Mar 19, 2014

It's (still) the economy, stupid

I've been gently harping here about precious metals and hedging. Both Bayou Renaissance Man and The Silicon Graybeard are more eloquent in their writing on the same topics... but I'll keep doing it anyway.

TSG just posted a good one on what has happened to the dollar thanks to inflation and the lack of a standard.

When I opened a savings account with a new bank out here they offered some promotion that would double my interest rate... to 0.08% APY. That's not a typo. The (promotional!) savings interest rate is under a tenth of a percent annually. I actually had to ask the bank rep to write it down for me, to make sure I wasn't misunderstanding.

I found an online bank (Barclays US) that offers 0.9% APY on savings. More than ten times better but still not even close to keeping up with inflation.

You can buy US Government Treasury Inflation-Protected Securities, which are adjusted against the Consumer Price Index... but since the CPI has half a dozen different methodologies, including ones that exclude the price fluctuations in food and fuel ... well. Good luck. The CPI over the past ten years has shown a 2-4% annual increase. Money sitting in the bank is effectively losing 3% of its purchasing power each year.

In the past people used to say overpaying one's taxes in order to get a refund in the spring was giving the government an interest-free loan, and robbing oneself of the interest-earning power of that income. I suppose that's still true, but there sure isn't much interest to be had.

Especially in light of the "bail-ins" that occurred in Europe last year, I'd be hesitant about just how many eggs I'd put in any basket. One of the silver forums I read uses the catchphrase, "If you don't hold it, you don't own it." Words of wisdom, but the logistics and safety of storage become an issue.

An ounce (troy) of silver is a hair under 3cc actual volume, or in coin form about 41mm diameter and 3mm thick. At current spot price, it's worth about $21. (The preceding, by the by, is why paper currency became prevalent. Carrying a thousand dollars in paper is simple; 50oz of silver is doable but awkward.) An ounce of gold is about half the size - 33mm diameter and 3mm thick - and worth 65x as much ($1330 as I type this). So - easy to carry, but also harder to work with for small exchanges. Even a 1/10oz gold Eagle is trading around $150 right now, so if you're going to "make change" from that it's going to be a handful of silver ounces. Paper bills make sense - given the condition that they are not fiat currency.

But going back to storage... it's easy to stack a few thousand (or a few tens of thousands) of dollars in a shoebox at home. It's easy to put a few dozen ounces of silver or gold away in the same way... but experienced burglars know where things are likely to be stored, and will check those places first. Stuffing it into a corner of the gun safe works to a point - if your safe is really safe. Even so - see above re: eggs/baskets. So where to keep it?

A safe deposit box? If the banks are "bailing-in", expect to have difficulty accessing that box for a bit.
Friends and family? I know a lot of people I'd happily loan twenty bucks, but asking them to hold a thousand or two? Iffy.
Hidden in the walls? Possible, but make sure you don't forget it when you sell the house... not to mention the loss if there's a fire.
Buried in the back yard? I hope you've got a REAL good map.

I can't tell you how to store your valuables - it's for you to decide what level of risk vs. accessibility you're willing to accept. I will, however, make the following suggestion:

Have CASH on hand. Enough to pay your rent or mortgage for at least a couple months. Not just big bills, either. If the bank is closed for the next two months, be able to pay your rent and utilities and eat and put gas in the car without swiping a card. If you need to use that cash (for groceries, or gas, or new tires, or whatever), don't hesitate to do so - but replace it immediately. With a "penalty" if possible. I dig into my stash once in a while if I need to get dinner at work but don't have time for an ATM stop. Then I stop at the ATM on the way home and replace what I took, plus a $20 penalty.

After that...

Put some cash into tangibles. I don't care what you buy - silver, gold, brass and lead, walnut and steel - but have something that has a value beyond what the government thinks it's worth.

And it should go without saying, buying tangibles is dependent on being OUT of "bad" debt. No credit cards hanging over your head. If you have a car payment, pay it down and be done as soon as you can.

DON'T put off building up an emergency cash stash, though. Seriously. It's a comfort that's hard to describe.

1 comment:

Peter said...

I couldn't agree more. I'm working towards a five-figure 'cash stash'. Not there yet - not by a long way - but I'll get there over the next year or two, for sure.

A tip: if you have a safe in plain sight, bolted to the floor and reasonably secure, it's amazing how many thieves and burglars assume that's where all the cash and valuables are to be found. They'll spend all their time trying to rip it out of the floor and/or walls, even dragging it out to a vehicle to take it away . . . while your real valuables, in a hidden safe or secure places, are untouched. Useful to know that.