce of gold was worth $35, you could buy:

  • a top-quality tailored suit for $19.75 – or 0.56 ounces of gold
  • a family car for $500 – or 14.3 ounces of gold
  • a house for $7,150 – or 204.2 ounces of gold

Today in 2010, with gold at $1,060 an ounce, you could buy:

  • that same top-quality, tailored suit for $600 – or 0.56 ounces of gold
  • the family car for $15,000 – or 14.2 ounces of gold
  • the house averages $218,100 – or 204.6 ounces of gold

As you can see, the value of gold does not change.  What changes is the value of the dollar, because it is a fiat currency.  Such currencies, as are all currencies today, have only the backing of the people’s confidence in their governments, which is declining.  The object here is to retain that value in one’s wealth as the value of the dollar declines.  The question rises – What does one put one’s dollars into in order to retain the value of those dollars?  As hyperinflation approaches, this question will increasingly be on one’s mind.

What to Look for in Value

The following are what I look for in any investment when I want to retain value:

  1. Retains value over time;
  2. Liquid enough to be readily exchanged for similar value;
  3. Recognizable to lay persons such as store clerks, mechanics and man on the street;
  4. Subdivisable;
  5. Durable to weather and mishandling;
  6. Transportability in case one needs to move;
  7. Small enough it can be concealed from would be thieves.

Options often thought of for investment or to store value are savings accounts, government bonds, stocks, real estate, diamonds and other precious stones, fuel commodities such as oil, food commodities, base metal commodities, collectibles, and precious metals.

Paper Options

If you would trust savings accounts or government bonds to store your value, you are probably not reading this.  First of all, these are all just paper with no assurance of value when hyperinflation hits.  Banks are going broke right and left.  Money in the bank will only deteriorate with inflation and therefore is no store of value under hyperinflation.  Governments on every level – federal, state, county and city – the world over are in danger of default on their debt already, so there is no reason to buy their bonds.

Stocks are still just paper and will have no value if the company goes broke.  Who knows what will happen to any company subject to hyperinflation.  Nor are stocks as liquid or divisible as other options.  Mining stocks, especially mining of precious metals might be a good investment, but again they are not as liquid or divisible as other options.  Putting money into any stock involves trust in the management of that company.  Gold mining stocks might be a rare exception.  There are very few silver mining stocks as most silver is produced as a byproduct from other mining ores.  Therefore putting money into stocks becomes more of an investment than a store of value.

Commodities

So much for the paper options.  The remainder are items of the physical universe, making them commodities.  Commodities, are by their nature part of the physical universe, and as such, hold value as long as there is a demand for that commodity.  The value of any particular commodity will go up and down with supply and technological advancements.  Of course there will always be some demand for real estate, else where would people live, work or recreate?  Precious metals have held value as currency for thousands of years, as opposed to paper currencies such as the German mark of the early 1920’s.

Commodities tend to hold their value through hyperinflation.  It is commodities that one wants to purchase with the money that is inflating.  Commodities remain relatively constant in value as they are in the physical universe as opposed to fiat currency.  Fiat currency only represents a concept of confidence in the government that issues it.  When that confidence deteriorates, so does the value of that fiat currency.

Real Estate

Real estate is a consideration for some, after all, you have to have a place to live.  One might reason why not store value in one’s domicile, but consider where will you live if you have to sell it.  Real estate is obviously not transportable, nor is it liquid or easily divisible.  Recent trends have shown that it is does not retain value well either.  There is one form of real estate that should do well as far as retaining value in the coming years and that is farmland.  Many economists and trend forecasters foresee food shortages making farmland prime real estate.  In this way it may also produce income.

Diamonds and Precious Stones

Diamonds and other precious stones are not recognizable to the lay person.  You have to take them to a jeweler to exchange them.  Nor are they subdivisible.  Precious stones are a luxury in good times.  In times of travail, their value will probably drop considerably.  Diamonds have never been thought of as currency as their value is not easily determined by the lay person.

Oil and Fuel

Fuel will certainly be at a premium in times of travail.  However, large quantities such as that required to store substantial value will not be easily transportable.  While it certainly would be worthwhile to store a substantial amount of fuel for bad times ahead, it is not as transportable as other means of exchange.  Some have suggested oil as a store of value.  Oil by itself has no value without the prospect of getting it refined.  If you have that means, then fine.  However, transporting fuel or oil to pay for groceries would be a difficult exchange.  Fuel is just not as liquid in that manner as one might like.

Food

Food commodities such as grain, rice and canned goods would make be a good store of value for relatively small amounts of value, considering the value before hard times hit.  One advantage is that you can always eat the food, unlike any other store of value.  But space may well limit the quantity of food.  When available space is filled, look for another store of value.  Another consideration is durability.  Certainly some foods are more durable than others.  One should keep in mind the purpose here is to see one through a time of travail and store enough food and means of exchange to see one through those times.

Base Metals

In good times base metal commodities would be a good store of value, but in time of hyperinflation, such things would offer little exchange value.  What would one do with a ton of zinc or aluminum if manufacturing is at a standstill?  A single exception would be copper pennies, minted before 1982. Copper pennies will certainly have value, and will be easily exchangeable. The only consideration is that you would have to have a lot of them to carry out large transactions.   But having some on hand for small transactions would be prudent.

Collectibles

Many people suggest that collectibles would be a valid store of value. Works of art are not durable, liquid, subdivisible or small.  Nor will they retain value in times of travail.  No one will be looking for art work in time of hyperinflation.

The only collectible worthy of consideration for storage of value would be rare coins that have been certified by either PCGS or NGC.  Being certified, they become recognizable and durable in their plastic casing.  The coins should be US coins because only US coins are easily valued.  There is much less documentation on foreign coins, making it much more difficult to determine their value.  However, just like any other collectible, one must pay a significant premium when buying rare coins.  That premium will likely eat up part of the stored value.   They are somewhat recognizable in that the value of US coins that have been certified are generally worth prices given in standard catalogs.  However, they are not divisible or as liquid as precious metals.

Some coin dealers are pushing certified US $20 double eagle gold coins, minted before 1933, as a store of value against inflation.  However, the coins are being offered at collector prices.  They only serve as a store of value if your are paying actual bullion prices.  Beware that these double eagle coins only approximate the size and bullion content of modern eagles.  They do not contain a full troy ounce of gold.  It’s far better to just buy bullion coins such as modern US gold eagles, Canadian Maple Leafs or South African Krugerrands.

Disclosure

In the interest of full disclosure, I will let you know that I do buy rare coins.  However, I buy them as a collector.  I do not buy rare coins as an investment, nor as a store of value, though of course, value is certainly a consideration when I buy them.  I buy rare coins for their artistic appeal to me as an individual.

Case for Precious Metals

Precious metals meet all seven of the above characteristics I would be looking for as a store of value.  The value of precious metals has never gone to zero.  On the contrary, gold and silver have been used as coinage for four thousand years.  They serve as a recognizable currency and as such are liquid, subdivisible and transportable.  Certainly precious metal must be stored safely to secure it from theft.

Past Confiscation

One point of hesitation is that in 1933 Franklin D. Roosevelt issued Executive Order 6102, allowing him to confiscate gold coins, gold certificates (paper money circulating at the time) and all gold bullion. Congress had given authority to him by Congressional action in 1917 with the Trading with the Enemy Act and in 1933 with the Emergency Banking Act.  Roosevelt’s executive order in 1933 only applied to gold.  However, the congressional actions still stand, allowing the president to seize all bullion by further executive orders.

Roosevelt’s executive order was revoked in 1974 by President Ford with his Executive Order 11825.  However, be aware the congressional actions of 1917 and 1933, which allowed Roosevelt’s executive order in the first place, are still in effect.  Therefore any President could rewrite and re-implement Roosevelt’s order.

Conclusion

For me the conclusion is that precious metals by far offer the best means of storage of value, whether in good times or bad.  In good times, one can splurge on the luxuries of life.  In times of hyperinflation one must retain value of one’s wealth to get through to the other end to enjoy the coming good times of the future.  Then one can buy all that fancy real estate, glorious jewelry and great works of art.

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