Posted by Michael Donelly

 Read this if: you are clueless about money, or just don’t bother thinking about such mundane things. Read it if you thought the financial crisis was over.

The upside: Protect your nest egg from inflation, and possible total destruction.

The downside: Transactions costs for buying gold and storage effort or costs.

It sounds simple doesn’t it? Saving money should be easy. Just put it in the bank, or get a financial advisor perhaps to put it into the stock market  for you.

Well, no actually

That might have been reasonably sound (though not great) advice if we were living in 1984, but unfortunately the world has changed for the worse since then. In 2008 a crisis unfolded that would change our lives significantly the world over. Incompetent or dishonest politicians would have us believe it was just a blip like all the recessions in recent memory and it’s all in the past now and that they have saved the world.

Sadly each boom-bust cycle in the past has brought us closer to the precipice. Every time a recession unfolded, central banks, mostly under the direction of politicians who had never had a real job  and who knew nothing about economics would flood the economy with money.

This had the effect of reversing each recession but at a hidden cost. Each time the economy would grow into a bigger boom-bust cycle than the previous one. The flood of money flowed to all the wrong places causing unintended consequences and bigger and bigger bubbles, first in property in the 1980s, then in technology shares in the late 1990s, another property boom from 2002 until 2007, and finally now a commodities boom with everything from sugar and cotton to oil and silver surging like there is no tomorrow.

Ominously there are those like the very entertaining Marc Faber who say the next recession will be the last before total collapse. In the 2008 recession governments bailed out banks who had gambled and lost on in the mortgage game. When the next crisis hits the governments will have no money left and will be bankrupt themselves. Banks would have to shut their doors and declare bankruptcy. This means any money you would have in the bank would be lost.

But they would never allow that right?

Actually, that’s right. They would not, because there is an alternative. They have a printing press and they will print all the money they need to and use it to save the banks once more and… god be praised, your savings.

What is there to worry about?

The problem is that when governments print money in massive quantities all the extra money in circulation ends up chasing the same number of goods. Prices rise and people find it hard to live on their salary and begin demanding pay rises. A vicious cycle forms. The government then is forced to print more money to pay its rapidly increasing bills and often the upwardly spiralling inflation on its debts. And so it goes on….your savings will still be in the bank but they will not be able to buy anything . My girlfriend’s mother was caught in a Bulgarian hyperinflation in the 90s. She sold her flat before the hyperinflation began and put the money in the bank. When it was over she used the money to buy her daughter a jacket!

What Can you do about it?

Imagine a world where your savings  have just become worthless. If you are lucky enough to have a job you’ll need to run to the supermarket as soon as you get your pay because tomorrow your salary won’t buy what it can now. If you are unlucky you will join the 25% unemployed and will be making regular visits to the government soup kitchen. Seems like a fantasy? I remember back in 2007 when I first mooted the prospect my brother laughed out loud. Post 2008 he still thinks it’s a remote possibility but he’s not laughing anymore.

Whether or not the possibility is remote, not to plan for it would be imprudent, especially when relatively little work needs to be done now and with very little risk.

Here are your main choices:

• do nothing and carry on using your bank
• buy government or corporate bonds
• buy shares (stocks)
• buy commodities like gold or silver and collectibles like stamps or art
• buy property

The arguments for and against each are complex, so for brevity’s sake, I’ll dismiss immediately the bank and bonds. In a financial collapse you don’t want to be holding someone else’s debt. You won’t see any of it back until the hyperinflation destroyed its value.

Shares will do better because they are backed up by real company assets but even so, when times are hard businesses do badly. It’s prudent to hold some shares because a financial collapse may never come about and at least you allow yourself some upside in this scenario.

Property will do very badly in a collapse. Its value is determined by people’s ability to pay their mortgages. Few buyers will exist in a collapse and property prices, whilst rising in value in terms of dollars or pounds will plummet in comparison to food, oil and other things we use day to day. Even if you find a buyer, as the transaction goes through the money will be worth much less by the time the negotiation is complete and you will have to raise the price and start again. For this reason property will be highly undesirable.

Commodities will hold their value best because they will still be in regular demand. People need to eat and drive their cars and that will not change. Primarily the monetary commodities of gold and perhaps silver will hold up best. During the financial collapse in Zimbabwe only US dollars and gold were accepted as forms of payment. Gold is the key.

There is another reason to expect gold to keep its value or even appreciate.  Historically all currencies were backed by gold or silver and it has only been since 1971 when The United States suspended convertibility of dollars into gold that currencies have been backed by nothing at all. After a worldwide hyperinflation episode it will be almost a certainty that the public will demand a return to the gold standard. This means that the government should back each dollar bill with a dollars’ worth of gold and should allow the holder of that dollar to exchange his money for the gold whenever he wishes.

There is so much paper money in the world today that there is not enough gold to back it. Gold would have to rise to at least 25,000$ an ounce to make this possible, representing a huge profit for anyone holding gold today!

Remember we are speaking about physical gold. Not mining shares, nor a fund that holds the gold for you. If a crisis comes you can’t be sure you will ever see your gold back when you need it most. Gold bullion is insurance and it is only worth something if it is there when you need it.

Is that all I can do?

Of course there is more you can do. You could buy a farm to ensure your food supply and some Rottweilers to protect it, but as we are so fond of mentioning on this site, 20% of the effort brings 80% of the desired result. If you save regularly in precious metals you will be better off than 80% of the rest of the world. Best not put it off. The next crisis will come soon enough. Do something about it today.

Read more about the collapse of the US dollar.