Tonight at dinner with some coworkers, the conversation predictably turned to Paul's-latest-and-greatest-doomsday-theories-for-this-week. Of course, I suggested that the best theories available at the moment are the ones being promulgated on CNBC.
The discussion sub-topic sparking the most interest was my habit of carrying a small amount of gold and silver coins during certain business trips. This seemed to pique the curiosity of some of my co-workers and raised a lot of questions, so I'd like to spend a few minutes this evening discussing my thoughts on this.
Why carry gold and silver coins? Why not just regular cash?
There's nothing wrong with carrying cash for emergencies. I think that's prudent. I read a interview of Porter Stansberry a while back, and he tells the story of how a business associate needed to get home from Argentina immediately to tend to a sick child in the hospital. The only problem was that he didn't have the $80,000 cash that the pilots of the Gulfstream jet were demanding to pick him up and fly him back to the U.S.
One of his traveling companions, however, did.
Cash can solve a lot of problems. My parents travel outside of the United States on a regular basis, oftentimes to underdeveloped parts of the world. One of the lessons they learned from one of their traveling companions years ago is "cash can solve a lot of problems." And it can.
But there are two main advantages precious metals have over cash in emergency situations:
By value dense, I mean you're carrying a lot of value in a small amount of space. A half ounce coin weighs, well, just a half ounce. Yet it's worth several hundred dollars - or perhaps even thousands of dollars in a crisis.
So what kind of crisis would we have to be in before people would accept gold and silver before US dollars?
First, let me state for the record that I believe that the likelihood of a crisis where the US dollar becomes worthless to the point other Americans won't accept them is slim. However, as there are discussions (albeit small ones) to move people away from physical currency, it's not inconceivable that there could be a situation where people elect to stop transacting business in currency and would prefer to do so in precious metals.
And again, I think the likelihood of people preferring precious metals to dollars is slim. There's a more likely scenario that warrants our attention, however.
A disruption in the credit markets and/or a series of bank holidays that make it difficult to conduct business and travel. Lest you think this is only the sort of thing you'd see in a dystopic movie, consider this speech from Vice President Joe Biden in 2009 when he was talked the prospect of bank holidays in the United States.
Last year, I had dinner with a friend of mine. We were both on the road, out away from our respective hometowns. My friend is a honest to goodness rocket scientist with a MBA - a really, really smart guy. He's beginning to have many of the concerns I have been having with our financial system for sometime now. We talked about why I carry coins when I travel far away from home. Consider this exchange:
Friend: So why do you carry coinage or extra cash when you're away from home?
Me: Let's suppose something really bad happens in the credit markets overnight, to the point the credit card systems and the online credit systems that large businesses use shut down. No one is getting credit. And maybe even the online banking system is shut down, too. Banks are closed, and ATMs are offline. How are you getting home to your family?
Friend: I have a return ticket on my airline for my flight home?
Me: So let's suppose your connecting flight arrives at the airport and pulls into the gate. The plane will likely need fuel to top off for your flight home. Your airplane captain doesn't hand the fuel company a wad of cash for the fuel the airline buys for that flight. That's all done on credit. And if the credit systems freeze up for whatever reason - financial IT system crash, cyber attack, massive disruptions in the credit market fundamentals, whatever - how is the airline going to buy the fuel it needs to fly you home?
Let me suggest one way you could get home - if you had cash or coinage on you, you could go buy an old beater car and exchange some silver coins for gas, food and water along the way. Or maybe you trade the gold coin outright for a seat on a private jet that's flying to your part of the country.
I don't know if my friend made any changes to his travel protocols after that discussion, but I think he understood my reason for carrying more than a few dollars on me when I am traveling long distances.
Explain how you might use a gold or silver coin in a transaction. Walmart isn't going to know what to do with it.
There are a couple of ways to use gold and silver coins in these situations:
Let's talk a bit about the first option. In the event that commerce has stopped - airlines, bus lines, passenger trains aren't working, grocery stores can't swipe your credit or debit cards, ATMs don't work and banks are closed - places that regularly trade gold or silver coins for cash would be the places you'd want to locate. Places like:
I would find some of these places, and if they aren't actively buying gold or silver coins in exchange for dollars, I'd be asking them who in town might do so.
So let's say you have a half ounce gold coin you want to trade in for cash. This evening, gold is trading around $1,145 per ounce, so you'd be holding approximately $572 in your hand. Expect to pay a commission for the trade, which will reduce your actual cash back (maybe as much as 10%, or perhaps even more in a crisis). At a 10% commission, you'd walk out with around $515. You could use those dollars to buy food, water, a small used motorcycle, some gasoline, whatever.
Of course, if things are that bad, there's a decent likelihood that half ounce gold coin will be worth far more than $572 an ounce. Gold went from around $200 an ounce in January 1979 to over $650 an ounce over the course of the next twelve months, in large part due to the Iranian hostage crisis. As irrational as that increase in price might have been, the reality is that the price did spike dramatically. And if it spiked dramatically over a crisis thousands of miles from us, what might happen to the price of gold for a crisis at home? Gold went from around $270 to around $293 on September 11, an 8.5% increase in one day, remaining at those levels for nearly a month.
So why carry both gold and silver coins? As my friend Jerid likes to say, "The gold is to buy your way home, and the silver is to feed and hydrate you along the way." You'd be using the greater value coins to pay for that beater car and some gas, and you'd be using the silver coins for food and water. Most likely, you'd be converting these coins into cash at a coin or pawn shop and buying the things you need with cash. Alternatively, you'd be using the coins for option number two above.
In that situation, you are actually trading the gold coin for the car, and the silver coins for food and water. As you can probably surmise, this tends to lead to some inefficiencies in the transaction. For example, if you have a one ounce gold coin worth $3,000, are you really going to hand it to a guy to buy his $1,500 car with it? Depending on the situation and how badly you want to get home, you may very well do that.
Again, we're not talking about doing this at a time when the economy is functioning normally. We'd be doing these things during a crisis.
If I go to a coin or pawn shop to trade in my coin for cash in an emergency, how do I know I'm getting the right exchange rate? How do I keep from getting taken?
First of all, it's always a good idea to have some sense of what the markets are doing. I don't think you need to check them every day, but you want to have some idea of what gold and silver prices are - often called the spot price for the metal.
Secondly, these places will be getting quotes regularly from various markets. There will likely be some fluctuations in the price throughout the day. If you think you're getting low balled, it's your right to go to another vendor and see if they will offer you more money.
Is carrying high value coins safe? Won't I get robbed?
It depends on how you look at it. Is texting while driving safe? Is driving above the speed limit safe? How about going jogging or walking at night with earbuds or headphones on?
There are risks everywhere. That's not paranoia; that's simply stating the obvious. Tonight, I went for a walk wearing headphones listening to loud music. In the dark. On a busy street. Is that risky? Some would say, "absolutely!" while others would simply shrug their shoulders.
Many of you - especially ladies - wear expensive jewelry when you're away from home. Or expensive watches. You leave your purses and briefcases in your offices unattended.
There's a degree of risk to everything we do. You have to decide how best to manage that risk.
And rest assured- security at the places where you'd be changing the coin for cash will be very tight. It's bad for business if people are getting jacked while they are there to buy or sell coins. I have little fear of harm coming to me in a coin or pawn shop in that situation.
What kind of coins should I buy for this purpose?
I only purchase two kinds of coins. I like American Eagle gold coins in one ounce denominations, and Mercury silver dimes. Keep this easy. Coin dealers and pawn shops will easily recognize these coins and their value.
Do you carry coinage with you everywhere you go?
Oh no. I even go out of town, overnight, without it. It really depends on how far away I will be and where I am going. If I am going to a place where I know I will have resources to get home in an emergency, I will likely not take any coinage with me.
Isn't all of this overkill?
It's like I always say - I'm crazy until I'm not. Preppers are regularly portrayed as taking extra, if not unusual, steps to mitigate dangers. I sleep better when I'm out on the road, a long distance from home, knowing that if things were to get bad suddenly, I have the means to get home. I know how to fly a small plane, ride a motorcycle, and drive a decent sized truck if need be. Combined with cash or coinage, I have options to ensure my odds of getting home to my family in an emergency are good.
If you're on the road, hundreds of miles from home, and the credit and banking systems seize up for a few days, how are you getting home? How are you feeding yourself in the meantime?
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