If you’re reading this article, you likely already understand the importance of owning gold and silver. But have you ever stopped to consider this critical question: How do you know if you have enough?
We don’t yet know the exact details of the fallout from the historic levels of currency dilution our leaders have pursued, so how can we determine how much gold we’ll need? It would be a cold slap in the face to see the big picture consequences headed our way and actively prepare for them—only to find out our stash came up short.
The traditional answer to this question has been to determine the percentage of assets you want denominated in physical bullion. Most recommendations fall somewhere between 10% and 20%. However, does this formula apply equally to both large and small investors? Young and old? What if your station in life changes—career advancement or retirement… marriage or divorce… new kids or grandkids… inheritance or lawsuit… sudden medical issues or change in lifestyle… relocation to a different state or country?
We all have to make adjustments as we go through life, but I always found the “percentage” approach a little lacking. It wasn’t practical enough, and didn’t assure me that the amount I’d accumulated would cover my needs when the time came.
I wanted a better formula.
What you’ll see below is a very practical way to determine how much gold and silver bullion you need to maintain your standard of living, should it come under attack.
I hear the gamut from investors on what they plan to do with their gold. Some say they’ll never sell it—how dare I even suggest that! I also talk with investors who strictly see it as an investment; if the price rises and they can grab a nice profit, they’ll take it.
I understand both camps. But I think each one overlooks something.
For the first group, what good does it do to endure a crisis and not use the very asset that was designed to protect you from that crisis? For the other camp, if you sell without considering the economic and monetary environment at the time, you misunderstand gold’s role. You might as well speculate in stocks or currencies or pork bellies.
I look at it a little differently. One reason I hold gold is so that I can use it if the reason I bought it in the first place comes into play—for example, if my standard of living were compromised by forces beyond my control.
If one purpose of gold is to serve as a hedge against inflation, stubbornly sitting on it through the entire duration of rising prices—or selling all of it prematurely because you had a gain—wouldn’t do you or your family much good.
The biggest looming threat to our lifestyle is the fallout from the giant monetary experiment currently under way in most of the developed world. Indeed, before this decade is over, our living standard could be impacted in materially painful ways—perhaps more than what we’ve been lulled into thinking, and certainly worse than what most mainstream investors are prepared for.
If price inflation were to match anywhere near historical examples of currency dilution, you will not be able to maintain your current lifestyle.
Are you sure your future income will keep up with rising inflation? Are you confident your savings will be big enough when dollars begin to buy less and less? If not, what’s your plan?
Let’s assume for a moment that gravity still exists, and that at some point in the near future all this debt and money printing and deficit spending will lead to a sustained and highly stressful period of rising price inflation. How will you pay for the increases in…
Eating out and entertainment?
Groceries and gas, again?
Vitamins and medications?
Medical, dental, and eye appointments?
Pet grooming, lawn care, etc.?
Groceries and gas, yet again?
And don’t forget the big expenses—broken heater, new vehicle, vacation… and will your daughter really want to get married at the county rec hall because your savings are no longer sufficient to cover the rising cost of a wedding?
Would I really use gold for common daily expenses? If the price of these items can’t be covered with the currency units I earn or have saved, absolutely.
Think of it this way: If gold (and silver) prices roughly match the rise in cost of living, you could trade in metal as needed and experience no inflation in your household… your standard of living would be preserved.
Gasoline prices double? Sell a few ounces of silver, and it costs the same to fill the tank. Grocery bill gets overwhelming? Sell an Eagle, and the difference is covered for a few months. Need a vacation, but travel expenses are soaring? Turn in a couple Buffalo coins, and pack the suitcase.
Here’s a comforting thought: Even during one of history’s worst periods of inflation—Weimar Germany—the gold price rose faster than the rate of hyperinflation. Now that’s purchasing power.
But precious metals prices have been falling over the past two-plus years, Jeff! This strategy wouldn’t have worked.
You’re right. But we’ve been in a period of relatively stable price inflation (government meddling with the numbers notwithstanding) compared to a time of continuouslyrising prices. Unless you had a personal emergency, selling gold to cover a rising cost of living hasn’t reached critical levels yet.
Understand, I’m not advocating we dump all our bullion during high inflation—that’s not gold’s sole role. What I am suggesting is that in the event things get nasty or even just uncomfortable, you offset that distress by using gold and silver to maintain your standard of living.
So how much bullion do you need to make it through the near-certain inflation storm and come out unscathed?
To calculate a realistic amount, I looked at two components.
1. Monthly expenses. Other than a fixed-rate mortgage, virtually nothing will escape rising inflation. How many ounces of gold and/or silver would you need in that environment? Look at your bank statement honestly and assess how much you spend each month. It’s probably more than you think.
2. The duration of inflation. How long will we need gold and silver to cover those expenses? The length of a high inflationary period will also dictate how much we need to accumulate. This is also probably longer than you think; Weimar Germany had high inflation for two years—and then hyperinflation hit and lasted another two. A painful four years of high inflation. Consider what it would take to maintain your standard of living for a couple years instead of just a couple months.
Assuming precious metals prices appreciate at least as much as the rate of inflation, here’s how much gold you’ll need, depending on your monthly expenses and how long high inflation lasts.
|Ounces of Gold Needed to Meet Expenses During High Inflation|
|Monthly Expenses (US$)||
|6 months||1 year||18 months||2 years||3 years||4 years||5 years|
|*Based on $1,300 gold price|
If your expenses are $1,000/month and high inflation lasts two years, you need 18.5 ounces of gold. If your expenses are $5,000/month, you need 92.3 ounces for the same time span.
If you use silver, here’s how many ounces you’ll need.
|Ounces of Silver Needed to Meet Expenses During High Inflation|
|Monthly Expenses (US$)||
|6 months||1 year||18 months||2 years||3 years||4 years||5 years|
|*Based on $21 silver price|
To cover $1,000/month in living expenses for two years would require 1,143 ounces of silver. Expenses of $5,000/month need 5,714 ounces.
These amounts sound high, and they are, because the reality is that most of us will probably use bullion to cover not our entire expenses but the rise in those expenses.
If you were to pay bills with your ongoing income and use the bullion for just the increase in those bills, then a double in the cost of living would mean you need half the amounts above. In this scenario, gold and silver would essentially serve as your supplemental insurance policy.
But don’t kid yourself; most of us probably don’t have enough, especially when you consider that this isn’t the only use for physical gold and silver—will you leave any to your descendants, for example?
What I’ve outlined here is exactly how gold and silver can be used: to protect your purchasing power. It’s like having your own personal financial bomb shelter; the dollar will be blowing up all around you, but your standard of living is protected.
My advice is to use these tables as a guide to assure that you own enough monetary insurance to offset the highly likely and nasty aftereffects of massive currency dilution. Gold has provided this exact timeless store of value since the Romans first debased the denarius.
Understand the big picture message: If you don’t save now in gold and silver, you’re going to spend a whole lot more later.
Jeff Clark is editor of BIG GOLD, and a regular contributor to the Hard Assets Alliance.
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