A lot of folks are considering gold and silver as a place to store some of their savings, and generally speaking, I think it's a great idea for a number of reasons. However, when you buy gold, there are a few things to consider.
Should you buy gold coins? Gold nuggets? Should you buy allocated or unallocated (pooled) gold? And perhaps the most important consideration...when you do purchase gold where should you keep it? Many people who buy gold mistakenly believe that a safe deposit box in a bank is a good place to stash your precious metals.
I've never really questioned the safety of safe deposit boxes, but now, I might have to. When big banks like Bank of America allow State Governments to raid safe deposit boxes that are not abandoned, it is a scary, scary world. This constitutes outright, overt theft of the part of the Government. What's worse, they are selling other people's valuables and spending the money!
If you do decide to purchase gold or silver (or any precious metal), I think that you will be happy with the purchase years from now. However, you'll only be happy if it's there for you when you need it. So, if a safe deposit box isn't safe enough for your gold, what is?
Well, consider using an actual vault, like Brinks. Yes, the famous security company. Or Via Mat. They're one of the largest vault operators in the world.
Well, it's like this:
The U.S. Dollar used to represent 1/20th of an ounce of gold. Obviously, that's not true anymore. Since a fully free banking system has never been established on Earth, all we have to compare our current system with is a few select "close calls".
The Suffolk System was one such "close call". The pre-Federal Reserve system having been eroded by the States' ban on branch banking and the establishment of a nation-wide clearinghouse mechanism, the banking system was never really given an honest chance in a truly free market. To the extent that it was free, however, it did work well.
Prior to WWI, the banking industry in the U.S. (and most of the world) was more free than controlled, and the nation's dollar was backed by gold. This provided a unique, and rather safe, method to save money. If banks expanded the credit market too rapidly (lowered interest rates, and gave out too many loans to too many people too fast), there was gold to act as a protector of your savings.
Lending was controlled by limited gold reserves. When banks overextended themselves, the economy would go through a sharp, but short-lived, recession. The market would correct itself, and business would resume as normal, healthier than before. This was a cure for the mistakes made by reckless banking policies. Of course, not all banks were reckless, just like today. Reality demonstrated what you could and more importantly could not do, in the free market.
This all changed in 1913. A theory that put the cart before the horse was introduced and expanded on...basically, it was assumed that the problem was that there was not enough in reserve for banks to meet claims if the money supply was expanded too far.
Instead of focusing on the obvious solution - stop expanding the money supply - Government figured it could "do something" about it. If, they argued, bank reserve shortages were the problem, then why not just remove the "plug" that keeps them in line (gold)? If banks had unlimited lending ability, then the economy would never go into a recession again. We all know how that turned out, don't we?
With gold backing paper IOU bank notes, inflation of the money supply is difficult, but not impossible. However, any such expansion of bank notes (money supply) would be curtailed by the value of those bank notes. As banks inflated their own money, customers would get extremely nervous and there would be an incentive to switch to a bank who didn't devalue its currency.
Through various mechanisms, the Government sponsored Federal Reserve (which is a collection of some 12 privately owned banks which are sponsored, controlled, and supported by the Federal Government) has the power to create an unlimited amount of money. Unfortunately, this also now makes the U.S. Dollar subject to what we now perceive as "normal" - inflation.
Many individuals mistakenly believe that to combat inflation all that needs to be done is to outpace it. If inflation is 3%, then all that needs to be done is earn 4% on an investment. However, this does not preserve the value of the money, it merely increases the holding of dollars which are becoming more and more worthless.
This is unfortunate, because Americans need the dollar to buy goods and services since that is what most businesses accept as payment and competing currencies are effectively illegal. The only real way to combat the problem of inflation is to return to gold. You do that by buying it.
How much depends entirely on your situation.
_________________________This entry was posted on February 24th, 2009 by David C Lewis, RFC. Edits may have been made to keep this entry current. · 1 Comment · Asset Preservation, Budgeting & Money Management, Insurance & Savings, Investing
How does one calculate inflation per year? By the increase of the price of goods and services over time? If so, a Coke cost a nickle in 1956 out of a machine, ice cold in a glass bottle. Now a similar product costs one dollar. Let me see, that’s a 20-fold increase in approximately fifty years or 40 percent a year. Is my math wrong? Have I made some false assumptions? And gold has rocketed from 35 dollars and ounce to 950. Hmm, that’s 27 fold, 2700 percent, or over fifty years a whopping 54 percent a year. The Great Mogambo is right. We’re friggin doomed.