Wednesday, November 18, 2009

Gold and a Collapsing Economy

My wonderful wife loves me very much. I can tell because she got me a subscription to Dave Ramsey's premium content site where I can download podcasts of his radio show, put it on my Blackberry and listen to it in the car, any time, day or night. It's money geek Nirvana as I drive.

With the warm glow of that fact making me smile as I type, Dave made a great point about gold to a caller the other day. The question was about the value of gold in a collapsing economy. That is, if fiscal doomsday comes and the dollar becomes nothing but worthless paper, wouldn't it be great to own gold? Dave's reply was, "No."

The deal is this. If a nation's economy falls apart, people are going to want to be able to feed themselves. The folks with the staples of life are going to be rich, not the ones with bags of gold nuggets. For example, in New Orleans after Katrina, the people with drinkable water were king. In Zimbabwe, it's the ones who have gasoline.

The currency of choice in a country where the money has devalued down to nothing is whatever people need - food, water, clothing, shelter, medical care, etc. Gold doesn't do anything at all for you. Dave claimed that in no nation since the fall of the Roman Empire has gold replaced a paper currency during financial collapse. I doubt the citizens of Weimar Germany were regularly walking into stores and buying bread with gold dust.

Having said that, gold would allow you to carry your wealth from one financial regime to the next. Real estate might be a close second, but as Zimbabwe has shown us, your home ownership is at the mercy of the local thugs should things really break down. If you have to flee, you can't take the land with you. Gold, on the other hand, is portable in small enough amounts. Once the nation stabilizes and a new government and new currency is in place, the gold can be cashed in and your wealth at least partially restored.

Between regimes, however, that gold isn't going to do too much for you.

However, as Woody Allen has shown us, sometimes real estate is portable.


Jeff Burton said...

Sorry, but this is so wrong. Please take a look at this. The only time gold is useless in the circumstances you describe is during very unusual conditions (like the siege of a city). Gold is not some kind of magic bullet. In other words, there is a time for gold (like 2000 to the present) and a time not for gold (e.g. 1980-mid 90's), but it can be a tool to preserve wealth when governments go nuts. Full disclosure: A small fraction of my portfolio is gold. Fuller disclosure: I never recommend gold to friends and family, because I'm not a gold bug. Make up your own mind.

K T Cat said...

Jeff, I'd suggest that the value of gold drops to near zero during a total national meltdown. If I'm starving, I'm gonna be trading gold for bread at something less than $1147 an ounce.

Kelly the little black dog said...

During disasters, such as a zombie Apocalypse, its guns and canned food!

K T Cat said...

Canned brains might be the best thing to have on hand. You could use them both to distract the zombies and as a delcious breakfast treat!

Jeff Burton said...

Please look at the video I linked to. Zimbabwe suffered "total national meltdown". The Zimbabweans in the video were not bottling water or refining gasoline. They were panning for gold. The idea that gold is not useful in such a circumstance, or that its value drops to near zero is wrong, and might I even be so bold to add, a little bit dangerous.

Of course any hard asset (canned goods, petrol, baseball bats) are better than nothing when confidence in a currency evaporates. But to say gold's value will drop to near zero is just wrong. It contradicts the experience of history. Please name a national crisis in which gold's value dropped to near zero.