Silver and Gold: The Superheroes of Wealth Preservation

The face value of this silver quarter is 25 cents, but it's really worth a whole lot more.

Back in 1964, a gallon of gasoline cost about 25 cents in the United States. That’s right. Believe it or not, way back in 1964, you could buy a gallon of gas for a quarter.

It just so happens that 1964 was the last year that the US Treasury minted silver coins, including the humble quarter.

(Actually, any numismatist worth his salt will tell you that the so-called Washington quarters minted between 1932 and 1964 weren’t made from 100% pure silver — but at 90% silver and 10% copper, they were pretty darn close.)

Now fast forward to this week.

The national average price for a gallon of gasoline is approximately $3.50 per gallon. Meanwhile, the melt value of a 1932-1964 Washington quarter was hovering around $5.88 — which means that a silver quarter that was used to buy a gallon of gas in 1964 still has enough value to buy a gallon of gas (and then some) almost fifty years later.

The lesson here is that precious metals such as gold and silver act as a reliable store of wealth. That’s true because gold and silver exist in finite quantities and have inherent properties with real value.

It’s no coincidence that gold and silver have been recognized as a medium of wealth by virtually every civilization in the world over thousands of years.

On the other hand, unlike gold and silver, a fiat currency (like today’s US dollar) has no inherent intrinsic value. Nada. None. Zilch.

And although fiat currencies efficiently facilitate commerce by acting as a medium of exchange that is far preferable to bartering — just like silver and gold do — their value is based purely on faith. I know.

Of course, the biggest downside to fiat currencies is that they can be created out of thin air with impunity, as the Federal Reserve has been doing to the US dollar lately with alarming frequency.

Over time, excessive money printing greatly diminishes the value of the currency and the resulting effects can be seen via price inflation. If things get too out of hand, then faith in the currency begins to wane and hyperinflation rears its ugly head, which typically leads to the death of the currency and a painful economic collapse.

Here’s one more example to think about: Let’s assume two poor saps became stranded on a deserted island in 1964. Let’s also assume that both castaways had $10 when they washed ashore; the only difference is the first person had a $10-bill in his wallet, while the other guy had 40 silver quarters in his pockets. Assuming the two waifs were finally rescued in 2012, the guy with the silver quarters would have 23.5 times more purchasing power ($5.88 x 40 silver quarters = $235.20) than the guy with the $10-bill, which just goes to show the pernicious effects of inflation on a fiat currency over time — even at relatively low rates.

The bottom line is that precious metals such as gold and silver will not necessarily increase your wealth over the long haul, but they will preserve the hard-earned wealth you’ve accumulated over your lifetime. That’s important to know. Especially if you’re like me and beginning to have very serious concerns about the continuing viability of certain fiat currencies — and the US dollar in particular.

Photo Credit: Kevin Dooley

Comments

  1. 1

    says

    This is a very good point! Under ‘normal’ circumstances precious metals are a good way to store value (or labour). This can change under extreme disrunption os life. Continuing from your example with the island – if there was no water on the island temporarily (whilst on the island) water will be more precious than gold and will give more power to the one who has some.

    • 2

      Len Penzo says

      Great point with your water/gold analogy. That is one reason why many people believe that precious metals like gold and silver, may be important to have if the dollar collapses — but they say it should be among the very last things to get on the survival item check list.

  2. 3

    says

    Poor saps being left with only 10$….But hey guess it was better having those 40 coins. I like the idea of silver and gold bullion but they are just so expensive. I say when I get some money I am putting some money aside to buy bullion and put in a safe or safety deposit box.

    • 5

      Len Penzo says

      Peter and I think alike, Paul. In fact, he wasn’t the only one who predicted the crash in 2008 — I saw it coming too, and was able to get out nine months before it actually happened.

  3. 6

    says

    Although I do not collect coins except for some Indian Head pennnies my Dad left me, I have accumulated a lot of silver in more decorative forms. Items like (sterling) silverware, etc. It is nice to know it has kept up with inflation, but I probably will pass it down to our children.

  4. 7

    AniVee says

    Great article, Len! It´s interesting to note that 20 years ago we were always talking about ways to GROW our capital and where to invest it … now we´re much more preoccupied with where to put it just to hold on to whatever we already have. This, I fear, is not a good sign …..

    • 8

      Len Penzo says

      Tis not a good sign at all, AniVee. I never thought I would say this, but the writing is now on the wall for the end of the US dollar.

      Over the coming weeks and months I will be sharing what I am doing to try and protect what I have, and why the dollar is now on an almost certain path to ruin.

    • 10

      Len Penzo says

      Good question, Lance. In 2002, the melt price of a silver quarter was about 83 cents. (That happened to be near a low point for silver). Meanwhile, that same year the average price of a gallon of gasoline in the US was about $1.30 (according to the Consumer Energy Report).

      So a silver quarter could buy a little over 3/5 of a gallon. Still, not bad. However … to look back over such a short span of time is extremely misleading. Precious metals store of wealth has held steady (with fluctuations, of course) for thousands of years. One of the more popular examples is that the price of a fine suit (or the finest formal clothing of the era in question) has always cost the equivalent of an ounce of gold (give or take), no matter the era.

    • 12

      Len Penzo says

      Actually, Ornella, it’s not the fiat currency that increases your wealth — it’s the risk you take with that fiat currency that provides the opportunity to increase your wealth! :-)

  5. 13

    says

    I am glad to read a balanced post about gold and silver. It is NOT a good long term investment. It IS a reliable store of wealth. In the long run, it has always maintained it’s purchasing power.
    I am just as cognizant of the possibility of deflation as inflation right now. The QE’s have not been able to produce economic activity or much inflation. This may be because deflationary forces are currently stronger than governments stimulative policies. I’m not sure the Fed has the ability (politically) to print enough money to cause a collapse of the dollar in the near term.
    Therefore, investors should watch inflation trends and the dollar carefully to look for signs of which way the economy will tilt. Deflation would be bad for gold and silver and favor cash.

    • 14

      George says

      Deflation would be more harmful to households with debt than inflation would, scares me for my parents sake they’re 50 and have 20 left on their mortgage. Either way, economic collapse is not something I want mixing with my job prospects when I graduate in spring.

    • 15

      Len Penzo says

      Thanks, Ken.

      I have to say … the “official” gov’t inflation numbers that suggest it’s tame are BS. Inflation is all around us. I particularly notice it in my food bill — despite some companies trying to hide it with smaller packaging — and it is reflected in the price of commodities and precious metals too.

      As I see it, deflation is not in the cards. Deflation would make the existing US debt problem even worse, and so the Fed will never let that happen. If they have to print a quadrillion dollars to stave it off, they will. Of course, that comes with its own set of problems.

      Frankly, the Fed has painted itself into a box and it has nowhere else to go. The only hope is to halve government expenditures immediately, and take the accompanying short-term pain that would surely result over the following two or three years. But that will never happen because the politicians like being reelected.

      And so, the end result is the dollar — and our current standard of living — is going to be toast. The only question is when. (And I’m betting sooner than most people think.)

  6. 16

    says

    QE is just money creation by the central bank rather than demand-driven lending doing the creation.

    The trouble with the QEs over here and I think also in the US is that they have been directed in some way at buying government debt while the banks have increasing capitalisation. Therefore there is no money being lent into businesses and the QE doesn’t help at all.

    On the other hand, money needs to be created all the time as some way of stopping the inevitable increase in entropy. If you build a house and sell it, you get paid for your labour. But if before you sell it, a hurricane blows it down, the work has been destroyed and you have to start again. The only way this can be done is by creating the money in the central bank. Otherwise the economy collapses completely.

    Gold is a useful store of work – as long as everything else remains the same. But the rate of production of gold (and I guess silver) is only 0.1% of the gross world product. The rest comes from some recycling (repayment of debt) and fiat currency generation (that’s a gross simplification of course but point remains).

    The central banks may have got it wrong recently – or the private banks on their behalf anyway – but that doesn’t mean that we should throw the baby out with the bath water!

    • 17

      George says

      I have heard that argument elsewhere too. I’ve been told most of QE stays with the banks and ends up on Wallstreet inflating prices of securities and commodities. Seems to make some sense that a lot of that money stays in the financial industry. How much makes it to regional and local lenders?

      • 18

        says

        Very little really makes it to business – as I said most is swallowed up by buying government bonds on the open market (the BoE can’t buy directly under European rules). The rest wallows in the City/Wall St propping up the banks and their lush lifestyles as you suggest.

  7. 19

    says

    You hit the nail squarely here in the comments about inflation, Len. Gov’t inflationary numbers are completely baloney. If you study the changes made during the Clinton years to how inflation is measured, you’d be shocked at what “isn’t” considered inflation. I agree with Jim Rogers on that point: always be weary of numbers provided by any government.

  8. 20

    Ian says

    The purchasing power of the ten dollar guy will actually be lower than it was in 1964, due to the corrosive effect of inflation. Therefore, the percentage difference in purchasing power will be much higher than stipulated, and to an exponential degree that is likely to sober people up about wealth preservation.

    Thankful, also, of your flat currency concept. :)I doubt if even you are aware of its superlative profundity. :)

  9. 21

    says

    My main issue with precious metals is delivery, let’s say people lose confidence in the fiat currency. I’m going to need physical access to my precious metals ASAP – do you really believe you’re going to be able to access them when such a crisis is going to occur?

    You’re only other option is to buy them and keep them in your home/person – in which case you’re going to be paying a premium on the spot price + you’re going to have to worry about security.

    Solutions?

    • 22

      says

      Ashley – in traditional Indian and Nepalese culture, people dealt with the delivery issue by wearing all the silver and gold (particularly gold, the major store of wealth, since unlike silver, gold doesn’t rub off when it’s roughly handled). Eventually it evolved into a fashion, though (like many fashions) it’s one that is fueled/underpinned by the desire to showcase status and wealth.

      I guess that’s a long winded way of saying that you could always pile good jewelry onto yourself, safety issues (and a certain gaudiness) notwithstanding. :-)

    • 23

      Len Penzo says

      I hear you, Ashley. I have struggled mightily with trying to figure out the best way to invest in gold and silver.

      You make great points about being able to access your gold/silver in a crisis situation — especially if society starts fraying at the edges (or completely breaks down).

      After a lot of thought, I finally decided to go with gold and silver ETFs (paper trading) in the near term. However, as the national and world’s financial situation becomes more dire over time, and I finally decide that a collapse of the US dollar is imminent, I will begin converting those ETFs back to cash so I can buy a combination of real gold and silver, along with other tangible goods.

      I realize ETFs have their own issues (e.g., there is a question whether or not they have enough physical metal to back them — if not, there is a risk of them becoming worthless in a market meltdown).

      I also understand that my strategy requires one to keep a very close eye on the financial markets, but I do that anyway.

      I promise to further explain my strategies for wealth preservation a lot more in the coming weeks and months.

    • 24

      says

      We have bit of physical gold and silver, but are not too terribly worried about security. Some of it is worn, some is in a safe deposit box, some in the safe, and some has been midnight gardened.

      Gold and silver are just another asset class (and not necessarily an “investment”). As with any hard asset, it’s good to diversify. Personal wealth should probably all concentrated in any one thing, whether in home equity, or precious metals, or notional paper assets.

      And to Paula’s point above, as long as Indian and Chinese and other peoples around the world continue to think gold and silver are just swell, we’ll continue to have a bit here and there.

  10. 25

    says

    Hi Len,

    Thanks for the note. I share your concern with the dollar, but am also aware that most conventional thinking doesn’t agree the U.S. dollar will face a currency crisis. Can you say more about your thinking as to why you feel the writing is on the wall?

    Best,

    James

  11. 26

    says

    Without getting our nerves in a knot, I think we should learn to re-adapt to things that we once used. Gold and silver we know was the original form of currency besides bartering. And since there are too many of us on this planet to barter with each other, we should become comfortable with investing in gold and silver. And not only invest in it, but also use a little in our everyday spending.

    • 27

      Len Penzo says

      I have one quibble with your statement: gold and silver shouldn’t be used as investments per se. Rather, they must be looked at as a store of wealth used to preserve our purchasing power.

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