Prudence: Managing Currency Risk with Silver & Gold

Ye shall not afflict any widow, or fatherless child. If thou afflict them in any wise, and they cry at all unto me, I will surely hear their cry; And my wrath shall wax hot, and I will kill you with the sword; and your wives shall be widows, and your children fatherless. — Exodus 22:22-24

The US dollar’s currency risk has so changed investment conditions that conventional investment wisdom no longer works. In fact, it has become a death trap. Fiduciaries—those charged with managing and protecting others’ assets—must recognize and manage currency risk, or lose the assets committed to them by dollar depreciation.


Not long ago a lady came to me with a problem. Age has incapacitated her husband, who is in a nursing home. It takes most of his and her pension to pay his monthly upkeep, forcing her to live very frugally. When she saw the stock market dropping mid-2008, she very timely ordered the stocks in her husband’s small IRA sold. But shortly before her husband became disabled, they had been talked into buying a very expensive annuity. It must have bordered on fraud, because she brought suit against the company and has all but won.

Her question to me was, What should I do with the funds from the annuity?

People like this make me tremble, because of the warning you can read above. Yet angry frustration over this lady’s situation, and that of millions like her, makes me want to scream, “Get out of dollars! Get out now! Convert everything to silver and gold!” 

Why? Currency risk has rendered exactly those investments most highly recommended for widows and orphans a death trap. Saddest is, whoever ignores currency risk will lose everything as the dollar dies.

What is recommended for widows and orphans? US Treasury securities or high grade corporate bonds, or annuities, or blue chip stocks. But these all rest on one assumption, namely, that dollars tomorrow will buy as much as dollars today.

And that is false. It hasn’t been true since 1913.

Any investment that promises to pay back dollars tomorrow for dollars today is a guaranteed loser. Since we have moved out of the days of 2-4% yearly money creation a year to 20% a year, that truth bites even deeper.

What these recommendations fail to take into account is currency risk, i.e., the risk that inflation will rob the currency of its purchasing power. 

If you loan a friend $100 on January 1, and he pays you back $100 on December 31 but the dollar has meanwhile lost 10% of its purchasing power, your December-31-$100 will only buy what January-1-$90 bought. The loan cost you ten dollars.


When Nixon closed the gold window on 15 August 1971, the world entered a new era: for the first time in history, all the world’s monies were unbacked fiat currencies, adrift on a sea of floating exchange rates.

At the top of international commerce, managers had always known the dangers of currency risk, but now every currency became a soft currency. Little by little recognition of currency risk seeped down the knowledge chain, but on the street of personal financial management, even 40 years later not many have caught on.

Maybe that’s because all today’s hotshot personal financial managers were eleven years old when the last inflation cycle peaked in 1980. At 21 in 1990 they went to work recommending stocks (“Buy and hold!”), which advice couldn’t miss in the then-raging bull market. From 2000 until now, they’ve been waiting for stocks to recover.

These folks now have twenty years experience—that is, one year’s experience twenty times. Outside the conventional wisdom they know nothing, but under today’s conditions—a quickly dwindling dollar and stock bear market—the conventional wisdom has become a death trap. Ignorant or afraid to trust their own judgment, unable to come to the truth, these lemmings are streaming over the cliff, taking widows and orphans along with them.

It is long past time for fiduciaries for widows and orphans, for churches, for charitable institutions, and of course for businesses, to grapple with currency risk and to manage their assets for maximum protection. Those who refuse to face currency risk will be guilty of betraying their trust.


If the map is wrong, you’ll never reach your destination. That’s why we always have to keep checking our map—our fundamental presuppositions. In this case, what if we are all wrong about inflation? What if deflation occurs instead? What will that do to our gold and silver investments? Or to dollars?

Be careful to understand the terms. Inflation is an increase in the money supply that generally causes prices to rise. Prices may also rise because crops fail or demand increases. Point is, rising prices do not cause inflation, any more than flat tires cause tacks in the street. Nor is inflation rising prices. Inflation (the increase in the money supply) is the cause, rising prices the effect. Tacks cause flat tires, flat tires don’t cause tacks.

Likewise, deflation is not falling prices, but a decrease in the money supply. Generally it causes prices to fall, as in the Great Depression, but many other forces can cause falling prices. A bursting real estate bubble, for example. A financial panic. Technological advances or bumper crops or too many new factories. But falling prices is not deflation.

This is the one question that you must answer correctly to survive this economic crisis: Will the outcome be inflation or deflation?

The answer to that question determines your strategy, because it determines currency risk. Under deflation the dollar’s value would increase; under inflation, the dollar’s value would decrease -- utterly opposite outcomes.


Currently a debate rages whether this present depression will be inflationary or deflationary. The main problem with the folks who take the deflationary side of that argument, I believe, is that they have no calendar.

Right. They haven’t observed that the year is 2009, not 1934. Since 1934 the entire banking, monetary, financial and economic structure of the United States has changed. Terrorized by an untamable deflation that overwhelmed all 1930s attempts to inflate, the US Establishment has since built institution after institution to deflect deflation before it begins.

  • In 1934 banks had a 35% reserve requirement, in gold. Today their reserve requirement, when I last checked (before the Fed stopped publishing M3 money supply statistics), was 75/100 of one percent. That means that for every $100 deposited in banks, the system can create $13,333.33 in loans. Hardly deflationary.
  • In 1934 there were no automatic circuit breakers to begin inflating at deflation’s first whiff. Now there are social security, food stamps, unemployment insurance, student loans, small business loans, loan-loans, Fannie Mae, Freddie Mac, FMHA and an uncounted host of other government spending programs. If those don’t work, government will send the nation on a crusade to build orbiting toilets for astronauts, or put pants on poor naked cats.
  • In 1934 the government hardly took part in the economy. By the end of World War II, economic power had been centralized in Washington. Today government spending (mostly for defense) accounts for over half of US output.

In short, since 1934 the entire US monetary, financial, banking, and economic structure has been transformed from the basement up, all with the goal of everlasting inflation.


The Federal Reserve system was created as an engine of inflation. Oh, as Steve Saville says, they also manage inflation expectations. That is, the Fed must keep their inflation from hyperinflation by continually gulling the public. So from time to time circumstances permit them and their captive media to float a deflation scare. 

This exhausts the list of the Fed’s weapons: inflation, and blarney (propaganda). At every crisis, the Fed will roll out these weapons and fire them till the barrels melt, be sure of it.

Moreover, events of the last eighteen months have given us concrete and not theoretical grounds to expect the Fed to inflate further. At every crisis so far, the Fed has inflated. It must: it hath no other weapon

  • Look what the Fed has done. Since spring of 2008, in bail-outs, buy-outs, sell-outs, etc., the Fed has slammed over $8 trillion dollars into a roughly $14 trillion M3 money supply. Right there is the inflation. The cause, inflation, has already happened, but six to 24 months lapse before it shows in prices, the effect.
  • Look what the US government has done. The administration has responded to economic crisis with the same spending programs that failed Roosevelt—but they did inflate. The Obama administration has committed itself to inflation—and to war, which is also very inflationary.
  • Look who the Fed is. Fed Chairman Ben Bernanke wrote his doctoral dissertation about the Great Depression, and concluded that the Fed failed because it did not inflate enough. In a famous November 2002 speech, “Deflation: Making Sure It Doesn’t Happen Here,” Bernanke addressed outlined all the inflationary methods he would use to fight any deflation. ( As Europe learned after Hitler published Mein Kampf, officials will do what they promise they will do. Bernanke has proven as good as his word.
  • What about commercial banks refusing to lend? No problem, Mr. Bernanke will simply end-run the banks and buy with newly-printed money direct from the market. He will buy Federal government debt directly, calling it “quantitative easing.” No bank needed for that.
  • Look who the Fed will be. President Obama recently announced that he would re-appoint Bernanke when his term expires in January. Surely we must assume they agree on one strategy: more inflation.

Reasoning from structure and demonstrated official conduct, only one conclusion seems possible: much more inflation will come, gutting the dollar’s purchasing power. 

Since these government measures will only slow down recovery while they inflate, America will likely suffer a long, drawn-out depression plus inflation. Given the unprecedented recklessness of Fed actions so far, even a hyperinflation is possible, creating so many new that prices rise 50% a month or more. I am not predicting this, only pointing out that now, for the first time in my life, Fed and Government mismanagement make a US dollar hyperinflation possible.


A “fiduciary” is a person to whom property or power is entrusted for the benefit of another. Fiduciary duty is what a fiduciary (“trustee”) owes to the property owner to administer faithfully the trust’s affairs, and most of all, not to lose the money..

Since lawyers abound and results are not always kind, over the centuries a standard has developed for gauging performance of fiduciary duty, the “prudent man rule.” “The prudent man rule directs trustees ‘to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested.’’” “Under the prudent man rule, when the governing trust instrument [is silent], state law is silent concerning the types of investments permitted. The fiduciary is required to invest trust assets as a ‘prudent man’ would invest his own property with the following factors in mind: the needs of beneficiaries, the need to preserve the estate (or corpus of the trust) and the amount and regularity of income. The application of these general principles depends on the type of account administered. … Under the prudent man rule, speculative or risky investments must be avoided.” (, “Prudent Man Rule.” In plain English, he must maximize income and minimize risk.

So much for theory. In practice, the prudent man rule means “follow the conventional wisdom.” Do what everybody else does. Play it safe, even if playing it safe won’t bring the greatest return.


But what happens when events render the conventional wisdom dead wrong? What does prudence—true prudence—demand when you discover something everybody else does not know? What if you are an 18th century surgeon, and have learned that bleeding your patient won’t help him—and might in fact kill him? Do you bleed him anyway, to forestall malpractice suits?

Which does prudence follow, conventional wisdom, or the lonely truth?


Because for so many years the US dollar was relatively stable (although steadily depreciating since 1914), the investment of choice for “widows and orphans” was US Treasury bonds or other high-rated corporate bonds.

Are US treasury bonds the best protection against a possible systemic collapse? Do they really offer a safe haven, or are they, in the words of Dr. Franz Pick, “certificates of guaranteed confiscation? Have these safe haven investments now become death traps?


August 15, 1971 ushered in a world-wide monetary sea change. On that day President Nixon “closed the gold window.” Under the 1944 Bretton Woods Agreement, only the US dollar was redeemable for gold, and every other currency’s exchange rate was fixed to the dollar. On 15 August 1971 Nixon announced that the US would no longer redeem paper dollars for gold.

For the first time in history, the entire world was floating on an uncharted sea of paper money. No national currency was redeemable for gold, and no exchange rates were fixed. The long over-valued dollar began to sink, while other currencies rose. Amid ups and downs, the dollar has sunk steadily over the decades.


The era of floating exchange rates forced a new model on every investment decision: which currency should we use?

If the currency is stable—if we expect the currency’s purchasing power on December 31 to equal its purchasing power on January 1, we never have to ask this question. But in a world of floating exchange rates, “which currency” become the first and most important question.

Suppose you have $100 to invest on January 1, and you want it back on December 31 with interest. Further, suppose US dollar deposits are paying 12% interest. 

Looks like tall cotton, doesn’t it?

But what about the loss from dollar depreciation? That has to be considered, too, because the future value of any investment equals the interest rate earned plus the principal but less the expected currency depreciation.

While a 12% interest rate may sound great, what if the expected dollar depreciation is 15%? Net of dollar depreciation, your gain turns into a loss. Future value equals ($100 x 12% interest = $12) + ($100 principal) ($100 x 15% depreciation = $15).

Your net on 31 December will be $100 + $12 – $15, or only $97 in purchasing power. Even high interest rates couldn’t overcome the loss from dollar depreciation. 

But aren’t the Fed’s recent money creations only temporary? Won’t Bernanke soon withdraw them somehow? As visible proof that the Fed is a permanent engine of inflation, I offer these charts from Nick Laird’s treasure trove, (I strongly recommend you subscribe to his website.)

Look closely at the chart, “US Dollar Purchasing Power: 1774 to 2008.” From 1774 to 1914, dollar purchasing power traded between 50 and 100. Only after the Federal Reserve was established in January 1914 does the dollar’s purchasing power decline below 50, and more sharply since the 1930s, when the government repudiated dollar convertibility into gold. Observe that this chart uses a logarithmic scale, so each tick shows an equal percentage distance, not an equal unit distance. (100 units to 200 units is a 100% increase, but so is 5 units to 10 units, so the same distance separates them on the scale. From 5 to 200, however, covers 195 units). Source is the US Bureau of Labor Statistics.

On the next chart “US Dollar Purchasing Power: 1914 to 2008” the chronic, depreciation of the dollar shows plainly. Nick shows data from two sources, the BLS and John Williams’ Shadow Government Statistics. Since about 1980 the US government has continually monkeyed with statistics, changing the components to make them look better. Williams’ figures take out all those changes and restore the Consumer Price Index series to its original components. Using Williams’ figures, from 1914 through 2008 US dollar purchasing power shrank from 100 index to 1.61, a 98.49% purchasing power loss. Mark how the decline accelerates after Nixon closed the gold window in August 1971. 

The last chart from, “US Dollar Purchasing Power: 1965-2008” shows dollar purchasing power from 1965, when the US abandoned silver. By SGS statistics, 1965-2008 dollar purchasing power declined from 100 to 4.79, a 95.21% loss.

Two other charts, “Dollar Valued in Ounces of Gold, 2 Jan. 2001 – Now” and “Dollar Valued in Oz of Silver, 2 Jan. 01 – Now”, clearly depict dollar purchasing power loss since the precious metals’ bull market began. 

In 2001, one dollar bought 0.0025 (25 ten thousandths) ounce of gold; today one dollar buys only 0.00095 (9.5 ten thousandths) ounce. Dollar purchasing power has lost 62% against gold.

In 2001, one dollar bought 0.25 (1/4) ounce of silver. Today, a dollar buys 0.05 (five one-hundredths) ounce, an 80% purchasing power loss.


The currency we think in is called the “numeraire.” Think of it as the denominator in every economic equation. It’s our mental standard of value.

But what happens when the numeraire lies? What happens when it loses purchasing power? Then the number dollars we earn every year increases, while we need more and more of them to buy necessities. The numbers say we are richer, but the facts show we are poorer.

When we live against a background of constant central bank inflation—as every person in the world now does—we must change our numeraire or remain always blind to value and purchasing power..

Wait, it’s hard to abandon the dollar. Prices were fixed in our minds when we were about 15 years old, and we were taught that the “dollar is as good as gold.” Looking at prices today, when a gallon of gas costs more than 10 times what it cost in 1965, we know that the dollar has betrayed us.

We need a new numeraire, a new standard of value.

If we don’t change with events, events will maul us.


Since 2001 the US DOLLAR INDEX, an index of the dollar’s exchange rate against its major trading partners’ currencies, has fallen from 121 to about 76. That implies the dollar has lost 37% against the euro, yen, and pound. This loss only extends the dollar’s primary downward trend since 1913. 

What is the greatest risk fiduciaries (and all of us) face today? 

The dollar’s rapid debasement and purchasing power loss

Keep funds as dollars, and you maximize risk and minimize income. For the first time in my life, hyperinflation of the US dollar has become a genuine possibility, as insane as that sounds.

What can prudence do? Search out an alternative currency to the dollar, so we can maintain purchasing power of our assets. All the other fiat currencies—yen, pound, euro—offer only pale copies of the dollar and perhaps transitory protection, while the hard currencies—silver and gold—have been locked into a primary up trend (“bull market”) since 2001 against all fiat currencies.

But what about the fluctuations? The dollar price of metals rises and falls, but this doesn’t constitute an objection to holding them. Turn the fraction upside down. Instead of “gold/dollar”, try “dollar/gold.” In truth an ounce of silver or gold remains an ounce (31.1034 grams), but the dollar fluctuates up and down constantly with every other fiat currency. But look: the primary trend of metals’ fluctuation is upward against the dollar. This trend should continue until 2014 or 2020.


The first rule of investing is, always invest with the primary trend. That also means, never invest against the primary trend.

What is the primary trend? The prevailing trend that carries a market up or down for 15 to 20 years. It’s the investment tide, and you must always launch your boat with and not against the tide.

For example, after a seventeen year downtrend, the Dow Jones Industrial Average bottomed in August 1982 at 777. From then until January 2000, it rose to 11,722, up 15 times. During that 18 year primary uptrend (bull market), you could hardly make a mistake as long as you bought stocks. A rising tide raises all boats. 

On the other hand, after a twenty year up trend, from January 1980 until February 2001 gold was locked in a primary downtrend (bear market). It sank from US$850 to US$252. Buying gold during 1980-2001, you were launching your boat against the primary downtrend, and you were destined to sink.

Today, the situation has exactly reversed. Stocks and the US dollar are in a primary downtrend, while silver and gold (since 2001) are in a primary uptrend.

For every thing, there is a time and a season.


“Well, everything you say may be true, but I have to do business every day in dollars. I do all my accounting in dollars, so I’ll just stay in dollars.”

There is no neutrality in this world, and no avoiding this decision. Holding US dollars—deciding not to do anything—is also a decision.


Transaction costs. Every time you exchange one currency for another, you incur transaction costs. To move from dollars to physical silver and gold and back to dollars incurs transaction costs of about 7.5%. That means silver and gold must rise 7.5% in dollar terms for you to break even in dollars. 

In the short term market fluctuations can be very wide, but over longer time the long-term trend will carry silver and gold up. Thus you should put only long term funds into silver and gold. “Long term funds” means “not to be used for one year or more.”

What should you buy? In a bull market, premium always disappears over time. Therefore buy the lowest cost per ounce form of silver or gold. Right now, that means US 90% silver coin (dimes, quarters or halves minted before 1965). In gold, buy Mexican 50 pesos or Austrian 100 coronas or Krugerrands. If your dealer doesn’t understand this, get another dealer. Under no circumstances buy numismatic or collector’s coins, because these will lose premium against gold. Stay with the basics, the most ounces for the least money.

Find a trustworthy dealer. Length of time in business, reliability, understanding, solvency, and business references count more than snazzy Internet presence, price, or a slick sales pitch.

Where should you store? Owning physical silver and gold places the safeguarding and storage responsibility directly on you. You can use a bank safe deposit box but better is a concealed, fire-proof safe on your own premises.

What about precious metals storage services, or the Exchange Traded Funds? Owning a claim to gold and silver isn’t the same thing as holding the physical metal. Do not buy gold or silver ETFs.

Why hold a sterile investment? Silver and gold are the ultimate cash, and as cash they pay no interest or dividend. In holding them you are waiting for their price to rise. However, by swapping silver for gold and gold for silver you can increase the number of ounces you hold while waiting for the price rise. These trades only take place every three or four years, but they are very lucrative. Except for the brief transit times when you swap, the metals remain in your own hands. For a complete explanation, read Why Silver Will Outperform Gold 400%.

Originally published October 2009