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Why I’m a Financial Survivalist

Why I'm a Financial Survivalist

I think it is safe to say that my investment philosophy is not mainstream.  In fact, I’m sometimes accused of being a survivalist, which I find to be a rather amusing accusation.  After all, I don’t stockpile food, fuel or ammunition.  I also don’t believe that the next financial crisis will throw us backward to a pre-industrial standard of living due to the wholesale disintegration of global supply chains.

I would, however, describe myself as a financial survivalist.  Much like you, I have worked hard for every penny of savings I possess.  I don’t ever want to face a situation in the future where my investment portfolio is down 50% or more.  I don’t think you do either.

More importantly, if such an event were to occur, average people like you and I would have absolutely no financial recourse.  Writing a letter to your congressman would get you nowhere.  Appealing to the U.S. Treasury for restitution would be futile.  If you were to confront your financial advisor, he would look you right in the eye, shrug his shoulders and loudly state, “No one could have seen this coming!”

Of course, such a bold pronouncement would be a vicious lie, meant primarily to distract you from his incompetence.  All students of financial history know another major financial market dislocation is coming, although the when and how are certainly up for debate.  I think most of us can agree that there must eventually be unintended consequences to the Federal Reserve’s misguided policy of holding interest rates near zero for a full decade.  After all, if economies were really so easy to manipulate upward without negative side-effects, wouldn’t someone have figured it all out long ago?

As a financial survivalist, my main goal is to preserve my money.  Growing that money is a secondary concern, particularly in today’s global financial minefield.  This is because compounding your money aggressively and then losing most of it in a financial crisis is an unpleasant proposition, no matter how good it makes you feel on the way up.  This is also a big reason why bubbles are so seductive.

But for most investors, a bubble represents massive gains followed by even larger losses.  Almost nobody who makes money in a bubble actually keeps any of it.

Just ask the famous 17th century physicist, Sir Isaac Newton.  He might have been a mathematical genius, but it didn’t keep him from losing his entire fortune in London’s 1720 South Seas Bubble.  At first, he invested a little bit of money in South Sea Company stock before promptly exiting his position for a nice profit after its price moved up sharply.

However, the stock price kept on rising, this time without him.  As Sir Isaac Newton looked around and saw his friends and associates who still owned the stock getting rich, he felt compelled to dump his life savings back into the market.  This was a fatal mistake.  Within a few months the South Seas Bubble had burst, costing Newton almost everything.  As he famously lamented, “I can calculate the movement of stars, but not the madness of men.”

I think we could all benefit from listening to the father of Newtonian Physics.  If this makes me a financial survivalist, then so be it.  I’m not interested in fitting in with everybody else just so we can all commiserate about losing our life savings together later on.

Being a financial survivalist means that I’m a fairly conservative investor.  This is especially the case today, when so many investments are so overpriced.  I don’t like taking big risks with my money.  Ironically, though, the best investments at this juncture in history are also those with the lowest risk.

I’m talking primarily about tangible investments, including bullion, fine art and antiques.  The benefits of these assets are immediately apparent to any good financial survivalist.  Middle and upper class households have successfully used them as wealth preservation vehicles for centuries.  And they are completely independent of both the Wall Street menagerie and our syphilitic banking system.

But fine art and antiques have been largely left behind in today’s world of complex derivatives, high-frequency trading and inscrutable crypto-currencies.  That’s why it is still possible to pick up some very compelling values in the hard asset space for shockingly low prices.

For example, you can purchase a solid 14 karat gold Bulova Accutron wristwatch from 1973 for only $1,000 – less than the price of a single share of Amazon.  Or you can buy an avant-garde contemporary drypoint print by the New York artist Mariko Kuzumi for a scant $200 – less than the price of a single token of the Monero crypto-currency.  Or you can invest in a highly desirable, 1 kilo Johnson Matthey vintage silver bullion bar for about $800 – the cost of just over 3 shares of Netflix.

I don’t care if I’m “missing out” on the market bubble, because I understand how all bubbles eventually end.  All I care about is holding onto what I worked so hard to earn.  And if you also like holding onto your hard-earned money, you may be just like me – a financial survivalist.

 

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U.S. Savings Bonds – A Disquieting History

U.S. Savings Bonds - A Disquieting History

U.S. savings bonds have been a time-honored method of accumulating wealth for middle class families.  They are simple to buy and redeem and are also backed by the full faith and credit of the U.S. government.  But these hallowed financial instruments have slowly evolved over the years, and, unfortunately, most of it hasn’t been for the better.

It might seem like an absurd suggestion, but U.S. savings bonds have a dirty, secret history.  For the past 15 years, the U.S. Treasury has been systematically degrading the attractiveness of these traditional financial vehicles.  As a result, it is very difficult to recommend them as anything other than a cash-substitute in certain niche financial situations.  If you really want to make money, or even just preserve your purchasing power, you will need to redeem your savings bonds and roll the proceeds into better investments.

Let’s start at the beginning.  The history of U.S. savings bonds stretches back to the Great Depression.  In 1935, President Franklin D. Roosevelt approved a law that allowed the U.S. Treasury to issue small denomination government bonds, sometimes called “baby bonds”, directly to the American public.  The government paid a very generous (for the Depression years) 2.9% interest rate on these initial notes.

The U.S. savings bond program remained relatively small until World War II, when the federal government’s financing needs skyrocketed.  As a result, the popular Series E bonds were introduced in 1941.  These fixed rate financial instruments were purchased and held by millions of households during and after the War.  From the 1940s until the 1970s, savings bonds almost always paid an interest rate that was comfortably higher than inflation.

In 1980, Series E notes were phased out and replaced by Series EE bonds.  Series EE savings bonds, which are still being issued today, earn either a fixed or variable rate of interest, depending on their issue date.  They pay no interest outright, but instead accrue interest like a zero-coupon bond.  Series EE savings bonds were traditionally sold for half of their face value, with a $100 bond selling for $50.  They are guaranteed to accrue to face value by the end of their original maturity, which is currently 20 years from the date of issue.

The other type of U.S. savings bond currently being issued is the Series I bond, also known as I-bonds.  The interest rate for these notes is based on the inflation rate as measured by the CPI (Consumer Price Index) plus a fixed “real” (after-inflation) interest rate.  Series I bonds were first issued in 1998 and, like Series EE bonds, accrue and compound interest until redemption.

 

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Now this is where things get interesting.  In 2003 the minimum holding period for both EE and I-bonds was increased from a reasonable 6 months to a rather unreasonable 12 months.  The U.S. Treasury supposedly changed this rule to prevent retirees, children, the frugal and other unrepentant savers from arbitraging the interest rate differential between savings bonds and short-term debt instruments!  As the U.S Treasury arrogantly stated, “Savings Bonds are designed to be a long-term savings vehicle.”  Just to drive home its point, the U.S. government also penalizes you three months worth of interest on any savings bond you redeem that is less than 5 years old.

And while the U.S. Treasury claimed that savings bonds are for the long-haul, their actions indicated otherwise.  From 1997 to 2005, Series EE savings bonds earned only 90% of the prevailing 5 year U.S. Treasury note’s interest rate.  It’s a very raw deal to give your valued “long-term” savers a subpar 90% of the lower interest rate 5-year bond, when the U.S. government could have easily paid 100% of the higher interest rate 20 or 30-year Treasury bond!  Unfortunately, this was a portent of worse things to come for long-suffering savings bond investors.

Then we fast forward to 2005, when the Treasury changed the terms on EE bonds from the old, floating rate model to a new, fixed rate one.  At first, this new fixed rate was effectively identical to the old floating rate (90% of the 5-year treasury).  Fair enough.  But the Treasury Department couldn’t resist the urge to turn the screws on small savers.

 

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By spring 2006 the EE series was only offering 74% of the going 5-year treasury rate.  By May 2010 that number had fallen to 57%.  Another 4 years later, in May of 2014, it was a pitiful 30%.  At the latest rate-reset in November 2017, the Series EE savings bond paid an almost non-existent 0.10%, or $10 per annum for every $10,000 invested, fixed for the life of the note.  This translates into an insulting 5% of the then-current 5-year Treasury bond rate!

Savers hoping for better treatment with I-bonds were also sorely disappointed. Immediately after their introduction in the late 1990s, Series I savings bonds were very competitive, with the real rate hovering between 3.3% and 3.6%.  But after the 2000 tech bubble burst, the U.S. Treasury decided it was time for the little saver to pay his “fair share”.

Real interest rates on I-bonds crashed during 2001 and 2002, declining from 3.4% at the beginning of that period to 1.6% by the end.  Real rates then bounced around the 1.0% to 1.5% level until the Great Financial Crisis of 2008.

At this point, the federal government decided that I-bond holders didn’t deserve to earn any interest on their savings at all.  After all, the Feds had to pay for all those bank bailouts somehow!  Real rates quickly plummeted to the 0.0% to 0.2% range where they have remained ever since.  That’s right.  As of November 2017, Series I savings bonds currently pay a measly 0.1% as their real rate of return.

 

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As an added insult, the U.S. Treasury discontinued issuing Series HH bonds in 2004.  These now defunct savings bonds allowed existing Series EE and I bond holders a tax-free exchange option once their notes had reached final maturity.  Series HH bonds did not accrue interest like other savings bonds, but instead paid it out directly to note holders on a semi-annual basis.  This way, loyal, long-time savings bond owners could defer Federal income taxes while also receiving interest payments via physical check or direct deposit.

But I believe the real death knell for U.S. savings bonds came in 2012, when the U.S. government discontinued issuing paper savings bonds.  Over the decades, countless savings bonds had been gifted at holidays, graduations, weddings and birthday parties.  By switching over to an electronic only distribution model, the Federal government destroyed the utility of savings bonds as gifts or savings vehicles for children.  Yes, the U.S. Treasury provides optional, print-it-yourself gift certificates, but these are a laughably poor substitute for the tactile and visual enjoyment provided by an official savings bond certificate.

If you care to look at the historical record, it is pretty obvious what is going on here – financial repression.  The government doesn’t want you, or anyone else, to save.  Instead they want to force you to recapitalize the nation’s financial system by giving you no alternative to low-interest bank accounts.  Or, if you’re inclined, the Federal Reserve is also happy for you to speculate with your life savings in the stock market casino.  Either way, the U.S. government wins and you lose.

Of course, you can always refuse to play their game.  That’s why I recommend you buy hard assets – things like fine art, antiques, precious metals and gemstones.  Savings bonds don’t represent the safe, lucrative investments they once did.  It’s time to redeem your savings bonds and convert them into tangible assets that will actually preserve your wealth.

 

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How Much Gold Does the Average U.S. Household Own?

How Much Gold Does the Average U.S. Household Own?

How much gold does the average U.S. household own?  It is a deceptively simple question that has a very complicated answer.  For one thing, there are no reliable statistics surrounding private gold ownership in the U.S.  And people certainly aren’t going to willingly volunteer this very personal information either.  However, I believe this question will become increasingly important as our global monetary system is inevitably reordered in the decades to come.

Before we make an attempt to answer this question of private American gold ownership, let’s talk for a moment about the official U.S. government gold reserves.  According to the U.S. Treasury Department, the United States currently holds over 8,133 metric tonnes, or 261,498,926 troy ounces, of fine gold at secure facilities around the nation.  Over 50% of this stash, approximately 4,583 metric tonnes, is stored at the world famous United States Bullion Depository at Fort Knox, Kentucky, where it is guarded by an active U.S. Army camp.

If these official U.S. gold reserves were distributed evenly across the estimated 125.8 million American households, it would total about 2.08 troy ounces (64.7 grams) of gold per household.  Of course, this analysis ignores the rumors that have persistently circulated for many decades that some (or even most) of these official U.S. gold reserves have been leased or sold without public knowledge.  These rumors have been stoked, in part, because the U.S. gold reserves at Fort Knox have not been audited since 1953.

Regardless, these really aren’t the numbers we’re looking for.  Instead, we want the average private gold ownership per U.S. household.  Or, more specifically, we want the median level of gold ownership per U.S. household.

Conspiracy theories about Fort Knox aside, it is obvious that official government statistics are not going to provide us the information we want in regard to average private U.S. household gold ownership.  So I am going to try a different approach here.  I am going to use my experience with gold scrapping and cleaning out elderly relatives’ homes to make an educated guesstimate about the amount of gold owned by the average U.S. household.

In order to attempt to derive a more meaningful number, I am going to explicitly exclude very wealthy households from my estimate.  This demographic is much more likely to own an abnormally large amount of very expensive gold jewelry and gold coins.  I will also ignore precious metal stackers and gold-bugs in this analysis; these people will obviously have more gold than the average middle class household.  In addition, I will exclude extremely poor households that are likely to possess no precious metals at all, other than perhaps a pair of wedding bands.

 

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The primary source of U.S. household gold is undoubtedly held in the form of solid karat gold jewelry.  Most solid karat gold jewelry ranges from 9 karat gold (37.5% fine) up to 18 karat gold (75% fine).  However, most people own a lot less solid karat gold jewelry than you might think.

Most karat gold jewelry is very lightweight; hollow pieces are not uncommon.  This is done to keep the weight, and therefore the cost, of the gold jewelry down.  So, for example, your average solid karat gold women’s ring or wedding band might only weigh between 2 and 5 grams, and contain 1/40 to 1/8 of a troy ounce of fine gold.  As you can see, it takes quite a bit of solid karat gold jewelry before you can even accumulate one troy ounce of pure gold.

It is far more common to encounter costume jewelry in the average U.S. household, which I loosely define as gold-filled and gold-plated jewelry.  Gold-filled jewelry has a thick layer of karat gold that is mechanically fused to a copper-alloy base.  In contrast, gold-plated jewelry is made by electro-depositing a very thin layer of gold directly onto base-metal.

Gold-filled jewelry can often be economically recycled for its gold content, provided it is judiciously mixed with solid karat gold jewelry before being sent to the refinery.  However, gold-filled jewelry’s fine gold content by weight is between 2.1% and 7.5% – substantially less than even the lowest solid carat gold alloys.  Because it is so diluted, it takes a huge amount of gold-filled jewelry to accumulate a significant amount of pure gold.

Gold-plated jewelry is even worse.  The thickness of gold electro-plate is typically measured in microns, or 1/1000s of a millimeter.  Most gold-plating on jewelry is between 0.1 and 5 microns in thickness.  As a result, electro-plated gold jewelry is impossible to economically recycle, rendering it, to the best of my knowledge, the leading cause of permanent gold loss in the world today.

Another major source of gold found in the average U.S. household is gold coins.  These are fairly uncommon, but some people have a random gold coin or two tucked away, even if they aren’t collectors.  These coins usually come in two forms: old circulated gold coins and modern bullion coins.

The first type of gold coin commonly seen in American households is pre-1933 semi-numismatic U.S. gold coins.  These were issued by the U.S. government before 1933, when the United States was still on the gold standard.  These coins come in denominations from the diminutive $1 gold piece to the gigantic $20 double eagle.  Although these coins were fully exchangeable with paper currency before the Great Depression, they tended to see little circulation because they represented such large sums of purchasing power.  Apart from collectors, most households that have these coins today inherited them.

Modern gold bullion coins are another type of gold coin frequently encountered.  The Canadian, U.S., Mexican, Australian and British mints (among others) began producing these coins in the 1980s.  The smaller fractional sizes – 1/4, 1/10 and 1/20 troy ounce coins – have been popular gifts for graduations, holidays and birthdays.  As a result, even average people with no interest in gold bullion have sometimes accumulated one or two of these coins.

 

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The final type of gold commonly found in households is rather unexpected – electronics scrap.  Many people don’t realize it, but gold is a vital component in almost every high-tech gadget out there!  In particular, heavily gold-plated contacts are used in CPUs, RAM sticks and other vital electrical contact points where corrosion resistance is a necessity.  Cell phones, desktop and laptop computers, tablets and set-top TV boxes are just some of the electronics that contain gold.

Of course, the only problem is that electronics don’t contain very much gold at all.  As the price of gold has steadily risen over the last 15 years, hardware manufacturers have gone to great lengths to reduce the amount of gold used in electronics.  This makes recovering the gold from computer scrap very difficult.  In spite of this, there is a thriving market for electronics scrap on platforms like eBay.  The average U.S. household has, in aggregate, only a few hundredths of a gram of gold stored in electronic equipment and computers.

So now it is time for the big reveal.  How much gold does the average U.S. household own?  In my opinion, a good guess is between 1/3 and 1 troy ounces (10 to 31 grams) of pure gold, plus or minus.  Almost all of this gold will be in the form of solid karat gold jewelry and gold coins, with a smattering from gold-filled jewelry and electronics scrap.  With gold currently trading at $1,800 per troy ounce, this translates into anywhere from $600 to $1,800 worth of gold, give or take, per household.

There are a few conclusions we can draw from our estimate of average U.S. household gold ownership.  First, it is safe to assume that these private gold holdings do not represent a significant addition to most peoples’ net worth.  Second, we can infer that the silver holdings of most American households are also proportionately low; applying a traditional 15x multiplier to gold holdings probably gives a reasonable estimate of household silver holdings.  Third, we can presume that the median U.S. household value of all other tangible assets, like gemstones, antiques and fine art, is also rather small.

These are important findings.  A massive dislocation is coming in the paper asset markets, where most Americans currently have the bulk of their (non house) net worth.  Hard assets, like precious metals, gemstones, fine art and antiques, can serve as a buffer during this future period of financial chaos.  But it doesn’t work if you don’t own any.  Invest accordingly.

 

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A 2018 to Do List for Alternative Asset Investors

A 2018 to Do List for Alternative Asset Investors

As 2017 departs and 2018 arrives, it makes sense for those interested in alternative assets to reassess their financial situation and make these smart moves.  So here is the Antique Sage’s 2018 to do list for alternative asset investors:

 

Rebalance your portfolio from conventional assets to alternative assets

The paper asset markets have had a tremendous bull market run over the past 9 years.  So there is every probability that the stocks, bonds and mutual funds in your retirement or brokerage account are worth far more than they were just a few short years ago.

So now is the perfect time for you to take a little of your winnings off the table.  Sell some of your stocks and bonds and reallocate the proceeds into an asset class that hasn’t performed as well.  Of course, there are very few asset classes that haven’t performed well recently.

But there is one asset class that was completely overlooked in 2017: bullion, fine art and antiques have lagged substantially behind.  In my opinion, this makes them perfect for alternative asset investors in 2018.  Their prices are low and their valuations are reasonable.  A move from traditional paper assets like stocks and bonds into fine art and antiques would simultaneously de-risk your portfolio while improving future return potential.

 

Don’t buy into the crypto-currency hype

Alternative asset investors may be sorely tempting to throw their money at those alternative asset niches that have done the best in 2017.  In this case, I’m referring to the crypto-currency complex.

Most crypto-currencies, including such illustrious participants as Bitcoin, Ethereum, Litecoin and Ripple, absolutely skyrocketed during 2017.  Bitcoin went from about $1,000 to $14,300 for an astounding 1,330% one year return.  However, Bitcoin was far from the best crypto-currency performer of 2017.  Ethereum rose by 7,470%, Litecoin increased by 5,775% and Ripple soared by an unbelievable 33,186%.

Now, I like the idea of crypto-currencies.  The world very much needs a form of money that is beyond the self-serving manipulations of corrupt central banks.  But Bitcoin, along with nearly every other crypto-currency currently in existence, has some pretty glaring flaws.

In short, it might be tempting for alternative asset investors to shift the entirety of their alternative asset allocation into crypto-currencies, especially in light of their recent outperformance.  But they should resist that urge.  Investment returns come in cycles.  Assets that perform well for an extended period of time inevitably underperform at some point in the future – usually when you can least afford it.

 

Buy yourself a wonderful piece of fine art

Life always seems to move faster than we would like it to.  There are always appointments to make, chores to finish and bills to pay.  But it is vitally important to step back and appreciate the world every once in a while.

A perfect way to do this is to buy a piece of beautiful art.  It could be a colorful print to display over your couch, or an avant-garde sculpture for your coffee table.  It could even be a fine piece of antique jewelry for you (or your spouse).  Almost anything that has been crafted by human hands with the primary intention of being aesthetically pleasing can qualify as art.

The only rule is that it should be a piece of art that appeals to you.  This might seem self-evident, but a surprising number of alternative asset investors get caught up in the idea of appreciation potential above all else.

Don’t fall into this trap.  Instead, buy a stunning piece of art just because it speaks to you.  If you are lucky, that artwork will not only give you countless hours of viewing enjoyment, but also a reasonable investment return as well.

 

Make sure you have enough cash or other short-term investments on hand

With the stellar run that both the stock and bond markets have experienced over the last several years, it is easy to believe that the good times will last forever.  And it is true that securities markets may continue to rise at a rapid clip for a while to come.  But the fortunes of the stock market can change with shocking abruptness.

Therefore, it is wise to reassess your financial position and make sure that you have sufficient cash on hand to weather an unexpected market disruption.  It is even more imperative for alternative asset investors – those who collect notoriously illiquid assets like fine art and antiques – to have a healthy cash buffer.

Having a large pile of cash or other short-term investments will help you fight the urge to sell less liquid investments at inopportune times.  This might not seem terribly important right now, when every asset known to man is rising without pause.  But having sufficient cash holdings will become vital if there is ever a market downturn.  It is good to be able to sleep soundly at night without having to worry about financial Armageddon.