Protecting Wealth in This Economy

Author: Tommy Leung | 07.29.2008 | Category: Economics, Life, Money

I write a lot about inflation. It is amongst the greatest evils in the world as it robs us invisibly. Unfortunately, it is not a very popular subject. Our economy has been getting worse and worse with each passing day. Prices have been skyrocketing in everything we buy–some relief may lie ahead with the recent correction in oil. With inflation and economics being such an uninteresting topic to most people, I figured I’d write about something we all care about: money.

The economy is in bad shape. Banks are failing, the national debt is increasing, home prices continue to fall, inflation is rampant, jobs are being lost, and wealth is being destroyed. One can argue that no real wealth was created in the last several years as the boom was due to inflation but, whatever. We have dollars and we generally measure our wealth in dollars.

The likely scenario in this potential economic Armageddon is massive inflation. Some analysts and economists say the dollar will go to zero. I don’t think the dollar will go to zero–that is a nightmare scenario. I think inflation is going to get worse as our government is ready to spend any amount of money to keep our current financial system from falling to pieces. The House recently passed a bill to bailout Fannie Mae and Freddie Mac. It is awaiting the president’s signature. The bill basically says the United States government will insure Fannie and Freddie no matter what happens–these two institutions account for about $5 trillion in mortgages.

The Great Depression was a time of deflation so while unemployment were in double digit highs and pain and suffering was abound, things were cheap. Our situation–not that we are headed for a Great Depression–is that of high and increasing prices. The reason for these high prices is inflation–a devaluation of the dollar. So, if the dollar is losing value you will be wise to not hoard any.

That is the simple way to protect your wealth. Do not keep your money in dollars. It is always wise to have some liquid cash because we still use it but, in this economy you don’t want to keep the bulk of your money in cash. It will also be wise to keep no more than $100,000 in any one bank as there is no telling which bank is going to fail at any time–three banks have already failed so far.

You can keep your money in other currencies or find a way to invest in something that is going to provide a return greater than the rate of inflation. Commodity prices are a reflection of inflation so as inflation increase, so will the price of commodities–agriculture, metals, oil, etc. This makes buying agriculture and energy ETFs a good choice.

I like silver. I have been buying silver for the past year and a half and keeping an eye on the metals market. Silver is still relatively cheap and has always been used as money. In fact, the word silver and the word money is often the same word in many languages. Gold has historically been too expensive for the “common” folk so silver is essentially the people’s money. Silver is also an industrial metal as it is used in all our electronics–computers, cellphones, etc. Like gold, silver is sensitive to inflation.

My personal strategy is to keep as much of my money in metals as possible and continue to see where this market and economy is headed. It is possible that the Federal Reserve will increase interest rates significantly and send us into a depression while protecting the dollar and inflation won’t be a problem. In that case, metals will be worth less dollars which will seem like a loss. In actuality, your purchasing power has not changed. The other scenario–which is much more likely–is that we continue on the policy of inflation and the price of metals will continue to go up. In that case, you have still not actually gained any new wealth, the dollar is just worth less–you will feel better knowing your metals are now worth more dollars.

The metals strategy is one of protecting wealth–a defensive strategy. There will be no creation of wealth by purchasing metals but, if you are going to be saving money, saving in dollars is a sure way to get poorer in an inflationary economy. Saving in metals will leave you no poorer or richer no matter what happens. If you want to start protecting your wealth with metals, search for “coin shops” on Google Maps and start buying a few gold/silver coins from your local coin shop. You can check the going prices of metals at Kitco–there will always be a cost above the spot price–going price–of the metals. Anyone who watches or plays sports will know that defense is how you win games. Defend against inflation and you’ll likely come out on top.

By Tommy Leung