Editorial

One of the great trends in tangible asset investing today is stacking silver.  Stacking silver is simply the process of regularly buying physical silver in order to hedge your investment portfolio against inflation, financial panic or other economic dislocations.  However, there is a something of a controversy in the silver stacking community.  Which is better to buy: low premium, bullion-oriented silver or higher premium silver that has some numismatic or collector’s appeal?

This might seem like a contradiction at first.  After all, if one is “stacking silver”, isn’t the entire purpose to get as much silver as possible for the lowest possible cost?  Well, yes and no.  Pursuing a weight only approach to silver buying is certainly a legitimate strategy.  And the simplicity of such an approach is quite appealing.  But it isn’t the only way to stack silver, or necessarily even the best way.

Like many things in life, there is no clear delineation between silver bullion and silver numismatic coins.  Instead, there is a continuum, or range between the two extremes.  On the purely bullion side reside most modern struck and extruded silver bars that perhaps trade for only a few percent over the spot price.  Generic silver rounds, struck in a variety of different sizes and styles by private mints, also fit into this category.

On the coin collector’s end of the spectrum are old U.S. and foreign silver coins, some of which trade for premiums of many hundreds or even thousands of percent over spot.  Of course most silver stackers don’t bother with these pieces because they have far too much numismatic value in relation to the silver they contain.  But there are a plethora of semi-numismatic silver coins (and even bars) that derive their value primarily from their bullion value while still retaining some collector’s premium.

90% U.S. silver coins are the poster child for semi-numismatic silver.  Struck from the 19th century until 1964, 90% U.S. silver consists of dimes, quarters, half dollars and silver dollars.  Silver dollars always command relatively high premiums while half dollars have more modest premiums.  Silver dimes and quarters have the lowest premiums of all, although they are usually still significantly higher than no-frills silver bullion.  90% U.S. silver coins are readily available in $100, $500 and $1,000 face value bags.

Another popular category of semi-numismatic silver coins is modern bullion coins struck by government mints.  These include well-known coins like American Silver Eagles, Canadian Silver Maple Leafs, Austrian Silver Philharmonics, Chinese Silver Pandas and British Silver Britannias.  Although these coins were all originally intended as bullion pieces, a vibrant collecting community has grown up around them over time.  Third-party certified, or slabbed, specimens in very high grades (MS69 or MS70 – essentially flawless coins) are particularly coveted in the marketplace.

Even silver bullion bars can, counterintuitively, sometimes garner high premiums.  Vintage poured silver bars, in particular, are great examples of this phenomenon.  Although initially treated as pure bullion pieces, vintage poured silver bars have evolved into a very hot corner of the market, with premiums sometimes reaching as high as 100% for especially desirable specimens.

All of this interest in poured silver bars has created a renaissance in its production.  After having been largely discontinued due to the labor intensive nature of casting compared to struck and extruded bars, poured silver bars have made a comeback as a specialty, “luxury” bullion product.  Smaller companies, like Yeager’s Poured Silver, have spearheaded the revival of this exciting form of semi-numismatic silver bullion.

But the real question most people have is “What is a better investment?” – pure bullion pieces or semi-numismatic silver?  In one sense, I don’t believe there is any “wrong” way to pursue stacking silver.  If you like it, buy it.  Any type of silver that you purchase will help you diversify out of overvalued paper assets and give your investment portfolio some much needed tangible asset exposure.

However, I have always been partial to incorporating an element of numismatic value, no matter how small, in my own silver stacking.  This is because semi-numismatic pieces grant otherwise ordinary silver the added benefit of optionality.  Optionality is any aspect of an investment that you don’t pay much money for, but has the potential to generate outsized returns.  Semi-numismatic silver might cost an extra 10% or 20% in premiums over purely non-numismatic silver bullion, but it also has the possibility of eventually selling for premiums of 50% to 100% over spot.  That optionality could be very powerful indeed, granting a “multiplier effect” to your silver holdings.

Generally speaking, I like incorporating additional ways of making money on my investments versus fewer ways.  In the case of stacking silver, exposure to the spot price of silver is one way of making money.  I like that.  But the optionality of semi-numismatic premiums is a second, completely distinct way of generating returns.  And, provided I don’t pay too much more for the opportunity, I like two ways of making money on an investment better than just one way.

One of the negative aspects of semi-numismatic silver is that it is usually less liquid than straight bullion, meaning it is harder to sell on short notice for its full value.  Many silver stackers who pursue a weight-only, non-numismatic approach do so because they believe it will be difficult, if not impossible to realize high premiums on semi-numismatic silver bullion in turbulent conditions.  This period of expected future economic crisis is often referred to in the silver stacking community as the “sh*t hits the fan” moment.

However, in my opinion, if you’ve constructed your portfolio properly, you won’t be selling your silver in these circumstances.  There is an economic concept known as Gresham’s Law, which famously states that “bad money drives out good”.  This dictum is usually applied to circulating coinage when debasement occurs.  If there are two different coins with the same face value, and one contains precious metal while the other doesn’t, the baser coin without any precious metal content will circulate while its more intrinsically valuable counterpart will be hoarded.

This exact situation was experienced in the U.S. after it ceased using silver in its circulating coinage in 1964.  Within a few years, it was almost impossible to find silver coins in circulation; their copper-nickel replacements freely circulated while the good silver coins were hoarded.

I believe that if there is ever a major financial panic in the future, Gresham’s law will kick in with a vengeance.  If you have been stacking silver before such an event occurs, then congratulations.  Your stash of silver will be worth much more than it was before.  But you probably won’t have to worry about panic liquidating your semi-numismatic silver pieces at low premiums.

Instead, you’re much more likely to use your credit card to spend virtual, rapidly-depreciating fiat dollars (or some other national fiat currency) for necessary goods and services.  After all, fiat currencies will be the “bad” money according to Gresham’s Law, while your silver stash will be the “good” money.  And the good, silver money will be the very last thing you’ll want to sell in such a situation.  Even if the banks are closed because of the panic and credit and debit cards don’t work, you’ll still part with any physical cash you have before you’d consider bargaining away your precious silver.

In the end, I think investing in silver via semi-numismatic coins and poured bars is just as good a way of stacking silver as buying non-numismatic bullion bars, rounds or coins.  Even if there is a future financial panic, Gresham’s Law dictates that your silver hoard is one of the very last investments you’ll liquidate.  There is a high probability that you will only willingly part with your silver once any financial panic has subsided and premiums for semi-numismatic coins have normalized.  But, as always, there is no wrong way of stacking silver.  In my opinion, any silver is good silver.

John Exter was a famous 20th century American economist.  His illustrious career included stints at MIT, the board of the U.S. Federal Reserve, and First National City Bank (which later became Citibank) as a senior VP.  He was even the first governor of the Sri Lankan Central Bank in the early 1950s.  To say John Exter had an impressive resume would be an understatement.

However, he is best remembered for creating Exter’s Pyramid, an inverted pyramid that roughly organized asset classes according to increasing risk and market size.  His pyramid is inverted because in a normal, healthy economy a relatively small number of extremely safe assets (located at the narrow base of Exter’s pyramid) support a large number of risky ones (towards the wide top of the inverted pyramid).  Exter chose to use gold as the foundation of his inverted Pyramid – a sensible choice given that the gold-based Bretton Woods monetary system was still intact during his tenure.

But John Exter didn’t just choose gold as the base of his pyramid because it was in vogue at the time.  He was also an avowed hard money advocate.  He was old enough to remember the days when the United States still had a circulating gold coinage.  He was also old enough to have the wisdom to know that a “flexible” money supply – a flawed ideal pursued by global central bankers for most of the 20th century – would inevitably lead to heartache and economic ruin.  Fortunately for John Exter, he died in 2006.  So he was never forced to witness the hideous financial denouement wrought by the world’s incompetent central banks during the Great Financial Crisis of 2008-2009.

Today, almost 10 years after that terrible crisis, the investment and economics professions have lost whatever tenuous attachment to reality they might have once possessed.  One of the top Google results for the term “Exter’s Pyramid” is an article from 2014 by an investment firm that is boldly titled “Exter’s Defunct Pyramid“.  You can probably guess the content of the article from the title alone; it is not flattering.  In any case, it accuses John Exter of being an ancient fuddy-duddy whose old-fashioned ideas about gold don’t apply to our streamlined, ultra-modern, super-perfect fiat currency system.

This way madness lies.

And I think our collective insanity is obvious to any truly impartial observer of our current capital markets.  As far as I can tell, the United States specializes in manufacturing lottery tickets in the form of highly dubious companies listed on public exchanges that purport to do something vaguely technological.  To paraphrase a common saying: financial stupidity – there’s an app for that!

Seriously, we have companies like Snap Inc.  This firm specializes in making software for live vlogging, which is like blogging except with videos taken in real time so you can’t edit out mistakes.  Snap hopes to make money by selling advertising that it must cannibalize from powerful internet giants like Google, Facebook and Amazon – either that or tear the last few advertising dollars from the rapidly dying print media industry.  Oh, did I mention that Snap currently sports a market cap of $17 billion and has yet to earn a single penny?  And with a business plan like that, I suspect it never will.

Unfortunately, I think that today’s stock market is a confidence game in the classic sense of the word.  There are only con artists and marks.  If you don’t know which one you are, it is probably the latter.

With these thoughts propelling me, I decided to update Exter’s Pyramid to reflect the realities of a very uncertain 21st century.  Below, I have listed my interpretation of John Exter’s asset classes from least risky to most risky:

• Precious Metals
• Fine Art, Antiques & Gemstones
• Paper Money & Bank Deposits
• Government Debt
• Municipal Debt
• Corporate Debt
• Commercial Real Estate
• Stocks
• Derivatives & Securitized Debt

As you can see, I’ve replaced gold with the more general category “precious metals”.  Precious metals, including gold, remain the most liquid of the safe assets available without a doubt.  I’ve also inserted a new asset class in the number two position: fine art, antiques and gemstones.  These undervalued tangible assets are all too often overlooked by an investment community that doesn’t understand them or have the specialized knowledge needed to evaluate them.   The investment potential of fine art and antiques is, incidentally, what the Antique Sage website is all about.

Next I’ve placed the asset classes we traditionally think of as being safe.  This includes physical cash, savings accounts and government bonds.  These assets all have great liquidity, but could potentially suffer from currency devaluations driven by future financial crises.

After these come municipal and corporate debt on the risk scale.  These asset classes can either be fairly safe or extremely risky, depending on a host of factors that most armchair investors are ill-equipped to judge.  They have some elements of safety, but also many potential risks in the current environment.

The final asset classes in my interpretation of Exter’s Pyramid are commercial real estate, equities, derivatives and pretty much anything that has been securitized.  These assets are all ticking time bombs.  When they finally implode, the financial carnage will be devastating.  Stay far away from these wealth destroyers.

To many financial professionals, Exter’s Pyramid is a historical footnote – a reflection of an obsolete monetary system that has no bearing on the present.  But I believe differently.  I think that Exter’s Pyramid is actually a window into our future – an economic warning of things yet to come.  We would do well to heed the words of wise men who have come before us – men like John Exter.

One of the most interesting figures in ancient Greek mythology is the Trojan woman Cassandra.  According to legend, she had been granted the gift of prophecy by the Greek god Apollo.  But when she later displeased the god, he cursed her to never be believed in spite of her prophetic gift.  This twisted curse later figured prominently in one of the best known tales of ancient Greek mythology – the destruction of the walled city of Troy.

In ancient accounts of the fall of Troy, Cassandra is one of the few people to recognize the danger that the besieging Greeks pose.  In fact, she attempts to intervene several times on behalf of the Trojan people to avert the disaster, only to be thwarted in every instance.  The Trojans ridiculed Cassandra, believing her prophecies to be insane.  The naive Trojans are eventually tricked into accepting the gift of the Trojan horse.  The Greek soldiers hiding inside the hollow horse spill out at night to pillage and burn the doomed city while Cassandra is forced to helplessly sit by and watch.

I feel, in many ways, that I am a modern-day parallel to the Cassandra of ancient Greek myth.  I have watched in horror over the past 20 years as a relatively stable, prosperous U.S. economy has been gradually deformed and hollowed-out by serial bubbles blown by the malicious Federal Reserve.  And yet I have been powerless to do anything about it.  I am a present-day financial Cassandra.

My life as a financial Cassandra started back in late 1999.  The first internet bubble was in full swing at the time.  I was a freshly-minted college graduate who had just landed his first job at a Boston-based mutual fund company.  I was learning everything I could about the financial markets, but a couple things puzzled me endlessly.

First, I couldn’t understand why everyone was in love with “new economy” technology stocks.  They seemed hopelessly overvalued to me.  But the investors buying them – including my company’s fund managers – could see a future of endless growth that was invisible to me.

Instead, I salivated at the prospect of buying the old-fashioned tobacco company Philip Morris which sported a shockingly-high dividend yield of 10% at the time.  Ironically, I had no money to invest myself and couldn’t convince anyone else of the value of the company.  Being a financial Cassandra has rarely been so frustrating.

In retrospect, Philip Morris has been a phenomenally good investment since 2000.  If you bought Philip Morris back then and held to today without selling, you would have received massive dividends over the years.  In addition, you would also be the proud owner of shares in four valuable Philip Morris successor companies: Altria Group, Philip Morris International, Kraft Foods Inc. and Mondelez.

The next memorable period during my career as a financial Cassandra occurred in the spring of 2007.  I could foresee that a financial crisis of some form was going to hit the economy, although I didn’t know exactly when.  Everyone else thought I was crazy.  My co-workers were talking about a permanent economic expansion driven by the ever upward spiraling housing and stock markets.  Predictably, I could convince no one of my views.  My co-workers and I eventually agreed to amicably disagree on investment strategy.

So I went searching for the most secure future cash flows I could find – U.S. Treasury bonds.   However, I also wanted the longest duration Treasury securities I could get as well.  This would enhance my profits if my forecast of an economic crash came to pass.  After much research, I eventually opted for zero-coupon, 30-year U.S. treasury strips.  Zero coupon bonds make no periodic interest payments, but instead issue one large final payment at maturity.

Buying long-dated U.S. treasury strips was so unorthodox at the time that the bond broker I spoke to when I placed the trade actually tried to talk me out of it.  I politely declined his free “advice”.  The global financial crisis unfolded about a year later.  I closed my U.S. treasury strip position for an 80% gain in only 18 months.  Being a financial Cassandra can be very profitable, if you can be patient and ignore the ridicule that comes with it.

And now, in 2017, I am staring at the third major bubble period of my life as a financial Cassandra.  This bubble is absolutely huge and the accompanying stock market insanity is breathtaking.  We are clearly headed for another economic disaster.

As an example of the absurdity of current stock valuations, media streaming company Netflix currently trades at more than 200 times earnings.  This is even though the technology darling has nearly saturated the domestic U.S. market, greatly diminishing its prospects for future growth.  In addition, the company’s profitability will always be constrained by content owners who will seek to arbitrage away any excessive revenue Netflix derives from an increasing subscriber base or rising subscription prices.

Another bubble stock, Tesla, looks like a raging Ponzi scheme with a staggering $61 billion market capitalization, which is larger than either Ford’s or General Motors’.  Its CEO, Elon Musk, could have reined in the company’s expansion when it was still a niche, luxury electric car manufacturer.  Tesla would have been a much smaller company under those circumstances, but it also would have had a reasonable shot at being profitable.

Instead, Musk chose to let it turn into a cancerous monster, growing without any limit using cheap capital market financing.  Unfortunately, the company is far too large and unwieldy to salvage now, particularly after its ill-advised Solar City acquisition.  Absent an unlikely buyout, it is only a matter of time until a financial crisis closes the capital markets and forces Tesla into bankruptcy.

Not all investments are doomed in the next financial bust, though.  Tangible asset like precious metals, investment grade antiques and fine art have been largely overlooked during our latest bout of bubble insanity.  These enticing investments have track records hundreds of years long proving they are sound investments.  And it takes far less money to get started buying art and antiques than you might think.

Of course, I can convince very few people of these opinions.  Such is the curse of a financial Cassandra.  But I implore you; please learn from my past.  Paper assets are grossly overvalued right now while fine art and antiques are perhaps the world’s most under-owned asset class.