Now that you have used the myinflationrate.com calculator and know your personal inflation rate, you may be wondering what you can do about it? As long as your personal inflation rate is above zero, the value of the money you hold today loses its purchasing power each day into the future. With current interest rates being less than the personal inflation rate of most people, just keeping your money in a savings account at the bank or in certificates of deposits is a losing proposition over time. Of course you need liquidity and easy access to money for those unexpected expenses and cost of living. However, there are other options for saving money that do involve risk that will help you keep up with inflation and may even help you surpass it.
The answer could be found in precious metals. Gold and silver over time have proven their resilience to inflation. There have been extended periods of time where gold and silver have lost value though as well, so it’s not a fool proof proposition. Everyone likes to point out the peak price of gold that was seen for a brief moment in January 1980 of $850 per ounce and use that as a starting point for showing how gold lost money over the next two or three decades. However, the price of gold in December 1979 was below $500 an ounce and by February 1980 the price was already back below $650. So take those stats with a starting price of gold in 1980 at $850 with a grain of salt. We could just as easily use a starting point of August 1971 with gold at $35 an ounce to show spectacular gains over time.
There are many ways to invest in gold and silver. American Eagle bullion coins are one very popular method. Many people like the personal security and feeling of value in their possession by the physical ownership of gold or silver American Eagle coins. Taking ownership of physical coins has its risk though. You must securely store these and keep them safe from theft, fire, or other threats. Insurance is an option, however precious metals are not inexpensive to insure and many people find that the costs outweigh the risks and find other means to protect their investment. Safety deposit boxes are certainly an option as well and do provide a great deal of security (at a cost).
Another option of gold and silver ownership is through the securities market. There are ETF options available which give you rights of ownership to gold or silver. These are just “rights” though and you do not physically hold possession of the precious metals. These are paper assets and only as good as the word of the issuing company of the ETF. The advantages include ease of ownership, high liquidity and not having the direct costs or risks associated with storage (although there are some fees built into the price of the ETF to reflect these costs).
A third option to consider is the ownership of pre-1965 United States circulation quarters, dimes and half dollars. Prior to 1965 quarters, dimes and half dollars minted and circulated by the US Mint consisted of 90% silver. Kennedy half dollars continued to be produced at 40% silver content through 1969. These coins still exist today and are hoarded by many enterprising individuals. You could potentially even find these in your spare change, although most pre-1965 quarters, dimes and half dollars were pulled from circulation long ago by the hoarders.
Consider a favorite story mine showing the power of precious metals as a protector from inflation. In 1964, a quarter could buy you a gallon of gas. In 2011, gasoline is now over $3.50 a gallon in most locations, however that same 1964 90% silver quarter has a silver content value of $6.20 today (with silver trading at $34.27 an ounce). You could sell that 1964 quarter and buy one and three quarters gallons of gasoline today. Is gasoline actually cheaper today than it was in 1964, or is it just that our US dollars have depreciated against the value of precious metals?!
An advantage of holding pre-1965 silver coins are the ease of storage and non-attention calling these coins bring. If a thief were to break in your home and found a stash of spare change that wasn’t bagged or marked in a special way, it’s very unlikely they would even bother looking twice at them. They’re more interested in your flat panel television or other items in your home that are likely covered by your insurance policy. Additionally, in a state of emergency or extreme difficult times, the coins are still considered legal US tender and could be used for purchases, however they are much more valuable for their silver content as demonstrated with our gasoline example.
There is a large and liquid market for pre-1965 silver coins as well. A quick check on ebay and you’ll find these coins sell quite well and you can easily list and sell the coins for their silver value or even greater if the coins are in what collector’s consider above average condition. If you go to your local coin shop you’ll likely get at least somewhat close to the value of the silver content, but the loss could be worth it to some for the convenience of the sale.
There are other precious metals and base metals that can protect your buying power as well. Platinum, palladium, copper, nickel, etc. all have inflation protection characteristics. I’ll write a future blog post about the pre-1982 copper penny at a later date. Until then consider your personal inflation rate and what you need to do to protect the buying power of your money over time!