Previous comments that “when this [financial crisis] finally ends the big winners are apt to be the ones who have lost the least purchasing power. Keeping score in nominal dollars is likely to be meaningless. Gold tends to hold its purchasing power regardless of what happens to fiat currency.” have prompted questions about:
- how to achieve such purchasing power with physical gold when this stage is reached,
- how to go about buying things with gold coins and
- how gold would be utilized under the assumption that a barter system would develop when dollars become worthless.
[Let me explain.]
The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article written by Monty Pelerin
[Below is an explanation as to why owning gold is necessary given what the future holds and how to deploy it when the purchasing power of your currency begins to decline rapidly.]
1. View gold as a store of wealth rather than a barter item: Gold will not be of much value for bartering purposes, at least not for typical small exchanges. You hold it to protect the purchasing power of your current wealth when the currency is threatened.
A currency collapse threatens dollar-denominated wealth. If one occurs (and I believe it is likely), gold should hold its purchasing power just as it has for a few thousand years. During such a crisis, it is likely that the dollar (or other fiat currencies) will be shunned because its value rapidly declines.
Barter is terribly inefficient, although at some point it becomes more efficient than attempting to protect against the deteriorating currency. Gold could be used in such a world, although it is rather impractical because of its high value and indivisibility. Silver would be more useful because of its lower value per ounce. Better still would be items like food, water, ammunition, gasoline, liquor, soap, medicine, toilet paper, etc. etc. Necessities like these will always be in demand and can easily be used in barter….
How long such a crisis lasts is not determinable. It will last until a new, trusted currency appears. That might take months or years. My guess is that regional currencies may develop as substitutes to the dollar. How well they are managed will determine if/when people begin to use them. Trust once lost is hard to regain.
Gold is pretty and constrains politicians when it is a barrier to money creation. Once the U.S. closed the gold window in 1971 gold ceased to play any role in the monetary system and no longer constrained anyone.
2. Gold tends to hold its purchasing power as demonstrated throughout history: That is the reason why gold interests me. Ten years ago, I never looked at gold. I regularly wish that I never had to. I would rather have money in productive assets earning income. I would rather live in an economy where prices weren’t distorted by monetary cranks. Conventional investments are too risky in a dying economy, especially one subject to huge currency risk. Tangible assets mitigate the currency risk.
3. Gold is nothing more than an escape from dollar deterioration and economic collapse: I wish economic life could return to the stable times of old. Sadly, I will never see those days again and many of you may not either.
While the threats are real and serious, they are not unlike the income security problem that mankind has always wrestled with. The current problem is just another variant of the classic portfolio problem. Limited assets must be spread among competing uses. Primary consideration must be given to life-sustaining needs (minimum consumption requirements). Secondary considerations go toward preparing for the future (i.e., a savings/investment program designed to create wealth for unknown contingencies and retirement).
To the extent the minimum consumption requirements are satisfied with something left over, there is a secondary decision as to how much of the excess to spend now versus spend later. Specifically, how much does one increase his current standard of living versus defer such excess to future periods in the form of savings/investment?
In normal times, these are the decisions prudent individuals face. In troubled times the same decision must be made although the problem is made more difficult as the means of achieving various objectives may be more limited.
Gold…is a store of wealth…([as are] other tangible assets).
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Related Article from the munKNEE Vault:
It would seem that there is a considerable lack of understanding about what the term “safe haven” actually means when it comes to gold. Let me explain just what it means – and does not mean.
We are in the midst of turbulent times, and it seems inevitable that things can only get worse. Most investors are of the opinion that gold is one of a very few areas of safety…however, when we look at historical charts, it is obvious that gold doesn’t always behave in the way we would expect. [Let me explain.]