The Cheapest Inflation Hedge

After mentioning some key points from Peter Schiff's 2007 book Crash Proof: How to Profit from the Coming Economic Collapse, I got to thinking about what the cheapest way to save in foreign currencies or physical gold would be. After discussing the matter with a friend, I decided to compare three methods: (1) buying and selling shares of the Merk Hard Currency Fund through a discount broker (many offer free mutual fund transactions), (2) buying and selling "digital gold" through GoldMoney.com, and (3) buying and selling physical gold bullion coins at the local dealer and storing them in a safe deposit box. I didn't consider gold Exchange Traded Funds (ETFs) since I've heard sketchy things about them.

I chose GoldMoney.com as a representative "digital gold" currency since it appears to be fairly legit and is growing in popularity. Basically, when you purchase gold through GoldMoney, they allocate the gold to you (earmark it) and let you choose a secure storage vault from their list. For transactions below $10,000, they sell gold at 2.5% above spot and purchase it at spot, and they charge a yearly fee of 0.2% for storage.

For physical gold bullion coins, I have seen recent buy/sell spreads of around 4%, so for a conservative representative value I assumed 5% on average. In my calculations, I treated the buy/sell spread as a purchase fee of 5% with no sale fee. For storage, I assumed a small safe deposit box at a flat cost of $20 per year.

The first step was to summarize the fees and expenses for each of the three strategies.

Table 1. Fees and expenses for dollar-hedging strategies

The next step was to calculate the total cost per year for each strategy, given various average balances and average rates of transactions. For each average balance and average rate of transactions, I calculated which of the three methods was the least costly over the course of a year (ignoring taxes). The results are presented in the following table:

Table 2. Minimum yearly costs for dollar-hedging strategies

From Table 2, we can see that there is no clear winner in all cases. For a small balance and frequent transactions, the Merk Hard Currency Fund is the winner (however, frequent buying and selling of a mutual fund often results in penalties, and Merk's prospectus warns against it, so maybe it's not really a winner). For balances greater than about $10,000 and a rate of transactions less than about $5,000 per year, physical gold coins are the way to go. For situations intermediate between those two, "digital gold" through GoldMoney.com is the least costly.

Keep in mind, however, that in these calculations I made a few assumptions that may not always be true, and I only compared one factor (yearly expenses) among the strategies. Obviously, there are other factors to consider. For example, the total cost to accumulate one's balance to begin with might be important if you don't plan to maintain the balance for more than a few years. Another example is that a lot of people are hesitant to buy "digital gold" that is stored in someone else's vault, no matter how legit the operation appears to be. The feeling of security and empowerment that comes from possessing physical gold -- at home, in a safe deposit box, buried somewhere in a treasure chest, whatever -- surely places a psychological premium over alternative dollar-hedging strategies in uncertain times. When you hold gold in your own hand, nobody can steal it from you without starting a hell of a fight. By contrast, all the Federal Reserve has to do to steal U.S. dollars from you is print more of them.

Bottom line: Saving money in a basket of "hard" foreign currencies probably isn't a bad idea, but it's likely more expensive than simply buying and selling gold. And isn't gold the hardest currency by definition, anyways? In the long run, how could gold fail to appreciate against any fiat currency?