I know this is a hot topic because I’ve gotten several emails and a few Twitter messages about ways to guard against the continually eroding dollar. The thought of ending up with paper money worth no more than the paper that it’s printed on is a bit scary to say the least.
As you know after reading my article on inflation your best friend in an inflationary environment is something that is NOT linked directly to the currency in question, the US Dollar in this case. Precious metals, etc certainly come into play here, but there are other less common things you can keep around to help out. Obviously you’ll need to have food storage and water taken care of to be able to truly protect yourself. But aside from that, what can you do?
The Obvious: Buy Gold!
I’m guessing that the first thing that comes to mind when you think about protecting yourself from inflation or protecting yourself from the dollar collapsing is gold. Buy gold! It’s got intrinsic value, and your primer on currency said that’s one of the foundations of real value, Rudy!
Sure, that’s true. And gold will always be worth something. Right now gold is trading at about $1,052 per ounce. Last year at this time gold was trading at just shy of $800 per ounce. Go back five years and it was just over $400 per ounce. Talk about appreciation!
There’s only one problem. Gold is TOO valuable. A one ounce bar, currently worth $1,052 as I write this, is pretty tiny. It measures just shy of two inches long by one inch wide and is about 0.08 inches thick. That’s pretty small. And pretty darn valuable.
Do you really think that will be valuable for any sort of barter or trade if the dollar becomes worthless? You can opt to use gold as a storage vehicle for larger amounts of money as long as you augment it with less ‘value dense’ commodities. If you only have gold, you’re asking for trouble.
Rudy’s Warning: Unless you’re using it as a pure hedge against a devaluation of the dollar, make sure you take physical possession of the gold you buy. If you buy virtual gold somewhere chances are you’ll never be able to get at it when you need it. The same goes for silver and other precious metals as well.
The Next Best Thing: Silver!
Silver is definitely less value dense than gold. Silver is trading at about $17.42 per ounce right now. This makes it a far better commodity to buy for every day commercial use than gold. I would recommend that you skip the silver bars and ingots and buy bags of ‘junk silver’. Junk silver is a term for coins that are worth more for the silver they contain than for their face value. You can buy junk silver from coin shops, pawn shops, and dedicated retailers.
When buying junk silver you are looking for pre-1965 minted US coins (not pennies!) which contain 90 percent silver. Coins minted after 1965 contain less, and I’ll talk about that in a minute. If you’re buying 90% coins an easy rule of thumb is that any combination of coins that comes to $1.40 face value is 1 ounce (technically one troy ounce) worth of silver. So right now, $1.40 face value of pre-1965 coins is worth $17.42.
The easiest way to buy junk silver is by the ‘$1000 Bag’ which is a bag containing $1,000 worth of pre ‘65 coins by face value. This bag contains 715 oz of silver and will be priced appropriately, and usually with a surcharge of sorts. So you don’t have to count the actual face value of the coins, if the bag weighs at least 52 pounds, you’re getting your moneys worth.
You can also buy 40% silver, which is basically silver half dollars minted between 1965 and 1970. These contain 40% silver. I would personally avoid them, but if you feel inclined to buy some, go for it! Note that you can also find these coins in circulation still, so if you ever run across fifty cent pieces, look at the mint date! You never know when you’ll get lucky!
The Poor Man’s Hedge: The US Nickel
This is something that is less commonly known about but has been advocated by a number of folks, including Jim Rawles at SurvivalBlog. It revolves around the concept that the Nickel contains 75% copper and 25% nickel and is therefore still worth something. At the moment the value of the metals in that coin is about $0.046. It’s not hard to figure out that if the dollar continues it’s slide and/or metals continue to appreciate the lowly nickel will soon become worth more than it’s face value, just like the pre ‘65 silver coinage.
This is more of a pure hedge than something you would plan to use in daily commerce. Most people don’t know what to do with copper or nickel and wouldn’t know how to melt down the nickels into base metals anyhow. That said it is likely that they will become valuable just like today’s junk silver is valuable and are thus a good long term hedge against inflation.
Rudy’s Tip: Coin debasing is what happens when the Fed changes the metallic composition in a coin to one that costs less. Typically the core metal is replaced with zinc flashed with the original core metal. This happened in 1983 with pennies which went from 95% copper to 97.5% zinc flashed with copper and are now only worth a fraction of face value. History shows that non-debased coins gain investment value once the melt value exceeds about three times the face value.
As a side benefit, look at what happens in hyper inflation. If you read my article about hyperinflation in Zimbabwe you will recall that over the course of the inflationary event thus far they have dropped a total of 25 zeros. Do you think they reissued coins during that time? Not on your life. So under similar circumstances if the US Dollar is revalued by dropping digits your nickel would be worth the exact same face value. For example if the Fed dropped three digits, that Nickel would now be worth $50 pre-collapse dollars. Not bad.
Where do I get this stuff?
Well, nickels are easy. Go to the bank and buy rolls of them. Read Rawles’ post for some more ideas but honestly I have just gone down to the bank and bought them by the roll. I usually buy about $40 worth at a time.
Gold and Silver are a bit harder. You can buy locally for sure, or there are online retailers. For junk silver you can also find E-Bay to be a good source, though I like the guys at GovMint since they have smaller bags available and knock off $25 if you buy more than $150. Google around for good sources around your area. This stuff is heavy so it can make sense to buy locally instead of paying for insured shipping costs. A drive is often worth considering if it’s not too far!
Wrapping Up
I personally stay away from gold. Silver and the nickel make sense to me. Think long and hard about what you need and make your decisions accordingly. One last tip: If you have money in retirement funds like most of us do, look at the option of diversifying out of the standard mutual fund choices and buying Silver ETF (Exchange Traded Funds) or similar investment vehicles. It’s hard to get cash out of your retirement fund, but this can help you against a stock market disaster!
One final request … if you have any tips or thoughts on what I’ve written, please share them with the group in the comments below!
I wrote last week about the historical 
Throughout the 1980s ethnic conflicts between whites and blacks escalated. The constitution provided that 80% of the parliament seats would be held by blacks and the balance could be held by whites and other ethnic minorities. In 1986 an amendment was made for that 20% to make them nominated positions instead of elected positions.
Throughout the 1990s inflation fluctuated between 15% and 48% according to official government numbers. The government continued to strong arm the economy by implementing price and wage controls, running deficit spending, and actively discouraging (violence anyone?) the creation of new businesses. In the early 1990’s the Zimbabwean Dollar (ZWD) was devalued by 40% followed by the government dropping price and wage controls in an attempt to reign in inflation and increase production. Despite this rampant deficit spending continued which undermined any gains made by relaxing the stranglehold on the economy. In 1999 the GDP growth went negative and it’s been there ever since.
Hyperinflation began in 2001 with the rate of inflation skyrocketing to 112%, capping out at over 600% in 2004. There was a brief respite in 2004 and then inflation headed for the moon. In 2006 the central bank of Zimbabwe kicked the printing presses into overtime and printed 21 TRILLION ZWD to pay off foreign debt, followed by another 60 TRILLION ZWD a few months later to finance a wage increase of 300% for government employees. Conveniently none of this was budgeted.
Today we’ll talk about inflation! I’m hoping you’ve read my article on 
Not inherently. Just like deflation, inflation is not good or bad in and of itself. In fact most economists believe that low steady rates of inflation are a good thing for an economy. The key is that the inflation rate should stay below the growth rate of the economy at large, or the Gross Domestic Product as we call it here in the United States. Mild inflation is also key to getting out of a depression or recession. Mild being the key word there.
Well, if you’re an economist this is where you start talking about the Quantity Theory of Money, the Velocity of Money, Currency Debasement, and other interesting things. Since we’re in a fiat money economy we’ll limit our discussion to that. There are really two things that matter in the long run. The money supply and economic output. If the supply of money increases too quickly compared to the economy at large that inevitably leads to price inflation based on the law of supply and demand.
A random final bit of information here. I talked about currency debasement in the last section. Debasement in its purest form is when you take a commodity currency (like a gold coin) and melt it down, then recasting the coin with a lower commodity content. Most historians believe that debasement was one of the leading causes of the fall of the Roman Empire. The Roman silver denarius was 95 percent silver when introduced. Over a one hundred year period it was debased so far that it only contained 0.5% silver. Yowza.
If you haven’t read my 
Well, there’s one big one that might look a bit familiar. Sky rocketing unemployment numbers. If the deflationary cause is related to ‘tight money’ or a lack of economic demand for goods and services then businesses often are forced to reduce their workforce. This usually results in those now out of work folks spending significantly less. As the economy continues to contract and businesses continue to reduce their work force the problem compounds.
I’m guessing at this point I don’t have to lay it out for you. In this country we are in a deflationary spiral now which was caused by the credit bubble (NON self liquidating) popping. Resulting in high unemployment, credit defaults, and the vicious circle. We now have printing presses running overtime flooding the market with dollars. And we’re selling more and more government debt. Neither of which is doing anything at all to right the ship.
It occurred to me that before I dissect any other economic collapses from the history books I should probably explain some of the basics of currencies and the two types of inflation: Hyperinflation and Deflation. If you already know all of this, feel free to heckle from the back row! On to Currency!
Initially most currencies were commodity currencies. We’ll assume coins made from precious metals though historically speaking just about anything with mutual value (a commodity!) was used as a commodity currency. It’s great to know that what you have in your hand is actually worth something. Gives you lots of confidence in it!
Fiat currency is worth money because the government says it’s worth money. It’s not backed by any sort of commodity. This means you can’t take a $100 bill and get a $100 gold coin from the bank. Fiat currency is VERY dependant upon confidence. It’s a worthless piece of paper unless you and the other side of your transaction have confidence that it’s worth something.
Good question! Some people claim it was inevitable. They claim that since the supply of gold on the planet is finite, there’s just not enough to go around to cover the money supply. Apparently they forgot they can just turn off the printing press. In any case, that’s the logic behind what happened, right or wrong. History hasn’t been particularly kind to fiat currencies and it’s not looking too well at them today.
