Holding gold in a deflationary economy?

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Since gold has always been a hedge in an inflationary period, I am wondering about the wisdom of having significant holdings in a severe deflationary period which is what we might very well be confronted with. Might government decide to once again fix the price of gold at some arbitrary level? Remember, it was $35 an ounce all through the Great Depression.

-- Richard Shields (dshields@patriot.net), December 27, 1997


Two thoughts occur to me: first, if it's not wise to own gold in a severe deflationary period, then what's the alternative? Most of the traditional alternatives (cash, bonds, or whatever) are only meaningful as long as you can make the assumption that we'll still have a functioning banking/finance system. I have no crystal ball that can tell me reliably whether this will, or will not, be the case -- but I think you need to make sure that you (and anyone you're discussing this with) get this assumption out in the open before you get into too much detail.

Second, I don't think it has to be discussed in the context of an "all-or-nothing" decision; in particular, the opposite of "significant holdings" is not necessary "no" holdings. Since gold is at a 12 year low (and recently hovering near an 18 year low), it seems to me that it represents relatively cheap insurance to invest, say, 5-10% of one's assets in gold (especially for the worst-case scenario of a complete collapse of the traditional banking system for a year or two before a new form of paper money emerges).

-- Ed Yourdon (ed@yourdon.com), December 27, 1997.

IMHO The wisdom of holding gold or silver at any time should be as monetary value when needed regardless of inflation or deflation. Speculating on the price compared to Federal Reserve Notes or any other fiat money is like shooting craps. If you want to gamble try Las Vegas if you live in the West or Tupelo, MS. if you live in the East. A lot more fun there. Alan Greenspan and the Federal Reserve arbitrarily fixes the price of FRN's on a regular basis by setting interest rates, therefore they are already fixing the price of money. This most probably will end in 2 years and 4 days if not sooner.

-- Joe Stout (joewstout@iswt.com), December 27, 1997.

I've asked TIAA-CREF to establish a precious metals mutual fund so that pension plan contributors can protect their retirement assets if y2k turns out to be serious. But they refused, stating that such a fund would be too speculative and hence unsuitable as a retirement vehicle. This information is for general interest.

My question concerns my uncertainty about what to expect if y2k is serious: would we get deflation only, inflation only, deflation followed by inflation, or vice versa? Would be interested in being enlighened on this issue.

-- Edward H. Greenberg (edward.h.greenberg@jpl.nasa.gov), December 28, 1997.

How can one ever conjecture what the "govern- ment" is likely to do in an emergency? Prob- ably the wrong thing. Same question re: inflation vs deflation. Seems to me to be prudent one should have 5-10% in some form of gold - coins, bullion. Who knows a good place to buy, without getting skinned? What are some good places to keep (hide) it? Anyone old enough to remember whether safety deposit boxes were sealed or otherwise not available during the 1933 bank holiday?

-- Art Scott (Art.Scott@marist.edu), December 30, 1997.

Gold IS an Internationally recognized medium of exchange...Our currency has flooded the world for years, most recently the new $100 and $50 dollar bills...Billions of "new" dollars...Dr. Franz Pick and others, remind us that G & S have been around for thousands of years and is the ONLY real $$...Fiat $$ has NEVER survived a nation...Currencies in the " East " have devalued 35+ in a few mos... It's scarey, but what other options are avalable that are safe? Swiss accts? Off shore? Your forum is GREAT!! Thanks for being there...

-- BOB BOWMAN (bbowman@gte.net), December 31, 1997.

Re Swiss banks and/or offshore accounts:

I decided against this a while ago, for two simple reasons: (a) I have no a priori reason to assume that the Swiss or other offshore entity will be any better prepared for Y2K than American banks, and (b) accessing one's funds in Switzerland or other offshore location presumes that telecommunications are working or that air travel is available.

Something else to keep in mind: if there is a serious Y2K-induced banking/financial disruption, there could be a set of government-imposed currency regulations... perhaps in the U.S. perhaps in Switzerland.

For most of this century, Switzerland was considered a "safe haven" for investors in various countries, just as the U.S. is considered a safe haven today in the midst of Asian financial crises. But if the Y2K problem turns out to be serious, there will probably be no safe haven. In any case, the "safe" aspect will have nothing to do with geography.

-- Ed Yourdon (yourdon@sprintmail.com), December 31, 1997.

Economies are not deflationary or inflationary, fiscal policies are. In the current environment, large movements in currency exchange rates and prices of commodities may be expected to continue as fiscal authorities attempt to 'control' the effects of large holes blown in the balance sheets of 'flagship' enterprises throughout the far east. Hold gold or silver if you think it may be useful for exchange, or hold other 'trade goods'. Best bet: store an "inventory" of goods that would be both useable and tradeable in event of severe disruptions. Limit amount of any one good to what you can reasonably consume in a few years (so if "worst case" never materializes, you have minimized holding costs of your 'insurance policy' against the Y2K hazard).

-- Frank Meyer (FVMactuary@aol.com), January 01, 1998.

I visited a local coin dealer to discuss purchase of gold and silver coins. He pointed out that you want relatively more coins of lesser value to avoid be stuck with paper money as "change." He asked for cash to make the transaction; no mention of filling out any paperwork. He pointed out that in New York State purchases of more than $1000- did not pay sales tax; in our town that's a saving of 7.25%

-- Art Scott (Art.Scott@marist.edu), January 16, 1998.

I think Frank Meyers post contains the best ideas yet. I would add to his post that when choosing between inflation and deflation, it is to the debtor's best interest for there to be inflation. Subtle Hint: the government is a debtor - what do you think they do?!

For those that decide that a trade good will have the same intrinsic value two years from now read Pugsley's book The Alpha Strategy - it is a good starting point.

On gold and silver sources - I have found Ron Paul Coins very helpful.

-- Ken Seger (kenseger@primary.net), January 31, 1998.

I was wondering if anyone had any comments or conclusions at the news in today's (Sunday, 2/8/98) paper that Warren Buffett, second richest man in America after Bill Gates, has quietly bought up a fifth of the world's silver stocks? He was quoted as saying he thinks silver is undervalued and thus a good investment. He was also quoted as saying he is putting the rest of his investment cash into bonds (specifically zero coupon feds) because he can't find anything in stocks that isn't overvalued. I remember the silver panic of 1979, when the Hunt brothers of Texas tried to corner the world silver market. Buffett has doen much the same, without driving the price through the roof. Curious.

-- D.C Lark (yankeejdc@aol.com), February 08, 1998.

Tax considerations: A net gain in US$ will be taxed at 33%. A net loss is deductable. Gold actually out preforms other assets in a deflationary envirnoment. It holds its value better than other assets such as real estate. Consider SE Asia's plight. They have been experiencing a deflation in terms of their asset values (equities and bonds) AND an inflation in raw materials and other items (oil) which must be imported and are settled in US$. Their currencies have been destroyed. Their asset bubbles have been destroyed. 1928 - 1935 all over again. In most of these countries gold and silver have retained their power to purchase. Witness Korea's call for gold donations from its citizens. This followed a call for exchange of US$ . Gold is still a reserve with the greatest stability in troubled times, wether inflationary, deflationary or both (in different sectors of economies).

-- Allen (polloa@webtv.net), February 23, 1998.

All That Glitters by Jim Lord at: http://www.y2ktimebomb.com/Tip/Lord/lord9807.htm has some excellent comments about buying gold \ coins.

-- Art Scott (Art.Scott@marist.edu), March 11, 1998.

FWIW, here's my personal philosophy about gold. It is *not* an investment; it is insurance.

-- Andrew J Jackson (ajackson@onramp.net), April 13, 1998.

Government didn't fix the price of gold at $35 during the Great Depression, Look at the history; 1833 through 1871 gold was set at $20.65 then roughly fluctuated +- .06cents till 1932. 1933 through 1971 gold averaged around $35, with high of $41 & low of $26. The 1970's was the beginning of the big changes. Prices jumped to $100 then $200 and averaged $306 in 1979. 1980 averaged $612 peaking at $850 I believe. Today it's around $300. Gold is set by a world standard, do you believe that the United States alone could fix the price? It is a hedge against our paper money, the paper that is no longer backed by precious metals in federal reserve. Gold has held it's buying power regardless of how much paper money it's worth. What bothers me is what was stated earlier, people today don't know the value of gold & silver, they have digital money backed by the paper money. If the digital money glitches away in the year 2000, I believe people will value paper money as trade. People talk of running the banks just before new years and hold cash in hand just to be safe, and if everything is ok they will deposit it back the next day. Banks can't handle that kind of run, here or world over. I plan on having Gold, Silver (collectable, junk, bars & rounds) and paper on hand. I won't run the bank. If the world is still spinning after 2000, I will keep my monetary collection as is, and continue saving and investing using the digital money as we currently do

-- Bob (bob@gte.net), July 09, 1998.

I have a question as opposed to an answer and anyone who can and wants can send me an email. I have been buying gold and junk silver for a long time and plan to buy more - in particular gold. I am concerned about government confiscation. Dealers advertise that we should buy semi-numismatic gold coins as the government has never tried to confiscate them whereas they have with bullion. With the picture we are all getting of y2k it would seem that no type of gold coin or bullion would be safe from such "attempted" confiscation and I say attempted because I would not give mine up. If so, then I would prefer to buy bullion coins although I am concerned that the 1 oz types if they escalate highly to say 10 times their current price would be hard to "spend" for small purchases and one would need small denominations such as 1/10 oz coins but the markup in the purchase is substantial on these. Any comments on any of this are welcome and appreciated.


-- Rancherdick (angusdude@my.yahoo.com), August 22, 1998.

Richard, I suggest you access www.goldinvestment.com for info. I believe the Email is Dave@goldinvestment.com Dave Berryman, the owner, has been in busienss there (Tacoma, WA) 28 years, and is a very "up front" guy.

-- Holly Allen (Holly3325@juno.com), August 22, 1998.


Warren Buffet has seen fit to buy millions of ounces of silver bullion. With his track record in the money business, it might be a good idea to mimic his choice of metal. I too am buying silver in its bullion form, mostly in US silver eagles. This might be the best form of exchange in a barter economy because 1 oz of silver is stated right on the coin. Junk silver is not well understood by the average American.

As to the original question of gold holding its value during deflation, I read that in the 1930s one oz of gold would buy an off the rack mens suit and has, despite swings in value each way, generaly held this approximate value relationship. I can't remember where I read that bit of trivia, but it stuck in my mind.

-- Uncle Deedah (oncebitten@twiceshy.com), August 22, 1998.

For those interested, I am told for gold and silver talk to Gaithersburg Coin in Gaithersburg, Md. Today they quoted me basedon spot gold @$288 a price of $304 for 1 oz. American Eagle. Very knowledgeable, friendly and patient. Larger quantities than 10 will get you a lower markup.


-- Rancherdick (angusdude@yahoo.com), September 05, 1998.

Good prices & "good guys" at http:/certifiedmint.com. I've done business with them. I have been "working" with both gold & silver for over 30 yrs now(yes I know it was illegal up to 1970)and IMHO you can never go wrong keeping 10% of your loot in G&S. I have always used bullion coins myself and I use a rough ratio of 35% in gold (1/10th oz. eagles) and 65% in 1oz. silver bullion coins(Maple leafs if you live near Canada) or US silver eagles. I also have Mexican silver Onzas just in case. I also KEEP quite a few silver coins (junksilver to those who know the term)If you will insure against all possible dangers in our world it is only logical to insure against the failure of your currency. This is the only insurance policy you can buy which will give you back your premiums if you don"t need to use it. A VERY small risk that you will lose a portion of your cost is the worst case. Buy your bullion coins and then pray to whatever GOD you hold near and dear that you NEVER have to use them for their insurance purposes. You can make a reasonable guessimate of the type coins(gold or silver) that you should have by simply thinking of what you may need them for. For small everyday type buys silver 1 oz. us eagles will serve quite well, as would the pre 1964 silver coins (dimes,quarters &halves). For the larger buying a 1/10 oz. gold eagle ($33.80) at $289.00 spot gold)will fill the bill.I personally don't keep any coin larger than 1/4 oz. gold eagle in the "insurance side" of my dealings. I hope this rambling jibberish helps you with your decision. An old quote-"he who owns no gold is in danger. He who owns gold is very worried".

-- Robert W Detwiler (buffgun@hotmail.com), September 06, 1998.

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