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Thursday, December 9, 2010

Cash and precious metals? Their role after a collapse.

A person recently asked in Glcoktalk about the role of cash and precious metals after a collapse. There’s still people that think there’s no place for any of this. Paper money is just poor tinder and you can’t eat gold. This was my reply trying to explain things better.

This isn’t research but my own experience. Note that its not one isolated case alone since everyone else in this country went through the same regarding this subject. My research on other collapsed nations shows a similar pattern though: The country’s economy collapses along with it currency and a parallel black market economy starts operating with stronger currencies. In all of these cases, gold retained its value in relation to the previously mentioned stronger currencies. The book “Blue Helmets, Black Market” has a good example. During the Bosnian war not that long ago, the local currency became junk and you dealt with Deutsche Marks if you had a good economic position. You wanted out of the sieged city of Sarajevo? 10.000  Deutsche Marks (about a years salary at the time before the war started)  bought you the papers needed and you got your family escorted out of the city in a UN APC vehicle. What happens when these stronger economies are the ones that fail? What you are seeing now. The price of gold and silver goes up. Truth is the dollar is going down against gold.
So, country/location: Argentina Time: December 2001-January 2002. Extent: Sociopolitical collapse with anarchy on the street which lasted a few days across the entire country but situations of lawlessness and looting went on for months. President flees in a chopper, five other presidents take its place and then resign in a week. Economic situation: Halts completely. People didn’t even invest in a can of paint to paint a fence (actually so that). Banks closed and ATMs ran dry. We’d default on our debt, the greatest default ever in history. The currency devaluates to 1 dollar = 1.4 pesos,  a couple days later its 1 dollar 2 pesos, the 3 then 4. The official price tried to keep up with the black market price to avoid “cyclic” schemes where they bought dollars at the cheap “official” price and sold it around the corner at “street” prices. Some people made small fortunes this way.
So, what does all this mean? That from a survival point of view you need one, maybe two months worth of expenses in cash in case ATMs run dry and bank holydays are declared. People will operate in cash mostly, and while some will still use plastic, specially DEBIT cards, don’t count on it. Specially small stores, they will prefer cash and till this day 90% of small stores here operate with cash. (Oh, bribes are made in cash of course, but gold and silver are nice too)
But soon enough that paper money starts loosing value as I explained above, and prices go up accordingly. The purchase value of your cash stash melting like snow in the Sahara desert and it depending on how bad it gets, it may go from buying you a car and a trunk full of supplies to buying you a candybar in a matter of weeks. It’s important to stay aware, not have a ton of cash in the first place, but also use it up if you see this happening.
In my case we had dollars stashed not gold but the principle of how you’ll be using it is the same. You sell whatever amount you need for that weeks expenses at the current exchange rate and you pay for whatever you must with the local, devaluated currency. Sometimes dealers are interested in getting the US dollars directly so you may do that if the exchange rate is fair. Its all about knowing the price of your currency or precious metals that day.
During the worst days, the price would change within the hour, so its important to keep up to date. Even today, almost 10 years later, when you turn on the TV you’re mostly waiting for the important day’s news, maybe weather, traffic, and dollar-peso price.
That’s exactly what you’ll be doing with your gold or silver after an economic collapse. Sell what you need to get by, maybe if you have a specific purchase going on the dealer would give you a discount if you deal directly with the precious metal.
It doesn’t matter if laws are made to try to control this, there’s always going to be a black market, and the more ridiculous the laws get, the worst it gets, the black market becomes stronger.