Dear Preppers and Survivalists,
Some Thoughts Before I Begin
First, have y'all been following the news articles about gold. In one, they say gold prices are going to decrease while others are saying gold prices will increase
In fact, no one knows what the price of silver or gold will be tomorrow, next week, next month, next year, and ... definitely not ten years from now.
With that said, ...
In 1792, The Coinage Act set the value of one dollar ($1) as 24.1 grams of pure silver or standard silver which is 1485 parts pure silver to 179 parts copper alloy. In other words, about 90% silver and 10% copper.
Around the same time, Alexander Hamilton (boo, hiss) suggested these United States adopt a silver to gold ratio of 15:1.
In 1900, the Gold Standard Act set the value of a dollar at 1.505 grams of gold. In other words, $20.67 for an ounce of gold, a ratio of 20 to 1.
In 1933, Franklin D. Roosevelt changed that ratio to 35/1, after enacting Executive Order 6102 (more about that later)
Between that time and 1971, when Nixon took these United States off the gold standard, the ratio changed, ending at a little over 42 to 1, in 1971.
Currently, the ratio ($16.24 for an ounce of silver and $1223 for an ounce of gold) is at 75:1
Lastly, according to some, ... If we took all these United States' currency and divided it by all the gold in the world, we would get a ratio of $55,000 to one ounce of gold.
Ya, ya, ya. I know, I used Wikipedia as my source. Ya, ya, ya. I know, I rounded up and sometimes rounded down. Ya, ya, ya. You're wondering, what does this have to do with the price of tea in China?
I'll tell you.
Using the Ratio
Depending on who you ask, some folks will say 'Traditionally, the ratio for silver to gold is 20 to 1' while others say it's a little less or a little more. Either way, you can use it, may be, as a way to increase your silver and gold stacks. When silver to gold has a high ratio, you sell your gold and buy silver. When silver to gold has a low ratio, you sell your silver and buy gold.
Let's look at an example. To Start:
As of this writing, silver is at $16.24 for an ounce of silver while gold is at $1223 for an ounce of gold, a ratio of 75:1. Plus, for this example, you have one ounce of gold and 100 ounces of silver for a total investment of $2, 847.
Say, in the next few years, gold goes to $2,000 an ounce and silver is at $20 an ounce; the ratio is 100 to 1. Now, you have a total of $4,000 invested, so far.
So, using the ratio, you trade your one ounce gold coin for 100 ounces of silver. You still have $4,000 invested, but 200 ounces of silver and no gold.
A few years later, when gold goes down to $1,000 an ounce silver decreases to $15 an ounce; the ratio is 67 to 1.
Again, using the ratio, you trade 67 ounces of silver for one ounce of gold. Now you have one ounce of gold and 133 ounces of silver.
Ya, ya, ya. I know, the prices of silver and gold have never been like my examples, but ... It's an example to illustrate the concept. Ya, ya, ya, I also know you have 'lost' money because your total investment is $2,995, but .. That's not the point. You now have one ounce of gold and 133 ounces of silver ... without spending anymore money! Lastly, I also now, you have to watch your expenses (shipping, handling, and dealers never trade straight across) because they cut into your profit.
Using the Ratio, Again
You can also use the ratio to determine what to purchase, silver or gold?
If the silver to gold ratio is high, you buy silver. 'Cause your money purchases more silver.
If the silver to gold ratio is low, you buy gold. 'Cause ... (That's right) your money purchases more gold.
Let's look at an example. To Start:
You have $1,000 to invest, way back in June 1995
With gold at $388.50 an ounce and silver at $5.35 an ounce; the ratio is 72:1. You would purchase silver.
Jump forward a decade to June 2005 and another $1,000 to invest.
Gold is at $430 an ounce and silver at 7.25 an ounce; the ratio is 59 to 1. You would purchase gold.
Jump another decade, to June 2015, and the gold is at $1181 an ounce, and silver is at $15.90. The ratio is 74/1; you would purchase ... Silver, of course.
First, thanks to Kitco for providing the Spot Silver and Spot Gold prices for this article and also the historical data for Gold and Silver.
Ya, ya, ya. I know the historical prices I quoted aren't completely accurate. I had to questimate because I was looking at a graph, not a spreadsheet for the data. Ya, ya, ya. I also know, I was lucky finding two decades where the silver to gold ratio did change enough to justify using the ratio. Lastly, a word of warning, it may take decades to use the ratio to increase your holdings, without spending more money.
Using the Ratio, a Third Time
The last method, that I will mention, that you can use the ratio is to determine 'How Much?' to purchase.
The first way, 'How much of each?'
Now, before I begin, this is all about diversification. You never put all of your investments in one category, so you need to have a mix in your investments. Got it.
With that said, using the traditional ratio of 20 to 1, you would purchase 20 ounces of silver for every ounce of gold you own, or vis-a-versa (one ounce of gold for every 20 ounces of silver you own)
You have 200 ounces of silver; using the traditional ratio, you would purchase 10 ounces of gold.
Using current prices, you would need to spend $15,478 ($3,248 for the silver and $12,230 for the gold)
"That's a lot of money, ...honey!" you partner would probably say, especially using such a low silver to gold ratio.
So, ... For now, you might want to use a higher ratio for your initial purchases, such as 75 to 1.
That would work out to be only 2.75 ounces of gold, for $3,364
Ya, ya, ya. I made a mistake that I didn't correct. Glad you noticed ; - )
If you missed it, you already own the silver, so your purchase would only be $12,230, not $15,478.
Ya, ya, ya. I also know, it really works out to 2.67 ounces of gold but I rounded up to the next higher quarter ounce. 'Cause the markup on 1/10 ounce gold coins can be expensive compared to the markup on 1/4 ounce gold coins.
Using the Ratio, a Third Time, ... Continued
Now, there is a second way of using the silver to gold ratio for your investments and ... by preppers.
You can use the silver to gold ratio to determine 'How much do you need as a hedge against financial collapse?'
Let me explain. Way back at the beginning, I mentioned that someone had calculated that there where about $55,000 for every ounce of gold in the world. This means, if we go back to the original way of thinking, when these United States were founded, a dollar (one ounce of silver) is really worth $2,750 and an ounce of gold is really worth $55,000 (20 dollars equals an ounce of gold)
Think about it, and ... Take a deep breath
'Cause right about now, you're probably predicting that I'm going to tell you to sell your 401K, sell your investment, and buy, Buy, BUY GOLD and silver.
I'm not. Let me explain.
Banks use hedges to limit their losses. It's like insurance.
The bank lends a company a billion dollars. If the bank didn't get paid back, they would go out of business. Something the bank doesn't want to do, so they buy insurance.
To do this, the bank would go to a company, like AIG (Remember, the bailout) and buy a billion dollar insurance policy for $1,000,000. If the company survives and pays the money back with interest, the bank is only out a million dollars. But, if the company fails or goes out of business, the bank will get their billion dollars returned, thanks to the insurance. A win-win because the bank always receives the $1,000,000,000!
Ya, ya, ya. I know, it's a little more complicated, but ... It's an example.
Doing the Same Thing
If you didn't know this, every time you deposit money in a financial account, you are for all intents and purposes loaning the financial institution the money.
Outrageous but it's true. You see, the financial institution either loans the money to other people, businesses, or invests it. The same goes for your 401K. The investment company takes your money and purchases stock, bonds, T-bills, and other stuff.
So, ... Like a bank that loans money, you need a hedge against the financial institutions, that you use, going out of business. You can do this by purchasing certain things. The easiest is silver and gold.
How to do This
By now, you probably know what I'm going to say, Use the Ratio!
Let me give you an example.
If you have $500,000 in your 401K, you would purchase about 9 ounces of gold.
If the world's economy collapsed, all these United States money would become worth $55,000 for an ounce of gold. In other words, your 401K would become worth 9 ounces of gold.
So, ... As a hedge, an inexpensive form of insurance, you would spend $11,007 to purchase an insurance policy against the possibility your 401k would become worthless.
But, But, But
You're probably asking yourself, 'Can't I buy an insurance policy from someone like AIG?'
You can (I think), but what keeps AIG from going out of business, like they did in 2008?
That's right. Nothing.
You're probably also asking 'Can't I purchase another asset class to reduce my risk, like I do, when I diversify in my 401K?'
You can. They're called Precious Metal or Gold Mutual Funds or Exchange Traded Funds, such as VGPMX, FKRCX, FSAGX, and many, many others. Your employer may even allow you to invest in these funds. Mine doesn't.
But, ... Just like you're 401K, you are giving people money, to invest in the metals. You're not actually receiving the gold and silver coins.
Much, Much, More
I have written about silver and gold over the years, as I have learned from people such as Len Penzo, Trent Hamm, Michael J. Panzner, and many more
The last two don't blog anymore. They both sold out; hopefully, for a whole lot of money. Ha, ha, ha.
I may spend a few hours looking for other stuff that I have written about financial matters and provide some links.
So, ... If you see this message, I'm still working on it but here's some othe thoughts for you and your family.
GSIEP - Friday's Thoughts and Other Stuff
GSIEP - Friday's Thoughts and Other Stuff
Almost, Almost Lastly,
Silver and Gold will not protect you family from the wind and cold, only adequate shelter will do that.
Silver and Gold will not quench your thirst, only stored water will do that
Silver and Gold will not save your family from starvation, only stored food and a productive garden will do that
Silver and Gold will not protect you from rapists, murders, and thieves, only a firearm with enough ammunition will do that. (and proper training)
Lastly, why should I trade you shelter, water, food, and protection for your silver and gold when all I have to do is wait for you to die then take the silver and gold?
I am the author of Prepper: Surviving the Tough Times Ahead an e-book about preparing for the financial collapse of the world's financial markets and many other events.