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Economic collapse 101: The most important insurance we never buy

By Len Penzo

For Len Penzo dot com

Published: Tuesday, Oct. 15 2013 9:30 a.m. MDT

In this May 13, 2008 file photo, gold standard bars are stacked up at the gold smelter company Argor-Heraeus in Mendrisio, Switzerland.

Karl Mathis, Associated Press

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Editor's note: This article originally ran on the personal finance blog Len Penzo dot com. It has been reprinted here with permission.

It’s ironic, but bankers and fiscally irresponsible governments despise gold and silver. Why? Because precious metals demand credibility and accountability, that’s why.

In short, gold-backed currencies force responsible governments to live within their means.

That is precisely why, back in 1971, Richard Nixon was forced to nullify the Bretton Woods agreement, which was signed at the end of World War II, and permanently closed the gold window.

As you might expect, Nixon felt he had no choice. The US had been living well beyond its means for more than a decade, printing lots of federal reserve notes to pay for expensive endeavors the country couldn’t truly afford, like the Vietnam War and LBJ’s so-called “War on Poverty.” That, in turn, led to an increasingly devalued US dollar. So, in order to preserve their wealth, many of the world’s central banks — led by West Germany, France and Switzerland — began redeeming their rapidly depreciating US dollars for the gold stored in Fort Knox; so much so that by the time 1971 rolled around, America had only half as much gold in its reserves as it did in 1960. In fact, it’s been said that the gold outflow was so rapid, if it continued, America’s gold reserves would have been completely consumed within a few more years.

Of course, instead of closing the gold window and abandoning Bretton Woods, the US could have simply scaled back its spending — but that’s what happens when critical financial decisions are left to profligate politicians and their complicit central bankers.

Since the US abandoned its ties to gold in 1971, America has continued to print money with reckless abandon, greatly expanding the size of the federal government and destroying the dollar’s utility as a store of value in the process — so much so that it now takes $560 today to buy the same basket of goods and services that $100 would fetch in 1971.

The bad news is, savers, retirees and other folks on fixed incomes depend on their currency to hold its value; and if currencies depreciate too quickly, it leads to lower living standards — for everyone.

Lately, the government’s inability to live within its means has been getting worse. Over the past five years, the Fed’s printing presses have conjured almost $3 trillion in new money out of thin air — and that doesn’t bode well for the US dollar’s value and continued confidence in its future.

Unlike paper money, precious metals can’t be created out of thin air, and that makes them proven instruments of wealth protection; it’s why some people choose to keep a portion of their savings in gold and silver. Just how secure are they? Well, last week, the national average price for a gallon of gasoline was approximately $3.38 per gallon. Meanwhile, the current melt value of a genuine silver Washington quarter minted between 1932 and 1964 is hovering around $3.85, which means that a silver quarter that was used to buy a gallon of gas way back in 1964 for 25 cents per gallon can still buy a gallon of gas (and then some) 50 years later — and it will 50 years from now too.

Some people love to point out that precious metals pay no interest, have no earnings, provide no yield, and spin off no cash flow — but that’s also their biggest strength! Precious metals serve no master, so they don’t rely on any counterparty to remain solvent. As such, gold and silver are the ultimate collateral, which makes them the perfect insurance policy against rapid currency devaluation, or a total loss of confidence that ultimately results in the death of a currency.

Critics such as day traders, short term speculators, and other people who don’t understand the true purpose of holding physical gold and silver, may insist that they expect precious metal prices to drop in the coming years — maybe even precipitously; but those folks miss the point. Whether the price rises or falls, the value of gold and silver never changes in real terms relative to tangible products. What’s really changing is the value of the paper currency used to purchase them.

Remember the gasoline example? That humble Washington silver quarter will always buy a gallon of gas, or a couple loaves of bread, regardless of whether the price of silver rises — or even falls precipitously — after you buy it!

Those who believe in personal responsibility don’t buy precious metals to make money — they buy them to protect the money they already have. Even so, I strongly suspect that less than 1 in 100 people, for whatever reason, actually bother.

Now, like any insurance, you may never need to rely on your gold and silver, in which case you would simply pass it on to your children and grandchildren. Then again, if the day ever comes when you do have to use it, you’ll be glad you had the foresight to protect yourself.

So, whether or not you find yourself laying awake at night worrying about the safety of your hard-earned money, including your retirement nest egg, consider accumulating a little wealth insurance — even if it’s just one American Silver Eagle or Canadian Silver Maple Leaf per month. I promise you’ll sleep a whole lot better at night.

Besides, it’s the responsible thing to do.

Len Penzo is a personal finance blogger with a strong disdain for debt. His blog, Len Penzo dot com, has been featured as one of Kiplinger's Personal Finance Best Money Blogs in 2010 and 2012.

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