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Today’s Growing Scarcity of Luxury Raw Materials

Today's Growing Scarcity of Luxury Raw Materials

We are quickly hurtling towards a crisis in the global luxury goods market.  The cause of this future crisis will be scarcity, or, to be more precise, growing scarcity.  The luxury goods market has traditionally used the finest luxury raw materials available, including gold and silver, precious gemstones and exotic hardwoods.  However, a subtle, yet growing shortage of these vital materials has slowly been developing.

This is a surprising and unwelcome challenge for mankind in the modern age.  During the 19th and most of the 20th centuries, the global supply of luxury raw materials rapidly increased as new mining or harvesting technologies were first developed and then perfected.  This massive increase in the prevalence of high-end materials coupled nicely with the phenomenal growth of the middle class in Europe and America during the same period.  Any new supply was quickly absorbed by burgeoning middle class consumers with either no or limited impact on pricing.

However, this seemingly endless cornucopia of ever increasing luxury raw materials has begun to diminish.  In some cases, production has merely stagnated for the last decade or two.  In other, more extreme instances, some of nature’s finest substances, which elegantly graced the fingers and wrists of our parents and grandparents, are now practically unobtainable.

Let’s start by analyzing the king of luxury materials – gold.  For most of human history global gold production was extremely small.  From the days of the Roman Empire until the 15th century, anywhere between 1 and 10 metric tonnes of gold were mined every year.  Then, as technological innovation accelerated, production rose.  By the mid 1850s, the Californian and Australian gold rushes had driven mine supply to 300 tonnes per annum.

But this was nothing compared to the tremendous mining innovations of the 20th century.  By 1970, world gold production was 1,475 metric tonnes.  In the 1980s, heap leaching techniques came online, driving gold production even higher.  In the year 2000, global mine production was around 2,575 metric tonnes.

But then a funny thing happened.  The growth of total mine output slowed considerably after the turn of the millennium.  2016 mine supply was estimated to be only 3,236 tonnes.  This represents an anemic 1.4% growth rate over the past 16 years.  This low growth rate isn’t the entire story however.  Future mine supply is expected to decline in the 2020s due to relatively low gold prices over the last several years suppressing new mine construction.

Gold is only one of many luxury raw materials with a supply problem, though.  The global mine output of diamonds increased dramatically during the 20th century, from just a few million carats per annum in 1900 to a peak of 177 million carats in 2005.  However, total diamond production has since collapsed to only about 125 million carats a year, a level that has remained stagnate for the past 8 years.

Although future diamond output is expected to climb to around 141 million carats by 2025, this is still well below the record levels of 2005 and only represents a 1.1% compound annual growth rate from 2016.  This estimated growth rate declines to a mere 0.6% if we use 2010 as our starting year and plummets to -1.1% if we measure from the peak of diamond production in 2005.

Both gold and diamond mines have been negatively impacted by many of the same economic pressures.  The easily accessible, rich deposits were mined out long ago and are now nothing but fond, distant memories.  This has caused prospectors to scour the ends of the earth looking for viable deposits.  As a consequence, most new gold and diamond mines have opened in some of the least hospitable places on earth, including the frozen wastes of northern Canada and the baking savannahs of sub-Saharan Africa.

Located in rugged, geo-political hotspots, these mines also tend to have far lower ore grades than the average mine from just a few decades ago.  For example, open pit gold mines operating today often yield less than one gram of gold for every ton of ore mined.  Modern diamond mining is even more brutal than gold mining, if such a thing is possible.  A hundred tons of ore is usually needed to yield a few scant carats of gem quality stones.

But the incipient supply issues with the luxury raw material mainstays of gold and diamonds are just the tip of the iceberg.  Many other traditional luxury raw materials are facing even greater supply constraints.  Mahogany, a tropical hardwood renowned for its rich, reddish-brown color and great woodworking characteristics, is another prime example.

For hundreds of years mahogany was the wood of choice for master cabinetmakers and woodworkers throughout Europe and the Americas.  But the resulting over-logging took its toll on mahogany supplies.  By the early 20th century, the type of mahogany traditionally used in antique furniture and other antique luxury goods – Cuban Mahogany – was commercially extinct.

Luckily, another variety of true mahogany – Honduran Mahogany, which had very similar physical qualities to Cuban Mahogany – was available in quantity.  Unfortunately, we exploited this new timber resource just as mercilessly.  Now Honduran Mahogany is endangered as well.

Less than 15 years ago, in 2003, Honduran Mahogany came under CITES (Convention on International Trade in Endangered Species of Wild Fauna and Flora) trade restrictions.  This means that all Honduran Mahogany imported into the West must be either plantation grown or otherwise sustainably harvested.

Predictably, the price of Honduran mahogany has soared since these import certifications were implemented.  And, unfortunately, there are no other commercially viable species of true mahogany left in the world.  The price of this fine cabinet wood is certainly not coming down again in our lifetime, and perhaps never.

Once again, mahogany is just an example of a larger trend.  As the amount of virgin rain forest has inexorably declined over the last 50 years, a wide range of exotic tropical hardwoods have also decreased in availability.  Native peoples have not only harvested these valuable trees for timber, but they also clear-cut the forest to create farm land and grazing land.  As a direct result, supplies of exotic hardwoods have declined while prices have simultaneously risen.

Gold, diamonds and mahogany are not exceptional.  The same story of growing scarcity applies to a variety of other luxury raw materials as well.  For instance, organic gems such as natural pearls, tortoiseshell, precious coral and ivory have all become increasingly rare due to widespread environmental pressures.  Rising populations have encroached on formerly pristine natural areas while expanding cities have released massive amounts of pollution into nearby oceans and wilderness.  Both of these activities destroy large swaths of natural habitat and reduce extant populations.

It might not be obvious yet because of the lingering effects of the Great Recession, but luxury raw materials have already entered an era of relative scarcity.  This is one of the reasons I like high quality antiques as investments.  They are often crafted from the finest raw materials known to man – luxury raw materials that will only become rarer as time goes on.

The History and Future of the Artist-Patron Relationship

The History and Future of the Artist-Patron Relationship

Most of us are familiar with the image of artist as avant-garde outsider, relentlessly dedicating himself to pursue the creation of the edgy and unorthodox.  And from the late 19th century to the present, this stereotype has been more or less true.

Most artists aren’t mainstream.  They create unconventional works.  They doggedly seek to push aesthetic boundaries.  These things, incidentally, have also given rise to the myth – or perhaps the reality – of the “starving artist”.  After all, it’s tough to be at the forefront of intellectual thought and still convince average people to buy your offbeat creations.

Long ago, however, the artist-patron relationship was dramatically different.  In the Middle Ages and Renaissance artists generally worked exclusively at the behest of rich and powerful patrons.  A wealthy patron would employ a gifted artist for years, or even decades, at a time, providing him with funds to cover the cost of his supplies and living expenses, as well as a generous stipend.  In return, the artist would complete works of art commissioned by his benefactor.

Although many of these Renaissance period artworks had religious themes, they were also intimately bound up with politics.  Patrons would often demand that they be inserted into ostensibly historical paintings or frescos in order to emphasize the patron’s religious devotion or importance.

A great example of this is the famous Italian Renaissance painter Raphael’s greatest work, The School of Athens.  This giant fresco, commissioned by Pope Julius II in the early 16th century, shows famous ancient philosophers and scholars debating in a mythical Classical setting.  However, Raphael inserted the Pope’s nephew, the Duke of Urbino, into the painting.  Raphael was either instructed by his patron to make this anachronistic addition or did it on his own to curry favor with the Pope.  In any case, this was commonplace in medieval and Renaissance art.

The Medici, a dynasty of wealthy bankers who dominated Florentine politics during the late Renaissance, perhaps best exemplifies the typical artist-patron relationship of the time.  Immensely rich and powerful, the Medici family sponsored famed artists such as the legendary Botticelli and Michelangelo.  Indeed, the Medici’s home city of Florence reached its cultural apogee under their rule, in no small part because of their generous patronage of the arts.

But this traditional artist-patron relationship began to fundamentally change in the mid to late 19th century.  Until this time, the French Académie des Beaux-Arts dictated trends in European art.  Artists who won awards or accolades at the Academy were well placed to receive important commissions from wealthy patrons.  But the institution was hopelessly traditionalist, valuing religious, historical and portrait themed paintings and sculptures rendered in a photo-realistic style above all else.

Starting in the 1860s, a small group of promising artists, including Claude Monet and Pierre-Auguste Renoir, rebelled against the rigid traditions of the Academy.  After repeated rejections by the Académie des Beaux-Arts, these pioneering artists founded their own art show called the Salon des Refusé, or the Salon of the Refused.  The works displayed at this unorthodox show later became the basis for Impressionism, the first truly Modern Art movement.

After the successful rebellion of the Impressionists from the Académie des Beaux-Arts, it became increasingly common for artists to reject the traditionalism that had dominated fine art from the Renaissance to the early 19th century.  They were free to pursue whatever styles, concepts or mediums they desired.  But this newfound liberty came at a steep price.  Rich patrons no longer directly subsidized an artist’s lifestyle.

Instead, artists effectively began creating works on spec, meaning they completed a piece of art first, and then tried to see if anyone was interested in buying it afterwards.  But if an artist’s style was too avant-garde, the public, including wealthy art collectors, would be initially repelled.  This translated into few sales and a meager, hand-to-mouth existence for most artists.  This was an unfortunate development for artists, considering how expensive good art is to produce.

The famous Dutch Post-Impressionist Vincent Van Gogh is perhaps the most well-known example of this phenomenon.  Although he was tremendously prolific, creating over 2,000 artworks during his lifetime, he struggled to find commercial success.  Although his works routinely trade for millions of dollars today, he ironically died a pauper, barely able to eke out a Spartan existence from his artistic talent.

The influence of these early non-conformist artists has persisted down to the modern era.  But while the 20th century was dominated by the unfettered, iconoclast artist, I believe the pendulum of history is beginning to swing in the other direction.  We are starting to see a variation of the traditional artist-patron relationship reassert itself.

This is most evident on peer-to-peer e-commerce platforms like Etsy.  Etsy allows an aspiring artist to create a few works on spec to gauge potential interest, and then accept commissions from interested customers – really modern-day patrons – for custom work.  This arrangement allows artists to tap the much-needed funds of well-to-do art aficionados, while simultaneously providing collectors a degree of control over the type of art they receive.

France’s Ancien Regime and the Coming Investment Revolution

France's Ancien Regime and the Coming Investment Revolution

Before its 1789 revolution, the French political system was called the “Ancien Regime”, which translates roughly as the “old order”.  Most of us envision this period of French history as a time of grand palaces, political intrigue and glamorous nobility.  However, the reality was somewhat uglier, with widespread corruption, economic oppression and disdainful arrogance.  What is really shocking, though, are the parallels between France’s Ancien Regime and our own time, and why it means an investment revolution is inescapable.

Pre-Revolutionary France was embodied by the Estates General, an assembly of the three most important groups in the kingdom.  This consultative body was summoned exclusively at the behest of the king, usually to approve new taxes, but occasionally to fundamentally alter established French law.

The First Estate was the church, ranging from the most exalted Parisian cardinal to the humblest of provincial priests.  The Second Estate was the nobility, whose titles were either inherited or purchased.  The third estate was the commoners, effectively everyone else in society – about 98% of the French population.

Although the Estates General was nominally democratic, it had one glaring flaw.  Any two Estates could overrule the third via a simple majority.  And that is exactly what happened. The clergy and nobility, although only about 2% of the total French population, possessed many advantages and prerogatives that the Third Estate lacked.  Therefore, these two groups colluded via their representation in the Estates General to retain their privileges to the perpetual disadvantage of the commoners.

Commoners paid a dizzying array of complicated and onerous taxes in Pre-Revolution France.  For example, member of the Third Estate had to pay the taille or property tax, the capitation or poll tax, the vingtieme or income tax, the gabelle or salt tax, the aides or excise tax and the timbre or stamp tax.  Peasants even had to pay an in-kind tax called the corvee, which forced them to labor a certain amount of the year for their aristocratic landlords or local government.  But the French clergy and nobility, in contrast, were exempt from almost all of these taxes.

As if these tax inequalities were not bad enough, the status of French nobility and the Church entitled them to collect taxes directly from commoners, oftentimes on behalf of the king.  Corruption among tax collectors was rife and members of the First and Second Estates always kept a substantial chunk of these taxes for themselves.

Starting with the reign of Louis XIV – the Sun King – the French monarchy badly mismanaged the nation’s finances.  This problem deteriorated to the point where the king actually openly sold titles of nobility to raise desperately needed funds.  If you were a wealthy Frenchman in the 17th or 18th century, you simply bought yourself nobility and a fiefdom.  These not only exempted you from most taxes and obligations that commoners had to bear, but were also inheritable, allowing your progeny to forever sidestep their civic responsibilities.

Unfortunately, I feel an investment revolution is inevitable because the modern world has successfully created a neo-feudal system similar to the French Ancien Regime.  The tripartite division among the Ancien Regime’s Estates General is mirrored in today’s institutions.  The mainstream media has effectively replaced the Church as the First Estate.  This is ironic considering the mainstream media has long been pretentious enough to style itself the present-day Fourth Estate.

The mainstream media’s sense of self importance is without equal.  They sit isolated in their echo chambers, disdainfully passing judgment on everyone around them, yet finding only themselves blameless.  And, as the 2016 presidential election or Bexit has proven, they aren’t above trying to influence the outcome of immensely important world events.  The mainstream media doesn’t simply report the news these days; they manufacture it like sausage.

The mantle of the nobility of the Second Estate has passed to the business and political elite of the world.  Immensely wealthy, out of touch with reality and often hopelessly corrupt, these people make important decisions that impact the lives of millions on a daily basis.  But regardless of how inept or poor those decisions may be, they never suffer any personal consequences.  Being one of the few, chosen elite in today’s world means never having to say you’re sorry.  Failed presidential candidate Hillary Clinton is the poster child for this class.

The Third Estate today looks much the same as it did in pre-revolutionary France.  Everyone who isn’t a globetrotting tech titan, standing senator or editor for the New York Times falls into this category.  In other words, the Third Estate is composed of the unwashed masses.

Our modern tax system is also just as lopsided as it was under the French monarchy.  The modest income of average people is heavily taxed while the vast capital of business elites, often tax exempt, flits effortlessly around the globe.  Large multi-national corporations are perhaps the worst offender here, using offshore holding companies by the dozen and engaging in complicated international tax avoidance schemes like the “Double Irish” or the “Dutch Sandwich”.

Much like the French nobility, modern-day wealthy individuals and families are able to dodge taxes via the use of corporate trusts, stock options and venture capital funds.  Whoever has the most money and the most tax lawyers, wins.  And that isn’t regular people.  Any 18th century Frenchman would instantly recognize our modern-day methods of buying social status and power.

But amidst our present gilded age, there is a looming investment revolution for our self-appointed elites.  The corruption and self-interest of the French clergy and nobility during Ancien Regime prevented the Estates General and the monarchy from ever reforming their political system.  As a result, France’s problems festered until revolution finally descended, completely wiping out the privileges of the clergy and the nobles.

We are facing a similar circumstance today.  Political and business elites collude with the mainstream media to protect their exorbitant privilege and wealth, all to the detriment of average people.  They stash most of their wealth in stocks, bonds and other paper assets.  Then they ensure monstrous profits by inflating global asset bubbles and legislating special tax breaks for themselves.  This is all courtesy of their central bank collaborators and political friends.

And these globalist elites currently believe they are untouchable – that an investment revolution is impossible.  They are the modern-day equivalent of Ancien Regime French aristocrats who bought their titles.  But change is coming.  Owning a few thousand shares of Google, Facebook or Amazon common stock might seem like a ticket to perpetual wealth today, but the view a decade from now will likely be very, very different.  An investment revolution is brewing and most paper assets will be poison.

This is why I advocate the ownership of investment quality art and antiques.  These discrete, tangible investments are not tied to the continuation of our hopelessly corrupt and ineffective economic policies.  All those French titles of nobility are worth very little today, but a fine 18th century French painting, sculpture or silver tea set is still highly prized.  When the long awaited investment revolution finally arrives, I know which assets I would rather own.

What Venezuelan Inflation Can Tell Us about Our Future

What Venezuelan Inflation Can Tell Us about Our Future

As 2017 progresses, all eyes have been on the Venezuelan inflation train wreck currently unfolding.  While the unfortunate South American nation stopped publishing official (and embarrassing) inflation statistics some time ago, an informal index calculated by Bloomberg known as the “Venezuelan Café Con Leche Index” currently pegs the annualized inflation rate in beleaguered country at 616%.

This shockingly high inflation rate is even more alarming in light of the fact that the Venezuelan bolivar used to be Latin America’s strongest, most stable currency for most of the 20th century.  In fact, the Venezuelan bolivar was one of the world’s few currencies to actually appreciate versus the U.S. dollar between the 1920s and the 1970s!

This feat was quite an accomplishment, underscoring Venezuela’s strong economy and fiscal position in the mid 20th century.  Unfortunately, that previous monetary stability abruptly ended in dramatic fashion on February 18, 1983, when Venezuela experienced a shocking currency crisis referred to locally as “Viernes Negro” or Black Friday.

Before Venezuela’s 1983 Black Friday devaluation, the bolivar exchange rate had been fixed at 4.3 bolivars to the dollar.  Currently, that same bolivar trades for over 5,100,000 to the dollar on the Caracas black market.  That averages out to a staggeringly high Venezuelan inflation rate of about 50% per annum for the last 34 consecutive years.

Consequently, over the last few decades Venezuelans have learned that bolivars should be spent as quickly as possible in order to avoid the devastating effects of rampant inflation.  Every government attempt to stem the inflationary tide, including lopping three zeros off the end of the old bolivar in 2008 and renaming it the bolivar fuerte – the “strong bolivar” – has failed miserably.  At this point, Venezuela teeters on the brink of hyperinflation, effectively insolvent.

Reading this news about Venezuelan inflation got me thinking.  Chronic, elevated inflation forces Venezuelan shop owners to constantly readjust their prices upward.  If they don’t, they will quickly sell out of their below market price goods and then lack the necessary capital to restock.  But developed countries with strong currencies, like the U.S., Japan and the eurozone, allow businesses to retain static prices on old goods, sometimes for many years at a time.

This point was driven home to me when I visited the website of an online gem dealer recently.  Much of this dealer’s inventory was several years old.  This state of affairs is completely normal for the industry, though.  Jewelry stores and antique shops, as well as art, gem and coin dealers have notoriously slow inventory turnover.  It takes these businesses time to find the right buyer for their goods.

But then it hit me.  Even though much of this gem dealer’s inventory was relatively old, the prices hadn’t changed.  I know this is true because I’ve frequented this dealer’s website for several years.  The pricing on old stock has been absolutely static.

This is a situation that doesn’t exist in Venezuela.  It is a situation that can’t exist in Venezuela.  Yet it is a situation that we in the developed world take for granted today.

Investors and consumers in the U.S. and other developed countries have become complacent about stable prices.  We believe, implicitly, that inventory prices will remain fixed and unchanging forever.  But this is a poor assumption, justified only by looking in the rear view mirror of monetary history.  Instead, it would be prudent to look at Venezuelan inflation for a glimpse of what a darker, rawer economic future might look like.

I know that many people naively believe “It can’t happen here.”  Those people are wrong.  Government officials and monetary authorities in the developed world are under exactly the same pressures for politically expedient solutions as their Venezuelan counterparts.

This is proven by how quickly and easily central banks around the world adopted quantitative easing during the financial crisis of 2008-2009.  Quantitative easing – the outright printing of money by central banks – had been a forbidden, nearly unthinkable, practice for central bankers in ages past.  Now this inflationary policy has been glibly justified and normalized by those in power.

This gradual slide into inflationism has important implications for investors in art and antiques.  I have been personally guilty of the conceit of believing that alternative asset prices won’t meaningfully rise while I carefully consider my choices.  I window shop art and antiques endlessly, yet only occasionally open up my wallet to buy.  And yet I am keenly aware that the U.S. dollar’s reign as the global currency hegemon is gradually drawing to a close.

While I firmly believe that the dollar will strengthen over the next few years, I also know that the dollar will eventually one day join all other paper currencies in the dustbin of history.  This isn’t a prediction so much as an inevitability driven by human fallibility.  If we learn anything from Venezuelan inflation, it should be that no fiat currency lasts forever.