Will Gold and Silver Protect Your Wealth in an Economic Crisis?

Jay Peroni, Lead Analyst, CEO and FounderBlog (Public), Crisis Investor

Gold: Will it Save You?

Many people have strong opinions on this question, one way or the other. Probably closer to the truth however is that gold and silver protect your wealth in certain economic crises. It’s pretty clear that precious metals get the job done in times of high inflation. But if there is an economic crisis coming our way right now, it looks like it will be a deflation, not inflation.

Will gold and silver protect your wealth in an economic crisis that’s based on deflation?

Why Gold is a Good Crisis Vehicle

What’s often not fully appreciated in modern times is that paper money is a recent phenomenon, mostly a product of the past 100 years. Digital money is even more recent, being around for just a few decades.

Before paper money became exclusive currency, the money role was filled by gold and silver and had been for thousands of years. Even when paper money did arrive, it was backed by gold and silver, so it was actually a claim on precious metals, rather than a standalone currency.

Historically, all monetary systems are based on barter. That is the exchange of something-for-something. Because of their rarity, and their use in fine jewelry, ornamentation, and religious objects, gold and silver were highly prized, and readily bartered for virtually any product or service available.

Even today, gold remains primarily a monetary metal. Though it has some industrial uses, most of it is held in the form of jewelry or in bullion coins and bars held by investors and by central banks.

Largely serving as a monetary substitute in modern times, gold tends to have its best performance when paper currencies, such as the dollar, weaken or experience crisis. Perhaps the best example of this is the 1970s when the US experienced double-digit inflation, and the price of gold rose more than twenty-fold. We saw it again in the early 2000’s, when gold at least quadrupled in price between the beginning of the dot-com bust and the late stages of the Financial Meltdown.

But what about a crisis brought about by deflation? The best example we have of that is the Great Depression of the 1930s. Gold didn’t rocket in price during the 1930s (though it did rise in dollar price due to the one time devaluation of the dollar in 1933), but it more than held it’s value.
That alone made it more valuable, because of the price of goods and services – not to mention stocks and real estate – fell dramatically during the decade.

Had you held gold at the beginning of the 1930s, the 1970s, or the early 2000s, you would have come out way ahead, even though each period of crisis was brought about by different forces.

What About Silver?

For the most part, the performance of silver tracks that of gold, except that it trades at a much lower price. For this reason, silver has often been referred to as “the poor man’s gold”. But silver actually has several advantages over gold:

  • It’s not as politically contentious as gold is
  • Central banks don’t have large inventories of silver that they can dump on the market to suppress the price
  • Because of its much lower price, silver is better than gold and a barter asset, particularly for routine purchases
  • The price differential between gold and silver has expanded considerably since the early 1930s, creating a potential investment windfall

Let’s spend a moment on that last point. Historically in the US, the price ratio of gold and silver was 20:1. That meant that while an ounce of gold was valued at $20, an ounce of silver was valued at $1.

Today, with silver at around $18 an ounce, and gold at over $1,250 an ounce, that ratio has expanded to 80:1.

It is possible, though certainly not guaranteed, that silver could make up that ratio change in a serious economic crisis. If that were the case, the price of silver would rise by four times more than the percentage increase in the price of gold.

Again, it’s something to think about – but it’s not a sure bet.

The Best Ways to Own Gold and Silver

The best way to own gold and silver is the way that you would hold any investment class, and that is to diversify.

Here is a potential diversification strategy:

  • Keep small amounts of gold and silver coins at home, just in case they are needed as barter assets
  • Keep larger amounts of gold and silver coins in an insured depository
  • Leverage bullion holdings by investing in exchange traded funds (ETFs) that track the price of gold (more on that in a bit)
  • Hold a small amount in gold mining stocks, as a way of playing any speculation that will likely occur during a bull market in precious metals (more on that coming too)

Gold and silver coins and bullion represent the best pure play on precious metals. They will likely be the ultimate crisis investment in the event that paper assets and currencies collapse. However, gold in particular could be subject to government confiscation, so you don’t want to have all of your money in bullion alone.

Paper gold – ETFs and gold mining stocks – are a way to expand your gold holdings – and also to leverage them against the possibility of speculation. However, should there be a currency collapse, paper gold probably won’t offer much protection.

The Best Gold and Silver Coins to Own

Several governments around the world issue gold bullion coins. This is the form of coins that you should want to hold. Government issued coins are widely recognized, and less likely to be the product of fraudulent activities. American Eagles and Canadian Maple Leafs are probably the best choices among government issued gold bullion coins. They are issued in coins containing one ounce or less of gold.

You should stay away from coins issued by private sources, since the integrity of the source can never be verified. Also avoid commemorative coins. They typically sell for more than their bullion content value, and the market for them is slim anyway.

It’s probably also better to avoid numismatic coins. Those are coins that sell for substantially more than their bullion content value, because they are recognized as being especially rare. The problem with these coins is that there are some discrepancies in the way they are graded. A coin that you were a assured was a mint state 70 grade coin, may be considered as only a mint state 68 on sale, resulting in a loss of value of thousand of dollars.

It’s also worth noting that since numismatic coins are essentially for collectors, they may not serve well as crisis investments. Since economic crisis brings about a decline in wealth, the global market for numismatics could plummet. There is significant potential that you could actually lose money on these coins in the exact economic environment you’re hoping that they would protect you from.

What Are the Best Places to Store Your Gold and Silver?

As mentioned earlier, you should only keep a small number of gold and silver coins at home. This is because of the potential to lose them to a fire, flood, or earthquake. It’s also possible that you could lose them to theft, in the same way that you could lose jewelry, electronics or anything else of value.

Larger amounts of gold coins, and especially gold bullion bars, should be stored in a licensed gold depository. Typically companies that sell gold bullion coins and bars will offer such a service. You’ll have to do a lot of research to determine the best companies to store your gold with. There are only a few, and not all are reputable.

Also be aware that when you store gold and silver with a third-party custodian, there will be fees involved. You will not only have to pay for basic storage rental, but also for insurance to cover the potential loss of your metals in the event of disaster.

So far we’ve been talking about physical gold and silver, but I hope you can appreciate that there are limitations in the ability to store large amounts of gold. For that reason, you should also look into paper gold investments.

Here are some recommendations:

The Central Fund of Canada (NYSE: CEF) – Owning Gold Without Keeping It

CEF provides you with an opportunity to invest in gold, without actually having to buy, store, and eventually sell the metal. The fund handles all of that for you.

CEF is based in Calgary, Alberta, Canada, and is a company that passively holds gold and silver bullion, both of which are priced in US dollars. Ownership interest in the fund is based on shares that trade on both the New York Stock Exchange and the Toronto Stock Exchange. This means that you can trade shares in the fund the same way that you trade stock in any other companies.

Over 95% of the fund’s assets are actually held in gold and silver bullion. Owning shares in the fund eliminates the need for bullion contracts, delivery logistics, storage, insurance, and assay issues (valuation). Other than your broker’s commission, there are no transaction fees or sales taxes connected with the fund.

Metals are stored in the highest security rated treasury vaults at a Canadian chartered bank. The fund has been around since 1961, so there is a long history on its performance and integrity. You can hold your metals through this fund, and not have to worry about the problems of physical storage.

CEF isn’t the only precious metals fund worth investigating. Others to consider PHYS and SIVR.

The Sprott Physical Gold Trust (PHYS) is another Canadian-based fund that provides a similar service to CEF. If you are interested in a specific play on the silver market, the ETFS Silver Trust (SIVR) is an ETF that tracks the bullion price of silver, in much the same way the other two funds track gold.

What About Gold Stocks?

Still another form of diversification into precious metals is to invest in gold stocks, or more particularly gold mining stocks. Just be warned these are highly speculative stocks under the best circumstances. But that’s also why they can be incredibly profitable during times of crisis and speculation.

Part of the reason why gold stocks are often recommended as part of an overall gold allocation is that they tend to outperform even gold bullion itself. This is because gold stocks represent a leveraged play on the metal. When you buy gold stocks, you’re not buying gold in any way (an important realization!), but the revenue and earnings stream of the companies that mine gold during times when the metal itself rising rapidly in price.

This leverage means that while the price of gold might double, the price of a particular gold-mining stock might quadruple.

But once again, it’s important to understand that gold stocks are highly speculative. They are not like blue-chip stocks that you might hold for the rest of your life. They make sense only during certain times – basically, bull markets in gold – and not under normal circumstances. Complicating the investment is that you never know when a cycle will end. At that point, the price of a stock could collapse in short order.

In addition, there are economic factors surrounding gold-mining stocks. They are, after all, stocks in companies that are engaged in a very specific business. That means that they are subject to all of the challenges related to that business.

When it comes to gold-mining stocks, challenges include mining operations in difficult locations, political or military instability in source countries, labor issues, and currency distortions. It is possible that gold mining stocks could drop in value even when the price of the metal itself is soaring.

8 High Quality Gold Miners

If you are aware of the potential pitfalls of investing in gold-mining stocks, and you still want to go ahead, here are eight high quality gold-mining companies to consider:

We’re not providing detailed information on these stocks, since this is a highly specialized investment sector. Please do a deep due diligence investigation of these and any other gold mining stocks you might want to invest in. The potential is good to make a lot of money on the stocks, but equally likely that you will lose a substantial portion of your original investment.

Gold ETFs

If you would like to invest in gold mining stocks, but you are understandably nervous about investing in such a speculative sector that you know little about, you can consider using ETFs. They are run by managers who have a deep understanding of the gold mining industry, and are in a position to select stocks in the best companies in the sector.

Some ETFs that are worth checking out are:

Market Vectors Gold Miners ETF (GDX). This fund invests in gold mining stocks, and does so by matching the price and yield of the AMEX Gold Miners Index. The fund is essentially an index fund in that its investments generally correspond with those in the underlying index.

Market Vectors Junior Gold Miners ETF (GDXJ). This fund invests in smaller gold mining companies that may have the potential to rise in price at a greater rate than more established miners. The fund tracks the price and yield of the Market Vectors Junior Gold Miners Index. Approximately 80% of the funds total assets will be invested in companies engaged in gold mining.

Global X Silver Miners ETF (SIL). This ETF is a play on the silver mining market. It’s results generally match the price and yield of the Solactive Global Silver Miners Index. At least 80% of the funds assets will be invested in the securities that are part of that index.

Should you decide to invest in either gold stocks or in ETFs that are comprised of gold stocks, just remember that those stocks do not represent gold itself. In fact, those companies and ETFs generally hold very little gold or silver bullion, if they hold any at all. They’re strictly a play on the mining industry. If your preference is to own actual gold, then you will also need to own bullion coins and bars.

There is no way to tell exactly how any asset class will do in a financial or economic crisis. But as is the case with investing in general, the best strategy is to have your money spread across different asset classes. That means hold some of your portfolio in gold or gold related assets, but be sure that you also have money in fixed income securities, as well as stocks of companies that are invested in the means of production.

The best strategy is always to be as well prepared as possible for whatever may happen. Gold and silver will help you do that in a crisis.

Additional Reading:

Fixed Income Challenges & Opportunities

How Will You Protect Your Portfolio During a Crisis?

Want to Make a Fortune? Buy Stocks at Depressed Prices!

How to Hedge Your Portfolio

Using Swing Trading to Profit in Volatile Markets

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While Dual Returns has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.