Thursday, February 15, 2007

Metals Rock!

I remember one day back in '59 while shopping with my mom at the discount store that she got as part of her change some shiny new pennies that had a picture of the Lincoln Memorial on it instead of the 'one cent' striking that used to be there. A few years later along came the sandwich dimes and quarters with the copper coloring showing through and I wondered a bit anxiously why they took the silver out and why the paper currency no longer had the words 'Silver Certificate' printed on them. Supposedly before this you could go to a Federal Bank and get an amount of silver equal to the face value of the bill but alas they were transformed into what we have today: Federal Reserve Notes, essentially a paper IOU from the government. Not that it mattered much to me at the time, but I really did wonder a little about why the obvious change to our currency had been made. It didn't seem to matter though because I never heard of anybody going in to redeem those older bills for silver anyway. I guess nobody cared.

So what's the true state of the economy if the value of our money is based on the relative solvency of our government and banking system? Most folks today are working harder and harder to get dollars that buy fewer and fewer of the things we really can't do without like fuel for our cars and homes, electricity to power our appliances and higher education for ourselves or our kids. True, you can go to Wal-Mart and buy a DVD player for 50 bucks that used to cost $600 ten years ago. For now that's all well and good as long as you can afford to pay the electric bill or have one that runs on batteries but eventually cheap labor may not be so easy to find in developing countries like China and Mexico. Prices on what we buy from them will inevitably rise along with the other things we need that have already seen inflation. We'll all be in electronic heaven I guess, while we munch down ramen noodles for breakfast, lunch and dinner and fill our ears with music while our stomachs crave real food and our bodies heat for our freezing limbs!

The price of pure gold and silver coins has doubled since 2003 and serves as an illustration of the amount of real inflation in the economy . The value of these coins has not suffered from any real volatility either. The rise in their value has steadily increased from their historic lows in the '90's. Back then you could buy a one-ounce gold Eagle or Maple Leaf for around $250 but within the past year the cost of those coins has risen to about $680 a piece! Meanwhile our paper continues to lose value and buys us less and less every day and if the economy should tank because of some catastrophic event or a combination of them in a 'perfect storm' scenario we could have a run on the dollar and hyperinflation as a result.

That’s the opinion of many experts and I’m just saying what they’re saying. Of course the major financial magazines don’t like talk about ‘doom and gloom’ hypotheticals because it’s not in their interest to do so. They’re in the business of keeping the paper system going with stocks and bonds, etc. so you won’t hear them talk much about investing in hard assets. In fact these gold and silver denominated coins have thrived as a solid medium of exchange for thousands of years and will continue to because there is a limited amount below ground and what we have above ground is in high demand partly because it is used in almost all those geeky high-tech products we so cherish. Also, paradoxically in the developing countries there is a realization even by those who have very little in the way of material goods that precious metals are a hedge against inflation. A government can devalue a ‘fiat’ currency but the same is not true for gold, silver, platinum, etc. American silver Eagles and Canadian Maple Leaf silver coins are still within reach for most at about $18 a piece and silver 'rounds' can be bought for even less as they contain the same amount of silver and look similar to the ones issued by the government mints, though they're not quite as flashy. Another option is buying 'bags' or 'half-bags' of what is known as 'junk silver,’ those coins we used to use before the government decided to give us the sandwich coins I mentioned previously. If our currency suffers a crash that junk silver could be used in place of a debased coinage. So think about buying some gold and silver as a part of your own ‘rainy day’ fund. You can store them and your important documents in a safe deposit box at your bank and watch as your precious metals investments continue to outperform other financial instruments that everyone's brother and sister is trading in. The day may soon come when you with great relief will thank and congratulate yourself for your foresight and strategic business acumen.
image courtesy of Austin Rare Coins

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