Investing

Let’s pretend for a moment that you are the portfolio manager at a large university endowment, pension fund or insurance company.  You have a very basic problem.  You have a giant pile of money that you need to invest wisely.  You want these investments to not only preserve their purchasing power over many decades, but also provide a reasonable, risk-adjusted return as well.

Unfortunately, this is easier said than done.  Inflation, geo-political troubles, debt defaults and market crashes are all normal occurrences over such a long investment timeframe.  Under normal circumstances, you would hold your institutional portfolio in a mix of stocks, bonds and cash.  And usually, this conventional asset mix would be good enough.

However, we are not living in economically normal times at the present.  Instead, we are living in a time of acutely heightened financial risk.  Most traditional fixed income and equity investments are wildly overvalued.  Even some alternative assets, such as private equity, venture capital and real estate, are trading at unappetizingly high valuations.

Of course, if you are a canny institutional investor, you know there is at least one place you could safely stow some of that massive portfolio: the global art market.  When I’m talking about the art market in this context, I’m referring to much more than just paintings or sculpture.  I’m also including antiques, high-end jewelry, prints, antiquities and objets d’art.  So I’m using a very broad definition of the art market.

Regardless, let’s assume that you want to invest a modest 5% of your institutional portfolio in the global art market.  If you are managing a small endowment or pension fund, this won’t be much of a problem.  A $1 billion total portfolio size would only equal a $50 million art allocation.

But if you happen to be managing a larger pot of money, you’ve got a real problem.  For example, as of 2016, Harvard University had a $34.5 billion endowment.  Yale isn’t far behind, with an endowment of $25.4 billion.  Even lowly Notre Dame University sports a substantial $8.4 billion stash.

In fact, there are fully 89 colleges and universities in the United States that have endowments greater than $1 billion in size.  A modest 5% allocation to the global art market with portfolios this size would absolutely overwhelm the marketplace in short order.

The story is disturbingly similar when looking at pension funds, insurance companies or sovereign wealth funds.  The California Public Employees’ Retirement System, otherwise known as CALPERS, is sitting on a $290 billion nest egg.  The world’s largest sovereign wealth fund, the Norwegian Government Pension Fund, holds around $1 trillion in assets.  The total value of U.S. insurance reserves was an estimated $5.8 trillion in 2015, to say nothing of those held at insurance firms overseas.

Institutional asset managers have a problem as large as their investment portfolios.  There is no way they can collectively place even 1% or 2% of those assets into the global art market without massively driving up prices.  We know this because of a wonderful little publication from The European Fine Art Foundation.

According to this gem of a report, the global art market has a turnover of around $45 billion per year.  That might seem like a lot, but it pales in comparison to the global annual stock market turnover of $100 trillion, which is over 2,000 times greater than the art market’s.  And the global bond market puts the stock market to shame, with an annual volume that is several times higher!

The sad truth is that many institutional investors stick with stocks and bonds for the very simple reason that those markets are large enough to accommodate their oversized portfolios.  But this is a lot like a drunk searching for his lost car keys at night underneath a lamppost because that’s his best chance of finding them.  Traditional portfolio managers buy stocks and bonds and hope against hope that everything will turn out well.  There is definitely an element of wishful thinking at work among institutional investors.

They are scared to make significant portfolio allocations to the global art market because they know the asset class is illiquid, making it very difficult for them to get in and out quickly.  In addition, investing in the high value segment of the art market requires special training and knowledge – skills that traditional asset managers completely lack.  All of this acts as a deterrent, which helps to suppress the price of fine art and antiques relative to traditional asset classes.

But I’m going to tell you a little secret: the relative undervaluation of the global art market will not last forever.  The smart money is already steadily and discreetly building their positions.  Fine antiques and works of art are being systematically accumulated by the wealthy and well-connected.  They are buying now because they know the market is illiquid and that they need to build their tangible asset portfolio now, before the investment merits of these choice assets become common knowledge.

I do have some good news, though.  You don’t have to sit on the sidelines and watch while the smart investors get rich without you.  The small investor is perfectly positioned to participate in the art and antiques market.

Regular people like you and me don’t have to worry about moving the global art market with our bid.  We can easily buy wonderful antiques for $500, $1,000 or $5,000 at a whim, and it will immediately have a positive impact on our portfolio positioning.  This is a boon to the small investor, and something that an institutional money manager can only view with jealousy.

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If you are anything like me, then you are a saver.  You like to squirrel money away for unforeseen expenses or maybe just a rainy day.  You savor the peace of mind that saving gives you – the knowledge that if bad times come, you will be as ready for them as you can be.

There are a lot of different ways that people save.  Some like high yield savings accounts while others swear by U.S. savings bonds.  Money market funds are another popular choice.  A few more sophisticated savers even use Treasury Direct to buy U.S. Treasury bills straight from the government.

All of these savings methods are viable choices, with their individual advantages and disadvantages.  Or at least they used to be viable savings choices.  Unfortunately, over the past 15 years the financial authorities have gone out of their way to make life tough for savers.

The U.S. Federal Reserve (along with every other central bank in existence) has suppressed interest rates, ensuring that savers do not get a fair return on their rainy day fund.  Stocks and bonds aren’t a solution to the savings problem either.  Not only are they far too volatile to be a good savings vehicle, but they are also egregiously overvalued at the moment.  Even the U.S. Treasury has done their part to stick it to savers by systematically changing the terms of U.S. savings bonds to make them less attractive.

That’s why I recently sat down with my wife to have “The Talk”.  The Talk is where I calmly and straightforwardly explained to my wife that in the very near future we will have to start doing some very unconventional things in order to preserve our existing wealth.  The broad equity and fixed income markets are simply not going to be appropriate long term solutions for wealth building.

At the same time we also needed a new savings strategy.  The days of keeping an ever growing stash of cash in a bank savings account is rapidly coming to a close.  This isn’t because I believe massive inflation is imminent.  But, at the same time I fully understand that the days of U.S. dollar hegemony are slowly, tentatively coming to a close.  So dollars are fine for now, but it is wise to plan ahead for the tumultuous financial future that is visible on the horizon.

After all, you don’t want to be racing all the other late-comers for the few remaining good assets when everything begins to unwind financially.  Also, investment diversification is, generally speaking, a good thing – a dictum that applies to savings diversification as well.  I don’t want to be a slave to my U.S. dollar holdings.

So what exactly does my new savings strategy look like?  I have just three words: gold and silver.  In one sense, this is not a particularly groundbreaking savings strategy.  In fact, it is quite the opposite.

Gold and silver have been considered money for thousands of years.  The flourishing trade of the ancient Greek economy was based on the silver drachm, a coin of about 4 grams (0.1286 troy ounces).  The medieval Islamic caliphates fueled their extensive trade networks with gold dinars, which also weighed around 4 grams.  More recently, the British pound was the envy of the world before 1931, when each pound could be exchanged for 0.2354 troy ounces (7.32 grams) of pure gold.

These historical examples underscore just how normal it was for strong currencies to be denominated in, or convertible into, gold or silver.  It is really only within the last 50 years that governments definitively broke the link between precious metals and money.  For instance, the U.S. Treasury only stopped exchanging silver certificates for raw silver in 1968.  And President Richard Nixon only suspended the convertibility of U.S. dollars into gold in 1971.

Unfortunately for savers, the outcome of our great monetary experiment with pure fiat currencies has been predictably bad.  Savers have been systematically disadvantaged in order to “save the system” for big businesses and financial speculators.

And that’s why my wife and I had The Talk.  We desperately needed a new savings strategy for the modern era.

So here is my idea.  I plan on converting some of our dollar denominated savings into silver.  Of course, I always like to put a twist on most financial strategies I implement, and my new savings strategy is no different.  Instead of just buying the cheapest silver bullion I can find, I will buy carefully selected hand-poured silver bars.

It has been clear for a while that vintage poured silver bars are one of the hottest categories in the world of antiques.  For example, vintage Engelhard and Johnson Matthey poured silver bars regularly sell for well over their bullion value.

But modern hand-poured silver bars offer an interesting alternative savings strategy.  They not only have low premiums that are only modestly higher than boring struck and extruded silver bars, but also have the potential to appreciate beyond their intrinsic value.  I already documented my very pleasant experience with purchasing a Yeager’s Poured Silver grab bag last year.  I intend to replicate this approach with other poured silver manufacturers.

There is only one major issue with my new savings strategy: psychology.  Most savers have been conditioned to view dollars as savings and spending dollars as dis-savings.  And, under normal circumstances, this would be absolutely true.

But we are no longer living in an age of rationality.  Instead, we are living in a time when central banks nonchalantly monetize trillions of dollars of government debt, crypto-currencies regularly yo-yo between 50% gains and losses in a single 48 hour period and Amazon stock trades at an utterly unhinged P/E ratio of 202.  Against an investment backdrop like this, savers need to start thinking unconventionally.

So here is my take.  U.S. dollars are still savings, but now I consider gold and silver bullion to be savings as well.  Not only is bullion low risk, with little possibility for loss, but it also can’t be printed by central banks on a whim.  And that is exactly what I’m looking for in a savings strategy!

Read more thought-provoking Antique Sage investing articles here.

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Read in-depth Antique Sage investment guides here.