Economic Collapse 101: How Much Gold and Silver Should People Own?

Ever since I started writing about the importance of owning physical gold and silver as insurance against the inevitable failure of the US dollar, I’ve been receiving an increasing volume of questions in my inbox from folks curious to know more about precious metals.

With that in mind, here’s one that I received last week from Joshua:

“I was wondering about how much (gold and silver) a person should own. I’m 38, with a wife and three kids. My only debt is a mortgage and a small bank loan. Going by your prep list for a possible coming financial collapse, I am well prepared. My plan is to start buying precious metals mostly as an insurance against dollar devaluation. So how heavily should a middle class guy be buying precious metals (assuming) I have an extra $1000 per month? How many ounces of gold and silver is a good number? Should I buy 500 ounces? One-thousand ounces? As many as I can? Assuming I have all of my other preps covered, what else is there to do with my extra cash assuming I see a hyper-inflationary event coming? So many what-ifs.”

There is no single right answer to how much gold and silver we should own, if only because there are so many variables that are dependent on personal circumstances.

Generally, most experts suggest holding between 10% to 20% of your net worth (excluding home equity) in precious metals. The biggest problem with that rule of thumb is that it’s virtually meaningless for folks who have a small or negative net worth. I also think it’s a bit too conservative considering the ever-growing risk of a currency failure.

Here’s how I determined what the “right” number was for me. Take a look at the following bell curve:

The curve shows the probable price distribution for gold after the financial reset occurs, and it was developed by a well-informed economics expert and blogger who goes by the moniker “FOFOA.”

I don’t agree with everything FOFOA says. For example, he believes that silver’s ultimate value may not necessarily rise in proportion with gold after the current system implodes; but other than that, I think FOFOA is on-target regarding gold’s resurgence as the cornerstone of the next system after the big reset.

Anyway, as you can see from his curve, FOFOA determined that the most-likely post-reset price of gold will have an equivalent purchasing power of $55,000 in 2009 US dollars (or $59,000 in 2013 dollars). The curve also indicates a 95% probability that the post-reset price of gold will fall between $25,000 and $85,000.

Are those numbers a pipe dream? Perhaps.

That being said, like FOFOA, I am confident that both silver and gold are extremely undervalued at today’s prices — especially when you consider the number of dollars currently in circulation.

You can make any assumptions you wish, but for my planning purposes, I took what I believe to be a very conservative approach and assumed a post-reset purchasing power equivalent of $10,000 per ounce of gold. (Although I believe it will ultimately be more than that.)

I also assumed that the gold-silver ratio will drop from roughly 60:1 today to 30:1 after the reset. (Since 1687, the average ratio has been slightly more than 27:1.) If I’m right, and gold climbs to $10,000 per ounce, then the post-reset purchasing power of silver will be equivalent to $333 per ounce.

I then used those assumptions to figure out how much physical gold and silver I needed to get me to the other side of a currency reset.

For example, if you want enough insurance to provide the equivalent purchasing power of, say, $100,000 after an economic collapse, then you’ll need to accumulate 10 ounces of gold (10 x $10,000). On the other hand, five ounces of gold and approximately 150 ounces of silver (5 x $10,000 + 150 x $333) should get you $100,000 worth of insurance too.

See how that works?

And if the actual post-reset value of gold ends up being on the order of $20,000 or $55,000 instead of $10,000 … well, you’ll be even better off financially.

A few points:

  1. Make sure that you have adequate food and other emergency stores in place before you begin accumulating gold and silver.
  2. I believe it’s important to diversify your precious metal holdings. Unlike FOFOA, I believe silver has more upside than gold, but its biggest drawback is it takes many more ounces to store an equivalent amount of wealth.
  3. Although the US dollar is going to fail sooner rather than later, nobody can say exactly when — so unless you think the “big reset” is imminent, don’t go overboard and start throwing every last extra dollar you get into precious metals. Enjoy life! Keep saving for the annual family vacation and other things that make life worth living; or home improvements and other tangible assets that provide value over a long period of time.

Finally, a word of caution: Always remember that precious metals are insurance. If you’re thinking about buying gold and silver as an investment or way to make a quick buck, then you’re buying them for the wrong reason.

Photo Credit: sprottmoney

Comments

    • 2

      Len Penzo says

      I don’t know about you, but I don’t have a crystal ball, Robert.

      Would you risk your home and wait to buy homeowner’s insurance in the hopes that the price may fall in the future? I wouldn’t — but that’s just me.

  1. 3

    says

    Yo! Where do you pick up your own silver/gold for yourself? Do you get straight bullion or do you get it by older coins w/ the precious metal in them?

    Reason I ask it twofold:

    1) I’m a coin collector and always love seeing what type of coins people have :) Similar to when they share their net worth!

    2) The thing that always concerns me with these worst-case “end of the world” situations, is that if you have a large ass coin or block of gold, worth say, $5,000 and what you’re wanting to trade for it (say, a cple gallons of water and bread for $50.00 (it’ll be expensive in this crisis, yes?)) how exactly would you go about breaking this coin/block up? Are you going to shave off a few slivers that’s worth $50.00 and then make the trade? :)

    So it would seem smart for those piling up these metals to maybe have some bigger chunks just for ease of storage, but more importantly a bunch of little coins/mini-bars to easily be traded in times of need. And, as one of my gold hoarding friends likes to say – a gun too, “because it’s gonna be the wild west out there!”

    • 4

      Len Penzo says

      There are two basic options, J: Some people buy online, and others buy their gold and silver from their local coin shops.

      I don’t think there is going to be an end-of-the-world scenario. If the powers-that-be are smart, there is going to come a point where they realize the current debt-based Ponzi money system can no longer be sustained. The G20 will then hold a weekend emergency meeting starting on Friday afternoon and they’ll announce a new monetary system on Sunday evening (that they will implement over a short time-period). That would offer the best chance of avoiding disruptions to supply chains.

      If the powers that be are not so smart, they’ll let the system collapse of its own accord. In that case, supply chains will break. If the powers that be act fast enough, they should be able to minimize the damage. If not, well … That is why everyone should have a long-term store of food, water and other supplies before stocking up on gold and silver! Ideally, your gold and silver should be used post-reset to buy up all the great deals and other investments that will be out there after a new system is in place — not for barter.

      Remember, US silver quarters (pre-1965) should always be able to buy a gallon of gasoline and a silver dime (pre-1965) should always be able to buy you a loaf of bread — no matter what the price is in US federal reserve notes.

      I agree, having multiple sized coins and bars of silver or gold would be convenient *if* no new system was established and society began breaking down so completely that PMs were the only thing being accepted for trade. In that case it would be easier to pay for, say, a used car with a single 100 oz bar of silver than 3000 silver quarters! I don’t think it will get to that point.

      Most folks who own precious metals also own firearms. The two go together like peanut butter and chocolate.

  2. 7

    says

    Huh. Hadn’t ever considered owning physical metals as insurance. I’m sure if the pooh hits the fan with our currency, some things (maybe gold, maybe just physical goods) will be worth a whole lot more than they are today.

    • 8

      Len Penzo says

      If the poo hits the fan, many things of tangible value that we take for granted, especially food items, cigarettes, alcohol, batteries, lighters, etc. will be worth a whole lot more than they are today. Although I could be wrong, I think the risk of a “Mad Max” scenario is low.

      While I believe there is a chance for a brief breakdown in supply chains, I think they will be temporary.

      The real pain will come after the new economic system is in place, which will result in a lower standard of living for most folks in America — and that is going to lead to its own set of troubles.

    • 10

      Len Penzo says

      As do probably 90% of all people who own gold and silver.

      While important, I’d place food, water, and a few other items higher up on the list than firearms and ammo.

  3. 11

    Josh says

    Len, I hope you are right about no Mad Max scenario, and only a temporary interruption in services. But I really worry about what even a temporary interruption will do to our society. Many people have no morals any more.

    Look at what happenned with so many of the more recent local calamities. Rioting and looting immediately. Look at every Target and Walmart on Black Friday morning. People rioting over crappy Chinese goods that they don’t even need. Look at what happenned in the Walmarts when the EBT card system went down for a few hours back in October in Louisiana. People go crazy immediately and turn to animals.

    I think the cities are only 3 meals from total anarchy. So what would a 1 month to 3 to 6 month interruption bring? I think the cities could very well turn Mad Max very quickly.

    During an interruption of services, would the police get paid? Would they show up to work? A very small spark quick quickly ravage a nation full of hungry and desperate people.

    • 12

      Len Penzo says

      You’re right, Josh. The cities are going to be a mess if supply chains break. The more densely populated, the worse it will be.

      It’s why I recommend keeping enough supplies on hand such that you don’t have to leave your residence for six months — just in case things get really out of hand.

      If supplies chains are still broken more than six months after the crisis begins, then we’ve got big problems. In my opinion, though, that scenario is truly a “long-tail” risk that is very unlikely.

      Because it is in society’s best interest to solve the problem as quickly as possible, the most logical outcome is that a monetary solution will be implemented ASAP to make it so. Let’s just hope it is the right solution.

  4. 13

    Dave says

    Len, I really like your site, and this article was good. What data are the freegold price probability distribution curve derived from? Thanks,

    • 14

      Len Penzo says

      Hi Dave. FOFOA says the curve is based upon this equation:

      (World GDP) / (available above-ground gold) = true value of gold

      If gold is the monetary standard against which dollars (and everything else) should be measured — and the last 5000 years of human history backs that up — then the equation makes perfect sense.

      Here are the latest numbers I found:

      World GDP in 2012: $71,830 billion (2012 dollars)
      Available above-ground gold in 2012: ~ 165k metric tons (i.e., 5.3 billion troy ounces)

      Therefore, gold’s real value today (as a bare minimum) should be $13,552 per troy ounce (in 2012 dollars).

      However, I can see other factors that could shift the center of the bell curve toward (although not necessarily all the way to) the $55,000 figure. For example, a lot of that “available” gold will not be for sale at any price (for any number of reasons) — as a result, the real “available gold” figure is going to be lower than 165k metric tons.

      FOFOA also referenced this video (start watching at the 7-minute mark to get to the gold discussion):
      http://video.cnbc.com/gallery/?video=1339705660&play=1

  5. 15

    Jan says

    Len,

    As a fan of your site -always look forward to a new article every Saturday!- these articles about the Economic Collapse 101 especially got my interest. I am a European living and working in the United States. In your opinion do you think the government would close the borders in case of an economic collapse and the European countries as well or would the effects spread worldwide and the same conditions here would be found elsewhere also? In short, better stay put and ride it out here?

    • 16

      Len Penzo says

      Thank you, Jan. I have no idea — I can only speculate.

      If the dollar fails first, the entire world economy will quickly follow because the majority of all world commerce is transacted in dollars. If not fixed, the world economy would eventually revert to a more-localized economy based upon barter — although local scrip may spring up too.

      I believe that unless you live in the middle of a large densely populated city, “bugging out” to find a safer place after critical supply chains have broken, is riskier than preparing ahead of time, “sheltering in place,” and riding out the storm. But that’s just me.

  6. 17

    Josh says

    A lot of the silver bugs say that most of the mined silver has been used and destroyed. Gold has been saved. They say oz for oz the remaining silver is actually more rare than gold. When the world realizes this, they say, silver will be worth more than gold.

    Any thoughts on those “facts”?

    • 18

      Len Penzo says

      Short answer: no.

      Unlike gold, a good proportion of silver is used in manufacturing processes for electronics, photography, medicine, solar power, batteries and other goods. A lot of that stuff ends up sitting in landfills (most of it is not actually destroyed). Silver is also “easier” to acquire because a lot of it is produced as a byproduct of copper, tungsten and even gold mining.

      I believe geologists are currently estimating that there is roughly 8 times more silver in the earth’s crust than gold. So I do believe the gold-silver ratio will drop substantially from where it is today — as I mentioned in my article, for planning purposes I am assuming 30:1. However, I believe it will actually fall to somewhere closer to 20:1. If I’m right, that means silver is currently even more undervalued than gold (by two to three times) — regardless of whether the ratio drops to 30 or 20.

      Bottom line: I don’t believe silver will be more valuable than gold, but I believe it has a much bigger financial upside.

  7. 19

    says

    To answer such a question, one has to open the history books for guidance of what to expect. King Solomon once said, “There is nothing new under the sun.”

    Since we use the same sun 2900 years later, I take his advice. Now what happened in US history in the 1929 crash? Did the economic chaos start in 1929?

    Well, the market crash actually started in 1922. Now you all are scratching your heads wondering what on earth I am talking about. First, the agricultural markets crashed in Chicago. Then the hyper inflation of food prices (Been to the grocery store lately?) forced the stock market to crash 7 years later.

    When we look at the drought in California, we get an idea of the rise in food prices coming our way this year. Take a trip to your local Wegman’s or Trader Joe’s and see for yourself how much more we pay for food today.

    In summary, the depression started in 1922 and finally ended in 1950 when the Korean War happened. Our next depression will possibly last 28 years again.

    So, make sure you stock up on silver and gold as “insurance” against something like this happening again. A rule of thumb is to invest 5-10 percent of your portfolio in precious metals. Think of it as a life insurance policy. You do not want to die; it is insurance against the catastrophe on your family. The same goes for investing in precious metals.

    To Your Health…
    To Your Wealth…
    To Your Wisdom

  8. 20

    says

    I’m wondering, who has a collection of these metals? Not many people I imagine. Grandma’s and such may have stashes of jewelry but they are often valuable beyond transferable money (memories and such).
    I only wish I had a massive lump of gold for emergencies, like in the movies (Die Hard 3 with the raid of fort knox for example).

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