It’s hard for most Americans to imagine what a full economic collapse may look like. Unfortunately, many other countries are all-too familiar with periods of currency collapse. We’ve all heard stories of people toting a wheel-barrow full of money to stand in line for hours at a store to buy a loaf of bread.
When it comes to survival planning, most immediately think of food and water, and rightly so. But what happens when supplies run low, as they most assuredly will if order is not quickly restored? Our economic system would likely revert to a bartering system – people exchanging goods and services for other goods and services. The paper dollar, the accepted medium of exchange as we know it today, would be worthless.
The Value of a Dollar
I don’t want to steer this post too far into the political realm, but it’s difficult to fully avoid a mild political discussion when talking economics. I’ll just make one point related to the value of a dollar, and refer to you more in-depth discussions on currency valuations with a lot more information.
So where does the dollar get its value? It’s not backed by a real asset. It has no intrinsic value – it’s just paper. The dollar’s value is largely established by its supply, and that is controlled largely by the Federal Reserve, who manipulates the value of its currency by printing more of it, or sucking some of it out of the system. Think supply and demand for those little pieces of paper.
The more paper bills there are floating around, the less value each one has. Conversely, the fewer bills floating around, the more value each one has. Of course, there are many other factors to consider such as the value of other world currencies, imports and exports, etc.
What I presented in less than a paragraph is really a gross simplification of dollar valuation, but enough explanation to drive home the point that if things really hit the fan, holding those paper bills won’t be worth very much.
The Gold Rush
A few years ago, when many saw the coming collapse of the housing market and resulting drop in stocks (and the dollar), investors began turning their attention to precious metals – mostly gold. Demand for gold skyrocketed, leading to record prices. Those looking to profit from the gold rush snapped up gold in any form they could find – bullion, bars, certificates, even stock in mining companies – whose revenues were bound to increase thanks to this wave of demand.
Personally, I’ve never really viewed gold, or an precious metal, as an “investment.” I don’t watch the value of gold and silver with the idea I’d buy it, hold it, and later sell to make a profit. I think of metals as insurance – insurance against a collapse of the dollar. And I don’t like to own anything other than physical metal because I can see it, feel it and know where it is stored.
Gold or Silver?
Ask any ten investors or economists covering commodities where gold prices are headed, and you’ll probably get ten different variations of the same answer: higher or lower. Historically, when something is at an all-time high, it only has one direction to go. However, in the case of gold, it’s possible that the price could be driven even higher on more worries over the state of our economy.
Since I was a late adopter to the idea of buying gold, I’ve found it difficult to afford in even the smallest forms. Just last Friday, gold closed at $1,217.40. This price point makes buying something like a 1 oz American Eagle gold coin nearly impossible for the average person. If I had several thousand dollars in extra emergency funds, I might diversify some of that money by picking up a few gold coins. However, there are other options to consider.
Many collectors have now turned their attention to silver. At the end of 2005, silver was trading at around $8. Last Friday, it closed at just over $18, making it a more feasible investment for most of us. In terms of bartering potential, silver may be a better choice considering its lower price per ounce.
Imagine carrying a $1,200 gold coin to a butcher to buy meat for your family. Chances are he won’t be able to accept such a large denomination, and you wouldn’t really want $1,200 worth of beef. However, you could easily hand over a couple silver dollars you’d collected over the years for several pounds of meat.
An episode of the show The Colony (one of the only television shows I still watch regularly) emphasized this idea of bartering. If you are unfamiliar with the Discover Channel show, here’s a two-sentence synopsis. Colonists are dropped into a post-apocalyptic scenario with only a few basic staples. They must scavenge the area for shelter, food, water and other survival tools, while fending off looters and surviving the brutal elements.
In a recent episode, a boat belonging to other survivors comes floating down a canal near the colonists’ shelter. The men are looking to trade goods with the colonists. They successfully negotiate the exchange of a number of items they had collected (vodka, sugar, medical supplies, etc.) for a generator, fresh produce, soap and other goods. Imagine if the colonists had a few coins to trade. If the traders were more interested in collecting wealth, the colonists could have picked up those same supplies while keeping their own goods by trading their coins instead.
How to Buy Silver
Since gold’s price is too high for me to buy in increments, I’ve turned my attention to collecting silver pieces. Interestingly, previously circulated American coins contained significant amounts of silver, but you have to know what to look for, because composition of the same coin could have changed from one year to the next.
For instance, the 1964 Kennedy half-dollar is popular with many coin collectors because it contains 90% silver, and 10% copper. At 12.5 grams, the silver composition of one Kennedy half-dollar is worth about $6.55. The site, Coinflation, offers a number of melt value charts and calculators that might be of interest.
Even something as small as a 1942-1945 U.S. nickel is worth over $1.00, because its composition includes less nickel and more silver than in other years. Nickel was more valuable for use in the manufacturing of armor plating to support the war effort.
Coins may be purchased from collectors at coin shops or online. I strongly suggest fully investigating any online vendor, as the increased demand for gold and silver has also increased the number of scammers. A site like eBay might be a decent online site to purchase from, as sellers have been vetted by the community itself.
Personally, I prefer to buy from face-to-face sellers at places like coin stores, jewelers and pawn shops. Keep in mind, you’ll probably pay a little more than the price per ounce because those willing to sell are probably looking to make a profit.
One trick for finding Kennedy half-dollars, without paying a premium to a collector, is to ask your local bank if you can buy a couple rolls of half-dollars, or “halves,” (they are $10.00 per roll). Technically, they don’t have to sell to you, and I probably wouldn’t go on the busiest day. However, if you go on a slow day and find a friendly teller, chances are you can trade in your paper money for a few rolls of halves.
Sort the coins and save any with significant silver composition, such as the 1964 Kennedy half-dollar (90% silver). Other halves minted up to 1970 included 40% silver, so they are worth hanging on to as well. Roll the remaining coins back up to return to the bank for cash, or drop them in a Coinstar machine and opt for an Amazon.com gift card to avoid the fee.
Coins should be stored like any other valuables - in a safe in your home, or a safety deposit box at the bank. I don’t recommend converting all of your dollars to coins, but it does seem prudent to diversify a portion of your portfolio to coins, if not for the investment potential, as insurance for an economic collapse.
Ask the Reader: I’m a relative newbie to the coin collecting game. I’d love to hear from some of you who have been at it a while, or from others with questions. Maybe we can all help each other learn more about diversifying our emergency funds into coins to preserve some wealth in tough times.