Why You Shouldn’t Buy Gold as a “Hedge” Against Devastation

Shaun writes in:

You need to be telling your readers to invest in gold because the dollar is about to become worthless.

I wrote about this idea a year and a half ago. I discussed why there are so many ads on the radio and the internet for buying gold and why it’s just old-fashioned salesmanship – creating a demand for a product so you can sell plenty of it.

Yet, two or three times a week, I get an email from a well-meaning person like Shaun who is very concerned about the future, believes that gold is protection against that future, and wants me to warn my readers about it.

First of all, I don’t buy into fearing the future. As I said over and over again during the 2008 and 2009 financial crisis, the only thing we have to fear is fear itself. The sky is not falling. As I said then, “Even in the darkest heart of the Great Depression, 75% of Americans had a steady job with a steady paycheck, which they steadily used to buy the things they needed. Those years also produced the Greatest Generation and an economic steamroller that ran through the last half of the Twentieth Century like a tidal wave.” The Depression was far worse than anything we’ve seen over the last decade.

But let’s say they’re right. What would happen if the dollar would become worthless?

The best thing we can look at is history, where reasonably modern economies have collapsed and their currency becomes worthless. The period I’m most familiar with is the Weimar Repubilc in Germany in 1922 and 1923.

What caused it to happen? Most of the workers in the entire nation went on strike for several months, causing the nation to produce nothing. The result was hyperinflation. In one year, the price of a loaf of bread went from 163 marks to 200,000,000,000 marks.

Sounds scary. What happend, though? Did everyone turn to gold as a means of exchange?

Of course not.

The economy went back to the bartering system in 1923 and 1924. People traded services with each other and traded services for goods. Instead of working for money, people worked for food and other goods.

Egon Larsen describes it:

Bartering became more and more widespread . . . A haircut cost a couple of eggs

Willy Derkow:

You very often bought things you did not need. But with those things you could start to barter. You went round and exchanged a pair of shoes for a shirt, or a pair of socks for a sack of potatoes; some cutlery or crockery, for instance, for tea or coffee or butter. And this process was repeated until you eventually ended up with the thing you actually wanted.

To put it simply, people didn’t switch to gold as a means of exchange when things got bad. Instead, they switched to bartering for the stuff people actually needed: food, clothing, shelter, cutlery, and so on.

Gold wasn’t used as a means of exchange because gold is not something people need on a day to day basis. Food is. Potable water is. Clothing is. Shelter is. Repair skills are. Gold is not.

If you want to “hedge” against some sort of imagined financial apocalypse based on a very negative view of the future, don’t use gold as that hedge. Instead, spend your time building skills. Store up some dry food in your basement. Set up a generator. Become as self-sufficient as you can. These things will help you whether “financial apocalypse” happens or not.

If you want to buy gold as a small part of your investments, that’s great. My wife and I have considered buying a few gold coins to keep in our safe for that very purpose.

But if you’re buying gold out of fear of hyperinflation or financial apocalypse, you’re buying into marketing that isn’t borne out by the facts of history. Invest your money elsewhere, preferably in things that make you more self-sufficient.

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  1. Joshua Zeller says:

    In the event that armageddon or a financial collapse does occur, gold will be worthless. You can’t eat gold.

    ~Z

  2. Hannah says:

    Very good points. And yet the ad at the bottom of your RSS feed is for investing in gold. I LOL’ed.

  3. CoolBoy says:

    @Hannah

    I had an ad with gold bars too! But on further inspection it was just for IRAs with a picture of gold.

    Great article, by the way. Way to look at history to see what people would actually do, instead of just buying into good marketing. Also, Glenn Beck strongly encourages buying gold, which makes me think one shouldn’t do it.

  4. Ross says:

    Outside of being a conductive metal, gold really has no practical uses. It makes no sense to dig it up out of the ground, only to dig another hole, put it in there and pay someone to guard it. If all these folks on the radio are saying what a great investment gold is, why are they selling it? Why aren’t they holding on to it?

  5. Tahlia42 says:

    Did we not learn anything from the housing crisis? Gold prices will not always go up. The ads say that gold prices have been gaining ground for the past decade. To me that is a good reason not to buy. Why buy at the top?

  6. KathiShops says:

    As always, thank you so much for being the reasonable voice in the chattering maelstrom of the Internet. Gold only has value because people buying or selling it agree that it has value. Money of any kind is the same. A bushel of vegetables has value because we can EAT them. Home repair or sewing skills have value because we can use them to provide shelter or clothing.

  7. Some German guy says:

    You entirely miss the point. What caused the inflation in The Republic of Weimar was the printing of money. Today, governments print money. The European Central Bank just put in place a program that is designed to buy European government bonds. This is effectively the same as printing money. The US and the UK already have such programs in place since 2008/09. Once this fake recovery (look at the negative credit growth everywhere in the Western world; there’s no such thing as growth in capitalism without credit growth) ends, these programs will be resumed and MAY cause higher inflation.

  8. Some German guy says:

    I think you miss the point. What caused the inflation in The Republic of Weimar was the printing of money. Today, governments print money. The European Central Bank just put in place a program that is designed to buy European government bonds. This is effectively the same as printing money. The US and the UK already have such programs in place since 2008/09. Once this fake recovery (look at the negative credit growth everywhere in the Western world; there’s no such thing as growth in capitalism without credit growth!) ends, these programs will be resumed and MAY cause higher inflation.

  9. BIGSeth says:

    I’m not one to jump on the gold fear bandwagon (I have no gold myself), but I think this doesn’t quite address the issue. Sure people may end up trading useful items, but I’m guessing they weren’t trading many stocks or bonds.

    If you’re actually worried about everything going to heck, AND you’re considering gold as a safe place to put your money, then it means you actually HAVE money somewhere else now (cash, stocks, etc).

    Saying “don’t worry about your million dollars in cash and GE stock if we have hyperinflation because you can trade for a shirt” doesn’t work as a response.

    Sure gold may be worthless as a personnel item, but I’m betting after everything rights itself again (as germany eventually did), that gold will have value. It also has value in just about every other country in the world were you to want to leave. My guess would be those left trading eggs for haircuts either didn’t have enough/any gold to leave the country or (a problem with gold) didn’t have it in small enough quantities to trade.

    All that said, I still wouldn’t buy gold.

  10. Mike H says:

    I love this. When I daydream about the apocalypse, in my mind people try to buy things from me with gold and before I chase them away, I say “Can I eat it? Wear it? Plant it? Kill and dress an animal with it? Live in it? Will it keep away the zombies/killer robots/velociraptors? No? Then WHY would I give you something I can use for one of those things in return for a chunk of metal?”

  11. CDG says:

    This is all so true, and yet good luck convincing the people who have completely bought into this. I have a family member who is one of them. Having this conversation is like talking to a brick wall. A lot of people totally romanticize the end of the economy as we know it, as if that kind of catastrophe would punish all the people they don’t like and reward people like themselves.

  12. Bruce says:

    I generally agree with this advice regarding gold, but for a slightly different reason. Hedging against the collapse of the dollar is foolish because of the status of the United States as the world’s top economic power. If things get so bad in the USA that the dollar completely collapses, then the world is basically in a stage of panic and gold will do you no good wherever you are.

    However, if you are in a country with a shaky economy/ currency, I think investing in actual physical gold would be wise. As an example, my wife’s grandparents were living in South Vietnam during the war. When they realized the country was probably going down, they started buying gold en masse and hiding it in clothes. When they later escaped to the USA, they were able to sell that gold for dollars.

    So I think as people that work/live in the USA, buying gold as a hedge for the end of the world makes no sense. But if you are living in an unstable country (economically and politically), buying gold is probably prudent.

  13. Bryce says:

    I think BIGSeth is on to something – I think an awful lot of the regular folk out there buying gold aren’t buying it to use as currency in a hyperinflated economy – they’re buying it as a store of value that could withstand a hyperinflationary time and still be worth something on the other side.

    I’m in agreement with Trent, though. Skills, willingness to work, and general self-sufficiancy will pretty much see you through anything.

  14. Des says:

    I totally agree that if the entire economy collapses gold would be worthless during that time. But, like Trent says, that is not likely. A more likely scenario would be that the value of the dollar drops a moderate amount. It doesn’t need to go to zero to have a huge effect on our daily lives. In that case, gold would be a nice hedge, and I think that is the point proponents are trying to make.

    @Bryce
    +1

  15. Stephan says:

    Those commercials and companies advertising gold and cash for gold services are for the most part a bad deal for consumers. Sending in your gold jewelry for cash or listening to some paid actor about how gold will protect you from collapse is just plain stupid. Like you said, if the worst happened, gold would be useless as well because it has no actual use for the average consumer

    Preferred Financial Services

  16. JT says:

    The idea is NOT to trade gold for food or other necessity items. Rather, the idea is to preserve wealth through a currency other than the US dollar.

    No one in their right mind would put all of their investment money into one stock, so why put it all into one currency?

  17. Stephan F- says:

    Too many people put the cart before the horse on this topic.

    Gold is just one thing you can do AFTER you have the basics covered. First you take care of your debts, put up food, see to your retirement/education and once those are out of the way then start doing things with gold and other commodities.

    They do the same thing when it comes to survival. They think guns=survival. when that is just not the case. Not to say a gun isn’t or can’t be useful it is just not in the top ten first things to get.

  18. Edwin | Finantage says:

    At it’s core, investing means you are putting money into something with the expectation that it’s value in the future will be higher. With stocks this means that a company that produces something people want (be it shampoo or cars) and will continue to want in the future. Along with that the company must not only produce something but make sure the products it produces are wanted over products from another company. In essence it provides some kind of value.

    Along the same lines, gold provides some kind of value. It is used in medicine, industry, jewelry, and electronics, among other things. It does have a definite use.

    But the hype of using gold as a hedge far outstrips the actual use that gold has. As Trent writes, it is just marketing hype. In reality, when an economy does poorly, gold has similar use to society as stock, or as a closer comparison, to any other commodity.

    I think part of the hype has to do with romanticizing the gold standard. People are led to believe that on the gold standard, there were never any currency or economic issues.

    I wrote an article about how these types of views on the gold standard are just a myth:

    http://www.finantage.com/read/The-Myth-of-the-Gold-Standard/

  19. Johanna says:

    I agree (mostly) with BIGSeth, Bryce, and Des, but I’ll add:

    For anyone who hopes to retire in any sort of comfort someday, preserving the value of a big investment isn’t just a nice bonus, it’s pretty much mandatory. Some people will eventually reach a point where they can’t work anymore. For others, delaying retirement isn’t the end of the world, but it’s still a really big deal.

    We’ve already seen Trent argue that if the value of your nest egg drops by half when you’re on the verge of retirement, it’s your own fault because you should have invested your money more conservatively. Here, “conservative” investments are things like bonds and cash, which do indeed offer good protection during a stock market crash. But they’re very bad places to keep your money during a time of high inflation – they’re not “conservative” at all when it comes to inflation risk. (Yes, there are treasury inflation-protected securities, but they’re tied to the CPI, which doesn’t always measure real inflation.)

    Unless you’re psychic, you don’t know whether your investments are going to weather the next financial storm or not. That may be a reasonable argument for diversifying your investments to include some gold. But I don’t have any, myself, nor am I buying any, for the same reason as Tahlia42.

  20. Jeremy says:

    Look at what happened in Zimbabwe–gold WAS used to purchase bread. Merchants would not take Zimbabwe dollars-you had to use gold or US currency.

    When the US dollar goes the way of the Zimbabwe money or German Mark during Weimar, what do you use?

  21. DiscoApu says:

    Owning something that cant go to zero is a good hedge for something that essentially can go to zero. Whether is energy, metals or another resource. I bet the good people of Iceland wish they had owned any other commodity other then the Icelandic krona. Gold has less appeal then it did many years ago because countries are no longer on the gold standard.

    The highest price of gold ever was in 1492(inflation adjusted)

  22. KC says:

    Gold *might* repeat *might* have a place in one’s portfolio. Although I’d only invest in the etf GLD. Buying and storing gold is not practical. And think of the fees you’ll have if you have someone buy and store gold for you.

    The problem with gold is it is not a usable commodity. It’s is easily malleable and can be remade and used over and over (unlike oil). Although it has it’s industrial purposes, it is mainly used for jewelry – which isn’t in incredible demand (unlike copper, which has a variety of uses that we can’t live without – air conditioning, phone lines).

    Gold really is only good as a hedge. It isn’t a good investment. It’s chances of doubling in a reasonable period is practically nil. But if things do go to hell in a handbasket then gold might be a decent investment.

  23. BD says:

    I’ve always said this. You can’t eat gold. Why is gold even valuable in the first place? In an economic disaster, gold will be worthless. Just look at all those Apocalypse End-of-days sort of movies, like Mad Max. Stuff like Food, Fresh Water and Fuel are the things that become valuable. And like you said, people barter. They trade. No one ever deals with gold in those apocalypse sort of disaster movies. Everyone is too busy surviving. So if everything collapses, just hope you’re self-sufficient or have something like Water, Food, Fuel, Shelter or Fix-It skills to trade.

  24. TOS says:

    I read a book back in the 70s, titled something along the lines of “The Upcoming Bad Times and How To Survive Them”, and one of its major points was to buy gold. How funny that the same “the world is ending, buy gold” story is still around.

  25. Bill in NC says:

    The time to buy gold was 10 years ago

    When everything was going well, pre-9/11, pre ‘Great Recession’

  26. jon says:

    Trent definitely misses the point of a hedge in this post. If you’re fully invested in the USD, and the US prints its way out of debt, your dollars will be worth less than they are today. Because there is a limited supply of gold (it is used commercially for electronics not for jewelry but that’s off topic), the idea is that gold would have the same real value despite the USD (or EUR) being devalued. Precious metals definitely have a place in a balanced portfolio.

    Buying gold is the same concept as stockpiling food, only it is much more liquid. The goal of those who are predicting strong devaluation of the USD is to have enough of a hedge to buy the USD at a discount, before the rebound.

  27. Mike Crosby says:

    I’m one of those who is ignorant of the facts. And most likely I’m wrong and you’re right.

    But yes, I have a Large Chunk of my money in golf.

    This is good though, one is right and the other is wrong. Let’s see where gold is in 10 years.

  28. Danielle says:

    Excellent point, I would also add that if something happens that would cause the economy to collapse having gold would be incredibly frustrating. Most “preppers” invest in silver quarters, dimes and nickles. They come in smaller amounts, imagine trying to trade a gold coin for a flock of chickens. Most people will be using the barter system but other wise I can see a lot of people trading in silver of LOW currency. Imagine wanting to buy a cow and finding out the price and having your gold coin, the cow by itself isn’t going to come close to the worth of the gold. Try looking for pre 1965 u.s. coins if you are hedging for the end of our world.

  29. AnnJo says:

    The gold I owned seven years ago was worth $350 an ounce. Now it is worth $1,200 an ounce. Next year? Who the heck knows? I do know that the first rule of investing is “buy low, sell high.” That alone tells me that buying gold now is most likely a bad idea.

    One thing I noticed over the bumpy ride of 2008-2009 was that as my stocks went down, my gold went up. Same thing last week – the Dow plunged and gold bounced.

    Trent is right that Germans during WWII had a hard time buying produce with gold. But I remember talking with a friend’s Jewish grandmother, whose family bought their way out of Nazi Germany with gold. It may not buy a loaf of bread, but it can buy escape.

    I think the chances of the dollar becoming worthless are fairly low but above zero. I also thing the chances of my house burning down are fairly low but above zero. Carrying insurance at reasonable prices is prudent, and gold is insurance against hyperinflation, but there are many things that come first – emergency funds, a well-stocked pantry, freedom from debt, some stocks, some bonds, some cash, some real estate.

    I hope my investment in gold goes back down in value. The fact that it is as high as it is means the world is economically troubled, and we will all be much better off if it goes back down. But the priorities to protect against economic turmoil are the ones Trent highlights – reduced debt, emergency funds, a well-stocked pantry, a secure home, skills, savings, diversified investments. Gold later, as insurance for all of the above.

  30. Looks like most of this is covered.

    The only thing that I’d add is every civilization at some point develops a system of money that goes beyond barter. While commodity money (gold, silver, bronze, copper, etc.) played a role, that was well before we had 6 billion people on the planet. As a result, commodity money simply isn’t feasible anymore.

    Our current system of fiat money was developed for a variety of reasons. One of them was that by having floating currency it helps to level things out when it comes to trade among nations.

    With floating currency, a devaluation can take place and exports will increase to fill the gap. Yes, it’s a painful transition period (ask anyone in Argentina when their currency lost 70% of its value during the financial crisis of the late 1990s and early 2000s), but eventually the devaluation makes a nation more competitive as an exporter.

    Of course, the bottom line with the entire discussion is that the U.S. is the reserve currency of the world because we are politically stable, have a long history (going all the way back to Alexander Hamilton who fought to ensure the U.S. never defaulted on its debts) of paying our debts, and we are the beacon of capitalism – an economic model that has delivered greater increases in wealth and quality of life than any other system ever developed.

    Gold? Bad idea.

  31. Donny says:

    I heard a commercial recently touting gold as a great investment. The announcer then went on to talk about prices on things in the 1980′s. He explained that adjusted for inflation, you could buy gold today for the same price as in the 80′s. I began to wonder why I would want to buy it as an investment if it is barely keeping up with inflation. I haven’t heard the commercial again, I can only assume that the other gold hawkers hunted the company down and had the commercial removed.

  32. John says:

    Gold’s value is almost as artificial as diamond’s. The world has far more gold then we could ever use to make jewlery and computer chips. The reason the price is so high is because so many people and governments are hoarding gold, thinking it will hold its value.

  33. Andy says:

    I think that most gold investors aren’t concerned about economic apocalypse per se, but rather a present government fiscal and foreign policy that will necessitate substantial devaluation of the dollar in the coming years. Of course, only time will tell what actually happens, but to imply that shifting a good portion of one’s savings into precious metals is ludicrous is incorrect in my opinion.

    I believe that there is little chance that our government will be able to pay its current and future fiscal obligations given current tax policy…and the chances of government raising taxes is unlikely as the economy is so weak and it is so politically unpopular to do so. It’s also politically unpopular to reduce entitlement spending (and military spending, given the neo-conservative influence on our conservative voters), so our fiscal obligations most likely won’t be shrinking any time soon. It’s also a tough regulatory and tax environment to start and run a business now, so I don’t know if we’ll see a whole lot of increase in output in the coming years. In the end, I see little chance that the Federal Reserve will not soon be buying government debt, which will result in significant dollar devaluation, and that US output will be stifled, which will back our currency with less and less in terms of what it can buy.

    I think most gold investors are most highly concerned with keeping their wealth in tact throughout the coming inflationary years – I don’t think their conversion of dollars to gold is a knee-jerk response to the possibility of a fiscal apocalypse. With regard to the latter, I’d absolutely agree with your recommendations to prepare for self-sustainance, and I would agree that gold is not necessarily the most liquid of barter items should the unthinkable occur.

    Whatever the case, I do believe that throughout history precious metals have been the most proven type of “money” available, and that they represent the safest place for one’s long term savings. They may not yield the best gains in terms of other investments, but they are safe. Admittedly though, the dollar is still the reserve currency of the world, which has and will continue to artificially prop up its value…but at some point I have to believe the camel’s back will fracture and we’ll have to whether significant currency devaluation. But, only time will tell where we will be in 10 or 20 years…it seems to me we’re in uncharted waters.

  34. triLcat says:

    You’re probably better off investing in Euros or Yen. Easier to store, and should Dollars lose value, they’ll be losing value AGAINST the Euro/Yen.

    But it would be a small part of a large portfolio.

    There’s another issue here. Even if the US economy crashes, a company like GE (since it was used above) might take a big hit, but it’s unlikely to go bankrupt since 1. Americans will still need appliances 2. They sell to other countries too – it’s a global economy.

    Meaning, if you’re holding GE stocks, they may tank, but if you can afford to sit tight, they will likely recover.

    My stocks lost money just like everyone else’s in the recent crashes. I didn’t touch them. They’re now a little above where they were in 2006.

  35. Kamil says:

    You are absolutely right. Thanks!

  36. I track gold almost on a daily basis.

    I would never invest in it as a hedge against “whatever”.

    It may be a decent investment in the long, long long term, but its short term fluctuations could devastate you if you jump in head first.

  37. Gold is not an investment, at least not traditionally. It is a store of value. If you think you’re better of buying Euros or Yen than hard commodities like silver or gold I think you are nuts. But to each his own.

    There is a lot of bad advice in these comments in my opinion. I suggest the book: Whatever Happened to Penny Candy.

  38. Chirol says:

    I agree with this post. However, I’d like to add that if you really are preparing for a dire future, one of the best investments you can make is in firearms and standard calibers of ammunition.

    I say this not because I’m predicting doom and societal collapse, but because lead and brass prices have gone up up up and ammo has become more expensive the last several years. Relative to gold its a very good investment, but also useful. Same with firearms. If you invested the same amount of money in stocks and in guns several years ago, the guns would be worth more by far. Just a thought.

  39. Jeremy says:

    You can’t eat gold?

    Tell that Zimbabweans–they couldn’t eat *without* gold.

    http://www.guardian.co.uk/world/video/2009/feb/11/zimbabwe-gold-panning-starvation-food

    From the video:
    “If you need cooking oil, you need to exchange for gold. If you need soap, you need to exchange for gold. Everything is gold gold..no Zimbabwe dollars.”

    The shops in Zimbabwe didn’t take paper Zim dollars–only gold.

    Stop watching movies like Mad Max for your preparation information and start watching what actually happens in history and current events.

  40. Erik says:

    Skills are the most important thing against currency failure like Trent said. If you can do things people value and need, you have a business you can live from. If people need those things now, you can start your own business now.

    If your concerned about the future, create a business that is in addition to your normal job that brings in independent $$$ and is different than your “day” job. I did and it is a God send and allowed us to be debt free and we are paying down the mortgage because that is what we value.

  41. Carey says:

    Gold, like any commodity, is a decent, but not “ohmigod” necessary, part of a well-diversified portfolio.

    Unfortunately, much of the hype surrounding gold that Shaun seems to have bought into causes people who otherwise aren’t saving nearly enough to put ALL their money into gold, which is insane. The apocalyptic Glenn Beck style marketing for gold “investment” isn’t helping matters either.

    The primary claim goldbugs make against the dollar is that dollars are worthless paper not backed by anything. But that’s not entirely true. Dollars (and other fiat currencies) have value because we all agree they have value. Its value is based on mass delusion (or mass faith).

    But so is the value of every other investment, when you think about it. Gold only has the value it has because people generally agree on a market price. If dollars are “only paper”, then gold is “only metal”.

    Like Trent said, the real hedge against the kind of catastrophe that Shaun is afraid of (and an alarming segment of the population seems to be actively hoping for) is having skills to barter.

  42. Amanda B. says:

    I disagree with Stephan, a gun (and bullets) would be in my “top ten things to have is everything goes south” list. There’s a question, should wose come to worst what ten things should every home have?

  43. Andrew says:

    While gold does have intrinsic value and has for thousands of years, it does function just like any other commodity, stock, bond, or whatever that is traded in a market. It is only worth what others will pay for it. The only way I see gold ever becoming a great investment would be if we went back on the gold standard, but that will never happen while we are in so much debt. The United States doesn’t have the gold to pay off its debt and so it needs a fiat currency that they can “print” more of and manipulate. You can’t just create more gold.

    Also, keep in mind that during the 2008 financial crisis, investors flocked to the dollar, not gold. While I agree that the long-term outlook for the dollar does not look fundamentally strong, remember that markets are traded based on perceptions of reality and not reality itself. If things get so bad that the dollar collapses, I think we’ll have more to worry about than just where our retirement savings are.

  44. Michelle says:

    Gold has no inherent value. You HAVE TO TRADE IT. You can’t eat it, you can’t cover yourself with it, you can’t drink it, it can’t lead you to safety, it can’t protect you. It just sits there, and looks pretty. Gold is a currency, just like the dollar or euro. Thinking of gold as anything OTHER than a currency is inaccurate, and I think that inaccurate information is a bad thing to base investments on.

  45. Andrew says:

    @Bryce – Yes, that is correct. Gold/Silver/metals are not useful during an inflation or collapse, but if you survive the bad stuff, they help you come out of the recovery in much better shape.

    If one believes that our economy will hyper-inflate or collapse, the FIRST thing to do is become as self-sufficient as possible for basic needs like food, shelter, and utilities (garden, basic home/self maintenance supplies, and solar power). Second, store up barter items like durable foodstuffs, common utility items, and common medical supplies (beans, bullets, and band-aids in survivalist talk). The enduring value stores like gold/silver stay in reserve until the economy is getting back on track, and then they can be used. In summary, first make sure you can keep your family comfortably through the hard time, and only then do you invest remaining funds in post-recovery funds.

    Note that if nothing bad happens, the preparations will make your retirement much easier because of the living expenses that have been replaced with a self-sufficient system.

  46. Adam says:

    Carey said: Gold only has the value it has because people generally agree on a market price. If dollars are “only paper”, then gold is “only metal”.

    That’s true. But the supply of gold is limited, while the supply of dollars is not. If the Federal Reserve printed billions of dollars (to pay for whatever the government wants, war, health care, stimulus, etc.), the dollar would drop by quite a bit, but there would still be a limited amount of gold, therefore, still having some value. The Federal Reserve punishes savers with inflationary policies. We have some money in a Precious Metals mutual fund, but no physical gold, and it’s only a part of our investments. It’s true that gold is not an investment, but a store of value, which is useful to have. Every financial decision has risk. Cash and bonds, have risk. Gold has risk. Silver has risk. Stocks have risk. Debt has risk.

    All that said, I think Trent’s advice is good. For most people, learning to be more self sufficient is going to be better than gold. But for those with a million dollars wanting to make sure they keep some of that value, I’d want to have some of it in gold.

  47. This is a very interesting idea….not buying into fear of the future.

    I myself probably wouldn’t buy gold but I certainly understand how profitable of an investment it can be.

  48. AsiaReader says:

    I’m definitely not saying that one should heed the commercials promoting the purchase of gold, but gold,as a durable commodity, is a barometer of the health of a market. A recent article at http://www.realclearmarkets.com/articles/2010/05/06/oil_isnt_expensive_the_dollar_is_cheap_98450.html gives a good summary. As someone who’s read _Atlas Shrugged_, I’m surprised at your analysis of what happened in Weimar Germany.

  49. AnnJo says:

    A couple of other considerations for those thinking of buying gold as a hedge.

    Aside from relatively small demand for jewelry and electronics, the price of gold expressed in U.S. dollars goes up and down based on two things – global fears and the value of the U.S. dollar compared to other major currencies. Right now, the debt crisis and perceived political instability is pushing it up while the strengthening of the dollar is moderating its rise.

    Fear has a way of coming and going. Buying gold at nearly the highest price its ever been means the chances are good it will go back down before it will rise much futher. Unless you are prepared to ride out potentially huge declines and plan to hold gold indefinitely strictly as an insurance policy and are sure you won’t need to sell it EVER assuming things DON’T fall apart, this can’t be a very good time to be buying it.

    Another consideration is that gains in gold are taxed at 28% (probably likely to rise along with all other taxes in the coming years). Since much of its rise in price will be due to inflation, you’ll be getting taxed on inflationary rather than real gains and stand to lose even if there is a further rise in price.

    Example: I bought some gold in (about) 1980 at $410 an ounce. It has never paid a dividend or interest. Today, it is “worth” $1220. If I sold it, my tax would be $1220 – 410 x 28% = $226.80 so I’d clear $993.20, seemingly a $583 profit over 29 years – a 3.1% annual compounded after-tax rate of return, not exactly earthshaking.

    However, just to hold its own against inflation, gold would have had to increase to $1,054. I cleared $993.20 after taxes, so I actually lost money. And for about 21 years out of that 29 year period, gold was BELOW the nominal price of $410 I paid for it, so if I’d been forced for any reason to sell it during those times, my losses would have been even greater.

    Of course, many other investments and hedges are subject to the same problems (direct taxes and the indirect tax of inflation) to greater or lesser degrees.

    If you really want to buy gold, chances are very good that over the next few years, global fears will diminish (whether wisely or foolishly) and the price of gold will go down substantially. That would be the time to buy, when everybody around you is convinced it is stupid to buy. Not now. And not until you have all the basics covered.

    I would have a year’s worth of food storage per person long before I’d consider buying an ounce of gold, and the cost is about the same or less. Food is an even better hedge against general collapse, but also has excellent uses when things remain normal or the collapse is strictly personal (like unemployment) and it isn’t subject to taxation. That’s a no-lose proposition.

  50. Theban says:

    The historical example used in the article is just that, an example. There are other cases in recent history when gold was actually used.
    During and shortly after WWII in a lot of countries in Europe, gold coins were used extensively.

    (This is not an argument for or against gold possesion, I am just stating some facts that older generations in Europe stil remember)

  51. Crystal says:

    If the dollar crashes, I’ll have more problems than what gold could help me with. Like Trent said, the only way to truly protect yourself from an economical collapse is to pull away from society and become as self-sufficient as possible.

    I am personally lazy and optimistic, so I’ll just keep on keeping on with my investments and keep my pantry stocked.

  52. Todd says:

    I like CDG’s point that the doomsdayers seem to romanticize the apocalyptic future. That scares me more than any economic issues do. Though I suppose it is an economic issue. Everything in our lives, however abstracted, relies on a kind of barter system. Things have value only to the degree we want them. As Trent has said before, relationships are very much the core of economic stability. (You could have the most wealth or the most successful business ever, but if people suddenly refused to do business with you your money would be useless.)

    On the other hand, several older people on my block live on only social security payments. It’s not an ideal situation, of course, but they do quite well because they have a network of friends, family, and neighbors who bring them gifts, do their yard work, drive them around the city, invite them for meals, etc.

    Plan well. That’s common sense. But by building relationships with those around us, we keep our own little economies–however small in scale–functioning well. Fortunately, I think that’s the vision most people have of a romanticized future, not a horrific survivalist scenario.

  53. Hannah Blair says:

    Very nice post. Still there are people who thinks Gold is the best investment without even trying other options..

    Anny ways want to share one small story related to this only.

    Once upon a time there was a Man. He has the only wish that he become the richest person in the world. He though that if I have plenty of gold I will become richest person in the world.

    So, he started praying God. He prays for many years one day God appear to him and told him to ask for a wish.

    He say: Give me blessings such that whatever thing I touch it turns in to Gold. God said, ok.. as you say.

    Now, whatever he was touching turned in to Gold. In starting he was so happy. Touch a wood chair and it turn in to Gold chair. Then he touch a flower pot, it turns in to Gold.. He was started feeling like richest person in the world.

    After 2 -3 hours he was hungry so toughed to eat something. As he touch apple it turn in to gold. He touch rice it turned in Gold.

    Summery:
    Gold can not full-fill your hunger.

  54. Jennifer says:

    My financial adviser has an interesting theory — that about the time that an investment starts appearing as an infomercial on tv, that is the time to run away, as the bubble for that area is about to burst. You’d be buying high right now.

  55. Perry says:

    My wife and I bought a couple of gold coins about 12 years ago, when the price was around $300 an ounce and put them in our safe. Then a couple of years ago when the price was over $900 an ounce, we sold them and used the money to jumpstart our emergency fund. Worked out pretty well as an investment.

  56. jojo says:

    FALSE: If people had gold, I’m certain it would be accepted for goods and services. The problem was no one or very few had gold.

  57. Chew on this… If gold is worthless, why do governments and central banks own it? After all if it’s something they own under lock and key and protected isn’t is something you should own?

    Should it be part of your portfolio? Yes say no more than 10%. Is it the first thing you should invest in? definitely no and in fact should be the last thing you invest in. Make sure all of your other ducks are in a row first.

  58. Bela says:

    Want to know what will be valued in the event of a financial collapse, look at New Orleans after Katrina. Bread and beer looked pretty popular.
    Hard liquor and handguns are my suggestions. True, neither are essential to life and both can be used to destroy it if abused, but both keep pretty well in miserable times people will find uses for both.

  59. Mike says:

    I wouldn’t suggest that anyone simply buy gold because of a TV Ad.

    Gold is going up at an ever increasing rate as it is now rising against all currencies (mainly the Dollar Euro and Yen) All fiat currencies are somewhat derivatives of the US Dollar as the Dollar is the world’s reserve currency.

    We are in a “debt crisis” because state and national governments have created too much debt that simply can’t be paid back. Much of it won’t be paid back. This is not about latching onto doomsaying or being negative. Gold is a currency and is doing as well as it is because it carries $0 debt or default risk. It maintains value because it can not be debased due to the “work” required to mine an ounce of gold.

    If you were to pull up a 10 year chart on the price of gold bullion, you would see a steady rising trend that has earned more than 15% annually for 10 years running.

    There are fundamental reasons causing the movement in the price of gold. It is far from the TV and radio ads referenced. This is a secular bull market that has several years to go, IMO. The fact that it’s getting noticed the last couple years is not an automatic reason to ignore gold. I am not advocating that anyone reading this reply run out and buy gold. However, it is very clear that most people do not understand how the monetary system is structured and why gold is rising now. Therefore, the automatic response is to avoid any understanding of the fundamentals.

    I think many will be surprised with where gold and silver are going. Great Blog and I am glad to see that contrary view here.

  60. Roscoe Casita says:

    During the Weimar Republics Hyperinflation:

    1 oz of Silver could pay your mortgage and food for a month.

    1 oz of Gold would buy a city block.

    Gold & Silver where NOT on the top list of priorities:

    1. 6-12 months of Food.
    2. Renewable Food, Fruit Trees, Garden, Chickens.
    3. Lead & Lead Delivery Devices.
    4. Gold & Silver.

    Gold and Silver are not Like Stocks, Bonds, or savings accounts. Once you spend it, its gone. Real Money. You don’t get your cake and eat it too.

    Silver 1940s 1.40$ = Steak, Potato & a drink at a restaurant.

    Silver @ 10$-20$ = about the same.

    ./shrug If Silver and gold are so worthless, I’ll take your unwanted Oz!

  61. mlyn says:

    China buys gold, India buys gold (the sovereigns), now because of the Greek debt crisis and the fear of a contagion to the rest of the EU, Europeans are panic buying gold and silver. The prices of gold and silver are still undervalued. It is already projected that it may be $2,000 by the end of the year by the precious metal professionals. Because there there will be a currency crisis is many countries, including our own, gold will become the number one currency because it can’t be electronically printed. Gold is not worth “less” because the world is no longer on a gold standard; it is worth more, especially when the world returns to the gold standard in some form in order to save itself from all the fiat paper printing of currencies.

  62. mlyn says:

    One more thing, we probably won’t trade in gold. Our gold holds value, e.g. like our savings account. When you need to buy a loaf of bread which is now $20 due to hyperinflation, you just take a gold coin to the coin shop and cash in for whatever the spot price is that day. The paper dollars in the saving account is earning very little interest compared to investment grade gold. Check out Gold Anti-Trust Action (GATA) on the web and all the links supporting that website. You will get a real education about the history of gold as real money.

  63. Jan says:

    Have you noticed the most negative people about the economy are selling gold in their ads (Glenn Beck/Rush Limbaugh)?
    We bought several pounds of silver bar in the last downturn (physically – since it is legal in Europe). We ending up bartering it for what we actually needed when the downturn passed.
    If you are going back to the German Republic- I don’t think we need to worry that a border war (WWI) will split the country up and give away the industrial parts to our neighboring countries any time soon…

  64. AnnJo says:

    @Roscoe Casita,

    “Lead and lead delivery devices.” Cute!

  65. John says:

    “You HAVE TO TRADE IT. You can’t eat it, you can’t cover yourself with it, you can’t drink it, it can’t lead you to safety, it can’t protect you.”

    Gold is a currency that you sell, just like a $20 bill it has value. Have you ever tried to eat a $20? or cover yourself with one? You are ranting about all the things you can’t do with any currency, and trying to say it’s exclusive to gold. Gold can be sold in any country for their sovereign currency; then, you can buy food, water, clothes. You’re missing the whole point or the meaning “store of value”

  66. Bruno says:

    Wow, you really need to rethink trying to give out advice on topics you’re not qualified on. Gold has been a STORE OF VALUE for the last 5,000 years plus. Those Weimar folks who had gold kept their wealth. You don’t trade a 1/10th oz bar of gold for a sandwich. You trade it for 6 silver oz coins, each of which you trade for other items of value, and THEN you barter them. They also have electronic debiting linked to gold accounts these days. Please don’t give this kind of “advice” out till you get educated on it yourself.

    Gold has about doubled in value (in dollars) in just 4 years . Meanwhile the stock market is lower than it was, and the dollar is worth about 10% less than it was. Maybe YOU can afford that kind of loss, but most people you claim to be helping cannot.

    Quaint talk about remaining positive and things always working out won’t help the elderly couple that loses their nest egg to massive inflation that we may see.

    When you can explain fractional reserve banking, fiat money, the federal reserve system, monetization of debt, and other economics topics to your readers, then you might be qualified to tell them to not buy gold during a crisis. Right now it looks like you have some reading to do. Try danielamerman.com for a good easy to understand primer.

    Hedge funds, money managers, billionaires, they’re buying gold to hedge against economic collapse. Are you privy to something they don’t know?

  67. If you really anticipate a catastrophic economic collapse, then you probably should store up on tobacco products (seal them tight and keep them in the freezer), alcohol, ammunition of various calibers, soap, and toilet paper. All of these are eminently barterable. Many people will give you their last bag of food for a cigarette.

  68. Belle's Dad says:

    Another point that’s not covered is this: the reason that gold has a dollar value is the dollar is no longer pegged to the gold standard. If the dollar were still pegged to that, the price would be, if not constant, then to a high degree. The reason that gold’s value has been climbing, in recent years especially, is the dollar’s value has been dropping, sometimes precipitously! The biggest jumps in gold value will show you the biggest drops in the dollar value. The other thing that de-linking the dollar to gold did was to make credit a wide-spread tool. If they were still linked, how many people would use credit like they do?
    Any thoughts? Am I wrong? comments and ideas welcome! -Also, can they be re-linked? Wouldn’t that be something?

  69. Bryan says:

    In Trents own words, “A loaf of bread was worth
    200 billion” So let me get this straight: I buy a loaf of bread before Hyperinflation at 163 marks, put it in a freezer for a year, then pull it out and sell it for 200 billion? Did he think about what gold was then worth? The time to trade for gold is BEFORE the calamity. Of course people didn’t trade in gold after the event occurred – who could afford it? He shouldn’t be giving advice.

  70. Bryan says:

    When FDR first came into office during the Great Depression, one of the first things he did was to outlaw the private ownership of gold. You could have jewelry, but no coins of bullion. He then devalued the dollar, effectively reaching into everyone’s wallet(bank account) and stealing almost half of the value. Shortly thereafter he reinstated the gold standard. If one of the greatest presidents in our history had that kind of respect for gold, so should you. It is the ONLY TRUE CURRENCY as it carries no liabilities.
    Besides, if mob rule erupts, then forget about vegetables, lead is the metal to own.

  71. AnnJo says:

    @Funny about Money,

    Sure, soap and toilet paper, and ammo if you shoot, alcohol if you drink and tobacco if you smoke, but I don’t get the point of storing things you DON’T use in order to trade later, in the event of a collapse, for things you DO use, like food. Doesn’t it make more sense to just store the things you use? That way, if there is no collapse, you won’t have thrown your money away on a bunch of useless stuff.

  72. Robert says:

    I think if someone was that worried. Then they should use there money to get 100% out of debt,
    Thats what were doing.

    Regardless of what happens me and my family will still need a place to live. so we paid off our morgtgage and now have our equity and 1 credit card down to being paid off within the next 18 months. so we will be 100% debt free.
    if someone is totaly worried about there money being worthless and have a lot of extra. keep a lot of cash in the bank. take the rest and by realestate. where its very cheap, its a good deal especialy if you by out right. no matter what people will always need a place to live. so you could always barted a place to live in exchange.
    if life does not end, you can always sell it in the future when it goes back up and profit from it.

  73. Matt says:

    What you are forgetting is that gold can be traded throughout the world. If hypothetically the US dollar fails then the Euro fails but the GBP has managed to unpeg itself to these currencies then GBP can be used. It may not be legal tender but if you can trade your gold for any currency then use that currency as payment then it will work.

    Currency has no value, the only value is what you give it. It comes down to confidence. If i have confidence in the GBP then the GBP will be worth something.

    And also, any savvy farmer will know that his surplus of food can be traded for gold and that gold will be worth good money in the future. He will become rich while those that hold gold now will survive.

  74. In my opinion it would be very foolish to not have some exposure to Gold or Silver. If you think the dollar is a better investment: compare the dollar against gold over any time period more than 10 years. I think you will find it quite interesting.

    The dollar is worth 3% of what it was ~100years ago. Gold… I’ll let you figure that one out for yourself.

  75. Here is an article I wrote on inflation and it includes a youtube video about Zimbabwe’s hyperinflation.

    http://josiahgarber.com/blog/2009/05/the-dollar-is-set-to-be-destroyed/

    What did people turn to as currency? Gold.

  76. Glenn says:

    Ever buy a protective put option on a stock position to cover your downside risk? You might not need it – the stock might only go up, but it acts as insurance – a hedge. Owning some gold or silver is a protective put on the value of whatever currency you use or perceive as risky. If the value of the currency goes down – gold goes up, which you then sell to get more dollars/Euros to cover your losses – or maybe make some money. It’s a hedging strategy.

    For a little perspective: Ask someone from Zimbabwe in 2009 how their life would have been different if they had a small bag of silver coins in addition to their backpacks/wheelbarrows full of Zimbabwe dollars? A person with a roll of silver coins would have been the richest person in the neighborhood.

  77. Lou says:

    I couldn’t agree more with AnnJO and less with the mind numbing rambling following it.

    The fact of the matter is gold has preserved value and outperformed the tanking market. It might be too late to make money in gold now, but anyone who saw something bad coming and invested in gold made a hefty some of money….and they aren’t concerned with saving pennies like this blog now ;)

    Don’t bash the one investment that actually has value and has provided a great ROI. Your stocks can go to zero…..gold never will.

  78. Great insights; your blog is excellent. This reminds me of Neil Strauss’s survivalism expose ‘Emergency’ book where he describes setting out to get the kind of self-sufficiency skills you describe (and many more.) Strangely, I don’t believe he or any of the other survivalists he interviews focused on stockpiling gold…

  79. zeke owen says:

    Ive been working in creeks all over the pacific coast and nearby mountains mining for gold most of my life. Alaska and on southward. you want to know the differance between gold and paper money? Go in to town to buy anything. Ask the person selling there goods. What do you want gold or paper money for your goods? they will say gold. I take out my scales weigh it out, take 10% off todays spot, done deal..always get a nice smile too. try that in some places and the’ll want paper money because the dont know any thing about gold. Understandable. To those of you that write in negatively about gold we forgive you because you obviously dont know anything about gold.I suggest you learn at least how long gold has been used for trade. And anybody that knows any thing about gold will tell you how long its been used for trade and the reasons it will be used for trade and exchange…and will be long after all of us are gone..if you dont know why gold is so precious you need to find out why. Its right there on your computer..open your mind and you wont have to guess anymore..50 years of placer mining,,zeke.

  80. I know is that you teach religion that is the plage of the world and yes you are a cult that do what a bunch of rich people wich made their money out of your ignorant pockets in the first place order you to do and that is to get more people so they can make more money, open your mind is all a lie. it is up to you being a slave all your life for the promese of eternal life that will never be a reality. live this one the only one that you’ll ever have and forget about it, in this world will always be people willing to lie to you for money and make an easy living out of your ignorance go expend that energy and get an education and make this life good for you and your family.

  81. Clinton says:

    Nice article, I was googling end of days buying gold cause it seems as though everyone is trying to buy up all the gold as if it there some apocalyptic in the future, but these people seem to think if they have enough gold that that will buy them anything, in my eyes gold will be worth what the paper doller you can’t eat it and I can’t grow it, I think see it more as a mean to show your wealty not to use in everyday life.

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