by Dr. Mercola
Interestingly, the US media is now pronouncing that the worst may be over for the US economic crisis. While it would be a great delight to see that happen, every possible piece of evidence I have been able to review does not support this optimism. There are still over 65 trillion dollars of derivatives that could blow up at a moment's notice and could easily dwarf what has happened in the US in the past 18 months.
A recent MetLife study found that 50 percent of Americans said they have only a one-month cushion -- roughly two paychecks -- or less before they would be unable to fully meet their financial obligations if they were to lose their jobs. More disturbing is that 28 percent said they could not make ends meet for longer than two weeks without their jobs.
And it's not just low-income earners who would find themselves financially challenged. Twenty-nine percent of those making $100,000 or more a year said they would have trouble paying the bills after more than a month of unemployment.
We are clearly living in interesting times, to say the least. The economic crisis is affecting each and every one of us in some way, and it is impossible to separate your financial state from your health.
When I posted my concerns about the economy last month, many were critical because there was not enough focus on what they could do, so in response to those concerns I have compiled this guide to provide you with the best positive steps I know of to protect you and your family in the coming months and years.
So I had a friend of mine, Jim Ehmke, who is a top-notch nutritionist and someone to whom I look for personal guidance in this area, write an article to help provide everyone with some recommendations. Although Jim has no formal economic or financial training, he has studied this area for decades, and when anyone invests that much time in one discipline they tend to become a world-class expert in that area.
While I was in Maui this year, one of the books I read was Outliers, the Story of Success by Malcolm Gladwell. It is an excellent book and provides the scientific basis for the observation that when one invests over 10,000 hours in learning, studying and practicing a discipline; they invariably tend to become a master. Jim would certainly qualify with the amount of time he has invested studying this topic.
Preparing for the Perfect Economic Storm
By Jim Ehmke (email: email@example.com)
Worst-case scenarios are something that few of us want to think about.
Personally, I consider myself an optimistic person who tries to live and act consciously in a positive way. I regularly seek to avoid negative and even horrifying thoughts and emotions.
And yet, sadly, negative and horrifying events occur worldwide on a regular basis regardless of my feelings. Are those of us who live in relative comfort oblivious to the possibility that worst-case scenarios might occur in our lives?
Let's consider briefly how we participate, consciously or unconsciously, to prepare ourselves for crisis. And, in fact, this behavior is considered normal and healthy.
Consider the following:
- Health Insurance -- this is actually insurance against disease, catastrophic health events and even death. Today's news is filled with the fear and consequences of not having health insurance. The positive aspects of vibrant health have almost nothing to do with health insurance.
- Life Insurance -- this should more accurately be called "death insurance," because that's what it is. Death is one worst-case scenario that we all eventually deal with.
- All the other "insurances" -- automobile, fraud, disability, homeowners, mortgage, etc. -- seem to offer us some level of protection from various disasters.
- Parents routinely take enormous precautions for the safety of their children, far more today than when I was a kid. For example, consider infant safety seats and seat belts for children.
- Gun ownership as "insurance" against predators.
- Our legal system -- this is set up to provide protection against many worst-case scenarios.
And all the other things we do to protect against worst-case scenarios that are not mentioned above. I'm sure we could all think of more.
In light of this rather normal behavior, it strikes me that something is missing regarding preparation for a financial worst-case scenario. One example is the very economic scenario that is playing out right before our eyes.
For the most part we have been trained to put all our financial eggs in one basket -- the basket of paper assets; stocks, bonds, currency and highly leveraged high risk derivative instruments that have no sensible meaning to most of us.
Paper Money May Be Worthless
It seems prudent to have some stocks and bonds, and obviously currency is necessary, but in this day and age the high risk paper mentioned above has put the average investor at a disadvantage which he or she is simply not prepared to deal with.
We are now seeing the unwinding of this uncollateralized paper, and the ramifications are staggering in their severity. Estimates of how much bad derivative paper is out there, depending on the expert, range from 300 trillion to 500 trillion dollars. The subprime debt which exposed the far greater derivative nightmare pales in comparison.
This is truly a staggering amount, at least it is to me, and dwarfs worldwide GDP (gross domestic product) several times over.
Most of us have not taken the time to genuinely investigate how to balance our personal economic situation and protect ourselves against the fraud, greed and excesses that have caused paper assets to crash in such a dramatic fashion. And most experts agree that it isn't over yet -- there is a lot of de-leveraging yet to occur.
Until 1971, the world of paper assets and currency was balanced with the gold standard. Gold provided a physical storehouse of wealth that was used to balance trade deficits and prevent unlimited printing of paper money.
Gold established and maintained economic discipline and balance. The use of gold in this fashion was agreed to by all the major countries in what is known as the Bretton Woods Accord.
But when President Nixon dissolved Bretton Woods, the modern world was thrown into uncharted waters; without the discipline of the gold standard, a new era of unlimited money creation was ushered in. Over decades, this eventually spawned an economy based overwhelmingly on debt, deficits, inflation, currency manipulation and unimaginable (at least to most of us) instruments called derivatives.
And now this house of cards is crashing and the economic worst-case scenario, for which few have prepared, is upon us.
Precious Metals are Real-Money Tangible Assets
The positive thing to do in such a situation is to protect yourself and your family by investing in the ultimate tangible asset, also known as real money; gold and silver. My experience in the precious metals business has taught me that the best way to do this is to take possession of the physical product.
Although there are gold 'paper instruments' including ETFs and even gold derivatives, why risk paper when it's easy and convenient to possess gold.
It's simple to do and you are in complete control of your assets. A client in his early 80's recently told me:
"Jim, I've made and lost two fortunes in my life and the most important thing I've learned is to be in control of my money. Don't trust other people to handle your money."
There's no simpler way to do this than to possess precious metals and cash. At this time $100,000 in gold weighs just over 6 pounds and fits in less than one quarter of a shoebox. Gold is the ultimate portable wealth; it's a small package and is universally transacted. In a normal situation gold or silver can be converted into paper money in a day with a phone call.
In dire circumstances, both can be used for barter. Gold and silver are readily available in one ounce, half ounce, quarter ounce and tenth ounce increments. Larger gold bars are also available, but they're not practical for barter transactions and the price difference between larger bars and one-ounce coins is minimal.
One unique form of silver is pre 1965 US change; halves, quarters and dimes were all 90 percent silver. The precious metals industry call this "junk silver," an oxymoron if ever there was one, but it's one of the most desirable forms of silver to own.
Not only because junk silver is a hot item to buy and sell, but because it provides outstanding flexibility in barter situations where a one ounce gold coin worth a thousand dollars or more isn't practical. Owning mixed denominations of silver coins makes good sense.
Did you know the Constitution of the U.S. forbids any currency other than gold and silver?
The writers of the Constitution knew that this requirement would prevent banks from taking over the money supply and indebting the people. Of course, this is all to the benefit of banks but often to the misfortune of citizens. The founders knew this happened in Europe and they were intent to prevent it from happening here.
Ultimately, the greed, abuse and criminal behavior of banks has led to what is occurring today. And now we, the citizens, are coerced into bailing out the bankers. This is not right. As Dr. Nouriel Roubini, Professor of Economics and International Business at New York University, so aptly stated:
"This is again a case of privatizing the gains and socializing the losses, a bailout and socialism for the rich, the well-connected, and Wall Street. And it is a scandal that even congressional Democrats have fallen for, this Treasury scam, which does little to resolve the debt burden of millions of distressed home owners."
How to Obtain Precious Metals
Buying and selling gold and silver is incredibly simple.
Over the phone, the customer and the dealer agree on a price. This is called a "lock-in" and the agreed-to price holds, no matter what happens to the price of gold between agreement and delivery.
Precious metals, like jewelry and diamonds and other valuable items, are mailed to the buyer via U.S. Post Registered & Insured for full value. The warehouse I work for has never had a package lost since opening in 1971. Nor has any warehouse I am aware of. Registered and Insured mail is handled separately and every handler must sign off on the package.
In the unlikely event that something should go wrong, the warehouse will replace the gold and go after the insurance. It is the buyer's responsibility to send payment by wire or check as soon as possible. As incredible as it may seem, the gold business is routinely conducted in this fashion -- where a person's word is their bond. I find this incredibly refreshing.
Selling gold or silver back to the warehouse is just as simple as buying it. Simply call and lock-in a buy-back price. Mail the product to the warehouse (registered & insured), and your funds will be wired or mailed.
The Bull Markets Have Three Basic Phases
All bull markets have three basic phases:
1. Phase One: Investor Accumulation
2. Phase Two: Public Involvement
3. Phase Three: Speculation
Phase One is quiet accumulation by savvy investors who recognize the emerging bull and quietly accumulate. This is exactly what has been transpiring in gold since 2000 when the price was $253 per ounce. Since then, gold as steadily climbed up to $1,000 per ounce with almost no public awareness.
After all, have you been reading about the remarkable gold bull market in the papers or have you heard about it on TV? No, not until just recently.
Phase Two of bull markets occurs when the public gets involved. This is exactly where the gold bull market finds itself at present. Obviously, the public is now taking interest, and judging by the number of calls I receive and the size of the orders, I know firsthand that public interest is heating up ... big time.
Newspapers, TV and other media outlets are all abuzz with info on gold, as well they should be. Big players like Morgan Stanley, Bloomberg and others now recommend gold as an investment. Morgan Stanley is projecting $1,650 per ounce gold by the end of 2009, and others forecast $2,000 per ounce.
Of course, no one knows for sure, but as the public enters the gold bull market en masse, the price is sure to soar. Moreover, the economic fundamentals, which have led to the current collapse in paper wealth as well as the gold bull market, have not changed at all.
In fact, the incredible amount of money creation for bailing out the big boys, based on yet more debt, will ultimately lead to increased inflation -- some say hyperinflation -- which is the perfect storm for gold. Gold is universally acknowledged as the ultimate hedge against the ravages of inflation.
For example, from 1971 to 1980, inflation soared to 21percent while gold increased from $35 to $850 per ounce -- a remarkable 24-fold increase!
Phase Three of bull markets is the speculation phase, when speculators and gamblers push prices to ridiculous levels and create bubbles. This is exactly what happened with two recent bull markets: the dot-com bubble and the real estate bubble.
How Much is Enough?
Of course, how much gold and silver to own is highly debatable and the answer will vary depending on who you listen to. I hearken back to a time when I was a kid in the sixties and listened to the Louis Rukeyser Show.
A time when the Dow was in triple digits and everything was quite conservative. There were no derivatives, debt was frowned upon and, believe it or not, the U.S. ran a huge trade surplus. Ah, those where the days.
His guests would routinely outline their portfolios and it seemed like everyone had a 10 percent position in gold. This was the conservative hedge against a crash or war or any unexpected event.
Gold fell out of favor in the 80's when dramatic mergers and debt instrument and speculation really began to dominate Wall Street.
This world of abstract wealth which spawned conspicuous consumption as a way of life continued through the 90's resulting in various bubbles, all of which popped, and slowly began to turn with the onset of the current gold bull market in 2000. But after 20 years of the "paper bull" a new generation of "financial advisers" emerged who had no experience with gold or hard times.
This younger generation of financial advisors frowned on gold considering it too risky and preferred paper. Now that's a kick. Hmm ... real money in the form of gold, which has always been the ultimate form of wealth and will always be the last man standing, is too risky? How could paper be more valuable or safer?
Granted, gold doesn't pay interest, nor do most stocks pay dividends, but in a gold bull market this becomes less important.
So, how much of one's portfolio should be put in precious metals?
Personally, my wife, Karen, and I have over 80 percent in precious metals and 20 percent in cash and a house. It's simple for us and we both sleep well.
The Sleep Test
I think the "sleep test," is a good way to determine how much risk is healthy; Don't make any financial moves that disturb your sleep, and if you do change them. This said, I realize that 80 percent is likely to be too high for many, not that it would disrupt your sleep.
It's just 'outside the box' of habitual economic thinking. But, 50 percent seems quite reasonable considering that gold is just entering the second phase of an epic bull market and it's about the only way to protect yourself against the ravages of a deteriorating economy that will feature overt depreciation of paper money, i.e., inflation.
Ultimately, whatever amount you are comfortable with is the right amount to invest. Whatever that is will prove to be a smart move. Perhaps the smartest money move you'll ever make. It certainly has been for us.
Health is Your Greatest Wealth
I am fortunate to have a wonderful career in the alternative health field since 1975. Economically, I've observed and studied the markets and have been investing in gold since the mid 80's. This June will be my third anniversary selling precious metals. But, ultimately, when all is said and done, what matters most is health.
Many times in my practice I've observed how stress adversely affects clients. Unfortunately, severe money stress is one of the most common experiences in our culture.
Other Helpful Comments from Readers
A number of our readers also contributed some great comments that were posted in my last major article on the economy. Many times these nuggets are lost in the large number of posts so I thought I would highlight a few of them for you now.
The great icon of self-help success books, Napoleon Hill, author of the classic Think and Grow Rich, taught that the fear of poverty is the number one stress that impairs and stifles people on a day-to-day basis.
Hill claimed there were six basic fears, and only the fear of death was more intense than the fear of poverty. As Mercola reader Crouchingkitty from Boulder, Colorado commented in a recent article:
"Our family has already been through the worst scenario financially, husband was unemployed for three years and we lost our home last year.
It felt like death as we sold everything of monetary value, lost the rest, and our family of three moved into a 1000 square foot studio rental in the mountains. So it didn't feel so bad when my employer went out of business last month, and my husband's hours were cut (at a job that already pays just 1/3 of his old pay). The worst part of it all was the time of fear before the house was lost.
Now I LOVE my life! It has been reborn as a life of connection and meaning!"
The more you can modify your lifestyle and take charge of the things that you do have some control over, the less stress you will feel, and the less fear you will have. Sometimes just seeing the situation as an opportunity rather than a crisis is enough to take the sting out of your circumstance.
Crouchingkitty goes on to say:
"My new-found open positive attitude attracted a community of people that has enabled us to live this new beautiful life. It is a life I never could've imagined 18 months ago, or even 5 years ago! I see the worries of the country, but from my experience it is an opportunity for a huge paradigm shift."
Some of your recent comments have emphasized the importance of being proactive. A reader from Syracuse, New York named Frasmus commented:
"My family and I have been anticipating a crisis like what is coming for quite a while and preparing ourselves the best we can. I offer the following suggestions:
If you have a high mortgage that is difficult now, the bank may foreclose eventually. Better to deal with it now. Sell your house and take the loss or just give it back to the bank. If you have elderly parents that own a home, consider moving in with them. You could care for them and offer your protection. Live in the country if possible.
Get back to the basics. Shed anything with a monthly payment. Expensive cable tv and car payments are the obvious ones. If you live in a cold climate, can you find a way to heat for free? It may be better to use fuel that is grown locally. Think "Little House on the Prairie."
I completely agree that the best defense is a good offense. Do what you can now, so that you will be in a better position if things do become worse globally.
Many of my readers are sharing ideas about simplifying their lives, returning to activities of the past such as barter and trade, instead of relying solely on paper money. Frasmus went on to say:
"Finally, be able to produce something people need that is easy to barter. We bought a grain mill so hopefully farmers will have wheat. We make the bread. We trade bread for firewood, etc. Community is critical. Think, "How can I trade if the dollar is dead?" Have something useful to use as currency."
Some of you talk about moving out into the country where you have some land and can be more self-sufficient. Some of you are raising goats for milk, making your own cheese and yogurt, creating your own organic gardens, home schooling your children, making your own herbal ointments, and even trading childcare services for electric bills!
And all of these things are wonderfully positive responses to this economic crisis, turning an otherwise frightening situation into something new and productive.
The resourcefulness of the American people remains one of our greatest strengths.
A reader by the name of Mitchind from Arcadia, Australia commented recently on turning hemp into plastics, lightweight building material, biodiesel, paper, clothing, and other industrially useful fibers.
Another reader mentions using algae oil for fuel, stating it can be produced "thousands of times faster than any other crop, including hemp."
There is no shortage of ideas -- just look at the fantastic bunch of them from my website readers alone! For even more inspiring ideas, check out this recent msnbc.com article in its entirety, which includes such nuggets as:
- Remain optimistic by accomplishing five things each day: one thing for your job search, one for your community, one for your family, one thing to improve your home, and one thing for your own spirit.
- See the big picture by taking inventory of what's really important and what makes you truly happy. Then remain focused on what really matters
- Unwind with cheap or free entertainment
- Cook, and even grow your own food
- Give to others in need
As long as we don't succumb to fear, I am confident we will see our way through the challenges of this economic "paradigm shift," if I may borrow that term.
There is no reason you must buy into the doom and gloom that the media loves to promote, and instead seize on the chance for a new beginning. Virtually everyone has a fear of poverty, and it behooves us to make cautious and wise investments with our resources. Our health may literally depend on it.
Right now, as the world is immersed in a crisis of paper wealth that threatens to get much worse, it seems to me that participating in the only available bull market -- gold and silver -- makes good sense.
Improving your economic health will almost assuredly improve your physical and emotional health by reducing stress and helping you feel more in control of your life.
Sleep well; it's great for your health.