Perils of holding cash - gold and silver seen as far superior

While it is important to keep some cash, a stash of old bank notes reminds David Levenstein of the cons of storing wealth in paper and why gold or silver would have been better

Posted:  Mar 22, 2011
By David Levenstein


The events of the last few weeks have really been an eye-opener. They remind me of a saying I once heard, "the only certain thing in this life is the constant uncertainty." As I have mentioned countless times, we live in rather turbulent times, and thus it is prudent to take the right precautions to protect your assets correctly.

No one could have predicted the earthquake that hit Japan recently, nor the nuclear crises that followed. But, they are indicative of the unpredictable global catastrophes that seem to be occurring more frequently than in past years. Coping with these natural disasters is one thing, but coping with man-made disasters is another.

Right now we are at the verge of what has the potential to become one of the biggest man-made financial disasters of all time. While we hope that it won't happen the smart thing to do is to take certain precautions. The disaster that I am referring to is the collapse of the global monetary system as we currently know it. If it happens, we will experience such devastation, that its effects will be felt practically all around the world.

All the symptoms indicating such a collapse are frightfully clear. Hopefully, a remedy is found before this happens otherwise, the fortunes of millions of people will be wiped out. The wealth of many people has already been unobtrusively eroded

In the events preceding the recent intervention in the Japanese Yen, the USD/JPY fell as low as 76.25 before it reversed and rebounded almost as much as 8% back to 82 against the USD in less than two days!  It is estimated that the BoJ bought as much as $25 billion of yen. The ECB, BOE, German Bundesbank, Bank of France, Bank of Italy also confirmed their participation in the intervention. The BoJ Governor Shirakawa said that the bank "strongly expects that Japan's concerted action with G-7 member countries in the foreign-exchange market will contribute to the stable formation of foreign-exchange rates".

The thing that is very strange is the strength of the Yen. The country has slow economic growth, debt to GDP is more than 200%, interest rates are low, and now the country has to deal with the aftermath of a massive natural disaster. If it was not for the resilience and fortitude of the Japanese people, such events could have crippled the country. But, in such a scenario, it is unusual that the currency should be so strong. Or perhaps it has something to do with the weak US dollar.

Since 2001 the US dollar has lost more than 40% of its value against most other currencies. Right now, as measured by the US dollar index, it is trading close to the lows last seen in November 2010. If this level is breached, then the US dollar could be headed for a precipitous fall. With the Fed's loose monetary policies, this scenario looks more likely to happen than not.

The way things look to me, not only are central bankers going to struggle to find a way to resuscitate their drowning economies, they are going to have to come up with some very innovative ideas to save their currencies. Currently, it looks as if the US has a lead in the race to the bottom, followed closely by the Euro and then the Yen. And, as these three major currencies spiral downwards, we can expect to see more frequent central bank intervention which is nothing other than market manipulation, higher inflation and higher interest rates which will make it impossible for countries to sustain their levels of debt.

Recently, I found a small stash of R200 notes that I had stored away eight years ago. Luckily for me, it was only R6000. At the current exchange rate, R6000 (South African Rand is equivalent to about USD860). In any event, over the years, I had forgotten about this envelope and while throwing out a lot of old items, I came across the envelope containing the bank notes. But, there was a problem. No one wanted these notes! I couldn't buy a thing with these notes as evidently they had been taken out of circulation. Now, these notes were only eight years old and were not forged notes. And, there was no expiry date printed anywhere on any of the notes.

Finally, I ended up at my local bank who also told me that they would not accept the notes and that I had to go to the Reserve Bank to exchange them. A few days later, I went to the South African Reserve Bank and the notes were exchanged for R100 notes with no problem. The point of me relating this story is to remind you, that at any time, any government can do whatever they like with their currency. If you are one of those people who have stashed cash away under your mattress, you may want to re-think the practice. It would be a terrible shame, if you wanted to use the money you had put aside and found that it was worthless. But, more importantly, while it is always good to have some cash available for unexpected emergencies, there are alternatives to storing cash. And, keeping the money in gold or even silver is a much better proposition.

Eight years ago, when I stashed the cash away, the price of gold was around $350 an ounce, and at that time the price of a Krugerrand was around R2000. A kilo of silver was less than R1000 and an ounce was approximately $5 an ounce. Eight years ago, I could have bought 3 Krugerrands or 6 kilos of silver with the R6000. If I had done this, I would have tripled my money by buying Krugerrands or made 6 times my money if I has bought silver.



Gold prices are moving upwards once again. However, the price needs to break through the key resistance level (R1) of $1445 before we see a sustained move to the upside.                          

About the author

David Levenstein began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

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