Hello Len, I’m a long time reader of your blog. I love your stuff. I agree wholeheartedly with your assessment of the coming dollar collapse leading to a reset. I cashed out of my 401k years ago and devote my extra money into precious metals as well as other preps. What do you think will happen to stocks during and after the reset? Certainly many companies will go bankrupt. But what about the big guys, like Walmart, etc. Many of these companies will still exist right? What will happen to stock holders after the reset? Do stocks just get revalued in a new (currency)? Is everything wiped out? I’m asking because I can’t help but really want to buy oil stocks in some big companies if the price of oil keeps going lower. Should I just keep focusing on PMs? Having all my eggs in one basket makes me nervous. I appreciate any response you could give me. — Josh
Thanks for being a loyal reader, Josh. Nobody knows for sure, but if I had to guess, I think most of your stock questions will depend on whether the end of the US dollar in its current incarnation is a long, drawn-out affair, or if it happens quickly (at least one macroeconomic expert who I greatly respect believes it could happen within a one-week period).
If it is the former, I expect stocks will rise sharply as the value of the dollar drops and money can be made — the catch is, eventually, I believe there will come a point in time where those gains will no longer result in real earnings because the increase in the price of stocks will not be sufficient to overcome the currency’s increasing loss of purchasing power due to hyperinflation.
If it is the latter, I think it gets more complicated. Since stocks will have to be revalued in the new currency, my hunch is actual losses would be limited to the resulting devaluation, but only if you sold that stock on the day that devaluation occurred. If you don’t sell, you’d still have the asset with no realized losses. And over time, the value of that stock in the new currency could very-well rapidly surpass the value in the old currency — especially if the reset results in favorable market conditions for the company in question. On the other hand, those same market conditions could also just as easily derail the company business plan and send it into bankruptcy — especially those that currently depend on zero-percent interest rates to stay in business. With respect to oil companies, I suspect the larger oil companies will be just fine, since oil is the lifeblood of world commerce. However, the smaller oil companies that rely on fracking may have problems because I believe most of those companies have relied on cheap financing (and high oil prices) to stay profitable — and you can bet that once the reset occurs, the price of money (interest rates) will return to proper historical levels (somewhere between 5% and 8% on average).
Len: I’m finally taking the plunge and am going to start buying precious metals this year. What percentage should I put towards gold vs. silver?– Nevin
Hi, Nevin. Good for you! When diversifying between gold and silver, the amount you allocate to each is completely up to you. With the gold/silver ratio currently hovering above 80, there have been few times in history when the price of silver has been as cheap relative to gold as it is right now. For that reason, I am currently biased towards silver; my current gold/silver allocation (by weight) is 35:1 — and I am working to increase that figure. The main drawback to silver is that, compared to gold, it takes more metal to insure an equivalent amount of wealth.
If you have a question you’d like me to take a crack at answering, send it to: Len@LenPenzo.com — and please be sure to put “Mailbag” in the subject line.
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Hi Len. I figured out my current net worth, and then transferred about 10% of that amount into gold and silver for “wealth insurance” purposes. I have read numerous articles about folks who completely cash out their Roth’s and 401Ks and use the cash to buy precious metals, but I can’t bring myself to do that. Not sure how wise it is to hold onto those two savings vehicles (Roth and 401K), but I guess I just want to keep the risk spread out. Unless I misunderstood your stance, it is in everyone’s best interest to get things back up and running after a collapse as soon as possible, and I am not convinced that every company in my mutual funds will go belly up. In my opinion, once you have your wealth insured with a percentage of pm’s (and keep that ratio adjusted as your net worth grows), you should keep investing as usual and hope for the best. What are your thoughts on that? And thanks for such a great website!
Matt: I think the companies with the biggest risk of going under are the ones that don’t turn a quarterly profit or have low cash flow and, therefore, depend on cheap credit to keep their business going (e.g., Twitter, Uber, Amazon, etc.). Why? Because cheap credit will be a thing of the past after the reset.
Most other companies should be fine, in my opinion.
As for your investment approach — everybody is different. Yours is measured and very pragmatic; and who can fault that?
Len, re the question of gold vs, silver: For those of us in, say, the bottom third of earnings and/or net worth in the U.S., I find silver to be more adapted to our condition. There isn’t a volume problem for us – we can’t afford enough to make that a consideration. Also, in times where our precious metal might be useful to actually buy goods and services we need, silver coinage will be in smaller denominations and more recognized as valuable throughout society. We have debased currency now that looks like it and it hasn’t been that long since identical – looking coins (Now called “junk” silver) were currency.
I agree with everything you say, Dave. In fact, I tell everyone who is considering to buy physical precious metals for the first time to start with silver. Junk silver (i.e., silver US dimes, quarters, half-dollars and dollars minted before 1965) is an especially great way to start “stacking” because the coins not only act as a means of preserving wealth in a currency crisis, they are almost guaranteed to be useful for bartering because everybody recognizes them and the veracity of the silver content is easily verifiable by the date on the coin. Also, the risk of having to worry about potential counterfeit coins is almost nil because the low denominations makes them unprofitable to do so.
Len, I would like to see a “sister” article: What happens to the wealth of individuals with no debt and some precious metal holdings?
Good idea, Dave. I’ll put one together soon.
In my opinion, I think if the dollar were to totally collapse, you’d have way larger problems on your hands than losing money in the stock market. Even if you had a stock pile of precious metals, how will you use those items to purchase anything? Like food, water, ..etc.
In the last recession, in you were diversified in a mix of broad market mutual funds, bonds, metals and utilities funds, you would’ve been fine. Yes, you would have had “non-realized” losses but if you would have stayed the game, you’d be fine right now.
I don’t know if having an entire retirement portfolio based on metals alone is a wise solution. Especially when you don’t know how much higher this market can go.
I agree. Diversification is the smart choice in a world of uncertainty, Don.
If the dollar were to completely implode and become essentially as worthless as Venezuela’s bolivar — as opposed to the dollar being sharply devalued, as it was when FDR reset the fixed price of gold in 1934 from $20.67 to $35 per ounce — then gold should be used as a bridge to transfer your wealth to the new currency. In other words, you would hold your gold until the US issued a new currency to replace the dollar, and after that new currency was proven to be financially sound, then you could convert your gold and silver into the new currency.
Wow, thanks for a super informative article and well-developed answers. It seems like the stock market is a constant thought for many, and the unpredictable outcome keeps many of us on our toes. When do you think the next big market crash will happen (if it will happen)?
The date of the next crash is anybody’s guess. I ‘m not going to go out on a limb and pick a date though.
what happens to money in the bank when things collapse……..are credit unions safer….or should you put it under your mattress also brokerages say no money even small amounts is insured what to do ?