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:
How much gold and silver should a person 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 financial collapse, I’m 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?
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.
Most of the so-called “experts” suggest holding no more than 10% 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.
How to Determine the Implied Price of Gold
The first step in determining the “right” amount of wealth insurance needed to survive a currency failure is to identify a realistic dollar-price of gold if it were based solely upon the actual currency supply and the amount of gold held by the US Treasury and world central banks. For that, let’s go to macroeconomist Jim Rickards, who deftly explains the calculation this way:
The combined M1 money supply in the world is about $24 trillion. That includes the United States, China, the Eurozone and Japan. Those four entities combine for over 70% of global GDP.
Now, the official gold in the world is about 33,000 tons (107 million troy ounces). That’s not counting private gold, because private gold is not part of the money supply.
Historically, central banks have run successful gold standards with only 20% gold backing; in most of the 20th century, the US had 40% gold backing.
I use the higher number, 40%, because I think a higher number might be needed to restore confidence in event of a collapse. The point is, 40% is a debatable, but reasonable figure.
Now, if you back 40% of the $24 trillion of (currency) supply with the amount of official gold, it implies a gold price around $9000 an ounce. But I predict $10,000.
So how do I arrive at $10,000?
That’s because I expect central banks to print a lot more money by the time this issue comes to a head. So, by the time the printing presses stop running around the world, that $9000 number will likely be in the range of $10,000.
The point is, $10,000 an ounce is not pie in the sky. It’s not a number I pulled out of a hat to get headlines. It’s the actual mathematical implied non deflationary price of gold. If you reintroduced a gold standard at a lower price, it would be deflationary. They’d have to reduce the money supply in order to bring it into alignment with the price of gold.
Now here’s the punchline: The global M1 money supply has doubled to $48 trillion since Jim explained this in 2017. So the implied gold price is now closer to $20,000.
Others believe that confidence will only be restored if the dollar-price of gold is based upon 100% backing — at least for a short period of time — which would result in an equivalent minimum purchasing power of roughly $22,500 in today’s dollars.
Are those numbers a pipe dream? Perhaps, but I think they are close.
That being said, 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 and central banks’ sustained and coordinated currency-printing programs known as “quantitative easing.”
So, for my planning purposes, I take Rickards’ conservative approach and assume a post-reset purchasing power equivalent of $20,000 per ounce of gold.
I also conservatively assume that the gold-silver ratio will drop from roughly 80:1 today to 30:1 after the reset. I say “conservatively” because, since 1687 the average ratio has been slightly more than 27:1. If I’m right, and gold climbs to $20,000 per ounce, then the post-reset purchasing power of silver will be equivalent to $667 per ounce.
How Much Gold Should I Own?
Based upon those assumptions we can determine how much physical gold and silver we need to get 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 5 ounces of gold (5 x $20,000). On the other hand, three ounces of gold and approximately 60 ounces of silver (3 x $20,000 + 60 x $667) 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 $25,000 or more instead of $10,000 … well, then you’ll be even better off financially.
A few important closing points:
- Make sure that you have adequate food and other emergency stores in place before you begin accumulating gold and silver
- I believe it’s important to diversify your precious metal holdings; silver has more upside than gold, although it takes more ounces to store an equivalent amount of wealth
- 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! Don’t stop saving for the annual family vacation and other things that make life worth living.
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: kwn