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Buying Vintage JM & Engelhard Silver Bars for Your IRA

Compelling investment opportunities are often found in some very unusual places. And right now one of those places is the world of old silver bullion bars. While antique silver bars from many different manufacturers are desirable, many of the most coveted and beautiful are vintage Johnson Matthey (frequently abbreviate “JM”) and Engelhard silver bars.

Back in the 1960s, 1970s and 1980s, the Engelhard and Johnson Matthey companies produced the most recognized and accepted silver bullion bars on the planet. These poured, extruded or struck vintage ingots exhibit gorgeous, old world-style craftsmanship. Quality mattered. As a result, they are quite popular with collectors today, often trading for substantial premiums over their bullion value. In fact, it isn’t uncommon for rare vintage JM and Engelhard silver bars to sell for hundreds of dollars per troy ounce – a truly shocking valuation in a world of $14 to $20 an ounce silver!

Now this is where things get interesting. You see, the vintage silver bar marketplace is giving savvy investors an extraordinary arbitrage opportunity at the moment. Old silver ingots under 10 ounces in weight – including JM and Engelhard silver bars – currently trade at much heftier premiums than larger bars with sizes of 20 to 100 ounces.

The present rule of thumb is that for any given level of rarity, premiums decrease dramatically as size increases. So for example, an iconic vintage 3 ounce Johnson Matthey maple leaf logo silver bar might trade at 3 to 6 times its bullion value, while an equally rare 100 ounce TD Bank-branded Johnson Matthey silver bar from the 1980s might struggle to sell for 1.4 times spot.

But there is no fundamental reason why this should be the case. I can see the reasoning behind some decrease in premiums for larger vintage silver bars of similar rarity. After all, Engelhard silver bars that weigh only a few troy ounces currently have less than $100 in bullion value, allowing a larger audience of avid collectors to theoretically bid up their numismatic premium.

In contrast, a 100 troy ounce vintage silver ingot requires $1,700 (with spot at $17 an ounce) as the base price of admission. Any collector premium must be added on top of that already prodigious sum. The amounts of money involved with larger silver bars can be intimidating, serving to reduce the potential collector pool.

But there are clear limits to this logic. Right now rare smaller silver bars often trade with numismatic premiums 10 times higher (or more!) compared to scarce vintage 50 and 100 ounce ingots. That can translate into maybe 20% of your total purchase price being intrinsic value in the former case versus over 70% in the latter case. Assuming equal rarity, a greater level of intrinsic value is always better than a lesser level of intrinsic value.

I know a bargain when I see one. And right now large JM and Engelhard vintage silver bars are the bargain of a lifetime.

Look, I’m not the first person to spot this market anomaly. The vintage silver ingot enthusiasts over at the All Engelhard website have published several commentary pieces over the years pointing out this strange situation. Their conclusion is the same as mine; you want to buy larger vintage silver bars with both hands. They are insanely undervalued right now.

Vintage Engelhard Silver Bars for Sale on eBay

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But the real problem is how to take advantage of this undervaluation. Most of us don’t have the $5,000 or more lying around that we would need to really exploit this vintage silver bar arbitrage opportunity to its fullest.

Or do we?

Many of us have 401-ks, IRAs or other retirement accounts invested in conventional stocks, bonds or other paper assets. I happen to have an IRA sitting around right now earning a pittance in long-term U.S. Treasury bonds. And this account has enough money in it to buy some very fine, very rare JM or Engelhard silver bars – larger bars.

Now here’s the trick.

U.S. citizens can open what is called a precious metal IRA. Also known as a gold IRA or a silver IRA, this retirement account is meant to allow you to invest in physical gold, silver, platinum or palladium bullion. All silver bullion coins or bars that are purchased in a gold IRA must be at least .999 fine, and, in the case of silver bars, manufactured by a NYMEX or COMEX approved refiner.

When our political overlords enshrined these gold IRAs into law, they intended for people to load them up with straight bullion coins and ingots. In fact, the IRS frowns upon the purchase of what it (disparagingly) terms “collectibles” in retirement accounts. So vintage Engelhard silver bars are definitely not the hard asset that people are expected to put into their precious metal IRAs.

But that doesn’t mean you can’t do it anyway. After all, the Federal Government made the rules surrounding precious metal IRAs. And they happened to leave in a couple loopholes for the coin collector/antique enthusiast. I say we exploit these technicalities that the Feds have graciously given us.

As mentioned above, in order for a bar to be eligible for a self-directed, silver IRA account, it must be .999 fine and produced by a NYMEX or COMEX approved refiner. Happily, a number of vintage poured, struck and extruded silver bars from the 1960s, 1970s and 1980s meet these requirements.

Here is a list of the most commonly encountered IRA eligible vintage silver ingots (which includes JM and Engelhard silver bars, of course). I’ve pulled this data directly from the CME Group, which is the parent company of both the NYMEX and COMEX commodity exchanges:

Engelhard – Along with Johnson Matthey, Engelhard is the premier name in vintage silver bullion bars. It produced a range of poured, extruded and struck silver bars from the 1960s until it ceased production around 1987.

Engelhard silver bars are much rarer than the market currently recognizes. It is estimated that Engelhard’s total ingot mintage across the company’s complete 28-year production run is equal to (or less than) 1 to 2 month’s average production of the U.S. Mint’s American Silver Eagle bullion coin. As a result, the rarest Engelhard silver bars can trade at very high premiums over spot. However, more affordable Engelhard ingots are available too.

Johnson Matthey – This diversified British chemical company was one of the world’s largest and most well respected makers of bullion bars from the 1960s until the mid 2010s. Johnson Matthey sold its precious metals division to the Japanese corporation Asahi Holdings in 2015.

As a general rule, its larger bars are poured while its smaller bars are struck. Please note that poured 1 kilo JM silver bars stamped with “SLC” (which stands for Salt Lake City) are not rare or old, having been produced rather recently in large quantities.

Vintage Johnson Matthey Silver Bars for Sale on eBay

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SilverTowne – A favorite of poured silver buffs everywhere, the Winchester, Indiana-based precious metal dealer SilverTowne has been making ingots since 1973. These vintage silver bars are found in 5, 10, 50 and 100 troy ounce sizes – all in horizontal formats and most with serial numbers. SilverTowne is still producing poured and struck silver bars today, but these newer bars aren’t serialized.

Sunshine Minting – Sunshine Minting is a respected silver refiner located in the famous Coeur d’Alene mining district in Idaho. It produced struck silver bars in 10, 50 and 100 ounce sizes starting in the early 1980s, some of which are dated. Undated older bars can be difficult to tell apart from newer bars, so I would exercise caution here. In addition to providing the planchets that the U.S. Mint uses to strike its American Silver Eagle coins, Sunshine Minting is still striking silver bars today.

The Perth Mint – This is a well-respected Australian refiner known worldwide for its Gold Kangaroo and Silver Kookaburra coins, among others. Owned by the Government of Western Australia, The Perth Mint has a long history, having been established in 1899.

The Perth Mint produced many beautiful poured silver bars back in the late 1970s to early 1980s that are highly prized by collectors today. Its logo is a stylized swan in a circle. The swan on vintage pieces always faces left, versus facing right on newer silver ingots issued by the company.

Royal Canadian Mint – Canada’s official mint produces the popular Canadian gold, silver, platinum and palladium Maple Leaf bullion coins. Although little known, the Royal Canadian Mint (abbreviated as RCM) also made silver bars in 1, 10 and 100 troy ounce sizes back in the 1970s and 1980s. You can distinguish these older silver bars by their horizontal format, versus the vertical format of the newer bars.

PAMP SA – This acclaimed Swiss refiner is famous for its “Lady Fortuna” bullion bars struck in silver, gold, platinum, palladium and rhodium. Many vintage PAMP bars are treasured by collectors and consequently trade for dizzyingly high premiums over melt value. PAMP SA is still producing precious metal bars today, so not all PAMP bars are old.

Degussa – A German refiner celebrated for its poured silver bars, Degussa was purchased by the Belgian multi-national corporation Umicore in 2003. Its logo is a half sun and crescent moon inside a diamond. I don’t believe that any Degussa-branded bars were produced after 2003, but this claim is subject to further verification.

Bunker Hill – A defunct subsidiary of the U.S. multi-national Gulf Corporation, the Bunker Hill refinery operated in Kellogg, Idaho – an important lead, zinc and silver mining region. Bunker Hill produced mostly odd weight ingots with a lot of variation in size and shape. The company ceased production around 1981. As a result, Bunker Hill vintage silver bars are rather difficult to find and expensive today.

Handy & Harman – Handy & Harman was a diversified U.S. industrial corporation that spent much of the 20th century deeply involved in the precious metals market. They made a variety of larger poured and extruded vintage silver bars, typically with a conjoined, double-H as their hallmark. The company ceased production of silver ingots some time ago, most likely in the 1980s. Consequently, their bars are rarely encountered by collectors today.

U.S. Assay Office – This official government agency was tasked with the assaying and refining of precious metals. The San Francisco, Philadelphia and New York City U.S. Assay Offices minted odd-weight silver bars from the 1930s through the 1960s. Each one bears the seal of the United States, along with its year and city of manufacture.

These vintage silver bars are extremely rare and in incredibly high demand from collectors. When one does arrive on the market, it usually sells for several thousand dollars, even if it’s only a 5 or 10 ounce bar. Don’t mistake these ultra-rare ingots for the much more common early 1980s privately-minted bars that state “contains silver formerly stored at U.S. Assay Office”.

As a parting note, if you decide to pursue a strategy of stacking older silver bars in your precious metal IRA, it is imperative that you opt for segregated storage at your custodian. This is more expensive than the more common non-segregated or commingled storage, but it will ensure that the vintage JM or Engelhard silver bars you add to your account today are the exact same ingots you pull out again at a later date.

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Hitting the Estate Sale Circuit

A few months ago I received an email from my mother that contained sobering news. My parents close neighbors of more than 41 years, the Miller family, was going to sell their house. The Miller’s were closing in on 80 years of age and it was time to move to someplace with less maintenance. They chose a townhouse in a retirement community, where someone else cuts the lawn, fixes the AC and repaints the fence.

This was really the end of an era for my parent’s neighborhood. My parents were the first ones to move onto their street in November 1977. But the Miller family was a close second, occupying their house in the spring of 1978.

However, my purpose here isn’t to take you on a trip down memory lane. Instead I want to talk about what my mother revealed in one of her subsequent emails. The Miller family was planning on having an estate sale to help clean out their house in preparation for their departure.

As is so often the case in these situations, the Miller’s children had no interest in taking on their parent’s lifetime of accumulation. I can empathize with this reaction. My own parent’s house is filled to the gills with junk. When the time comes, my sister and I have (jokingly) discussed burning it all to the ground rather than sorting through it.

But I’m willing to sift through a substantial amount of trash if there’s some treasure to be found.

And that’s why the Miller’s estate sale was so intensely interesting to me. An estate sale is simply a public auction or tag sale of more or less the entire contents of a house. Although any number of motivations can prompt the decision, there are two big reasons to hold an estate sale. The first is to assist in the liquidation of a deceased person’s household belongings. The second is to clear out an elderly person’s debris from decades of living when the time comes to downsize.

The Miller’s case was obviously the latter situation. This meant that their estate sale came with a couple of caveats. One was that they wouldn’t be selling everything. A lot of clothing, personal items and sentimentally meaningful things would make the trip with them to their new townhome. In addition, Mr. and Mrs. Miller would be there in person to either accept or reject any offers made.

In any case, upon hearing the news of an estate sale, I sprung into action. I immediately compiled and sent a list of items I was interested in to my mother so that she could relay them to Mrs. Miller. These items will be familiar to any regular reader of my site: vintage jewelry, sterling silverware, mechanical wristwatches, fountain pens, old coins, etc. Antique, compact and precious is the name of my game and estate sales are often an excellent place to find them.

I was particularly interested in the Miller’s estate sale because it had some auspicious factors that I often look for when antiquing. Of course, these factors don’t guarantee that I’ll have a successful excursion. But they sure do increase my odds.

First, I knew from firsthand experience that the Millers had been living in their home for over 40 years. That means 40 years of stacking things up and rarely cleaning things out. This is a plus for the antiques enthusiast who wants everything to be as old and as undisturbed as possible.

In effect, you want to be an archeologist peeling back the layers of history. If you’re lucky, you’ll find a treasure that someone is willing to part with for a reasonable price.

Next, the Millers are a fairly well-to-do family. This is important because the richer the family, the more likely that they own nice stuff. And when we are picking, nice stuff is exactly what we are looking for.

This rule of thumb actually applies to other venues besides estate sales. Garage sales, thrift shops and antique stores all carry a selection of items related to the current and historical wealth specific to that particular geographical area. Simply put, you want to shop in rich neighborhoods because second-hand shops located in those areas are more likely to have nicer antiques. Of course, the prices are often higher in the tonier neighborhoods, so it isn’t all upside.

I was also aware that the entire Miller family (kids included) had moved to Great Britain for two years during the late 1980s because of Mr. Miller’s work. This meant that they had established a functioning household in Europe, complete with the possibility of art, antiques and other precious items. And it is a near certainty that when the Millers returned to the U.S., they brought back any European bounty they had acquired overseas.

Even if Mr. and Mrs. Miller had no interest in antiques whatsoever, vintage British wristwatches, fountain pens or sterling tableware from the 1970s and 1980s could still be a veritable gold mine. In fact, my mother did say to me that Mrs. Miller had mentioned old watches and antique English silver, including sterling napkin rings. Now napkin rings might not be tremendously fashionable items at the moment, but I will not hesitate to buy them with cash money if the price is right.

And this leads us to my parting thoughts. The erratic, bubble-prone economy of the last two decades has hollowed out the balance sheet of the average American family. We are getting poorer and poorer as a nation, often regardless of how long or hard we work.

Tangible physical assets like bullion, vintage jewelry, sterling silverware and other antiques are one of the few remaining effective ways to pass wealth from generation to generation. It is a pity that many older households are flushing their family heirlooms out the door because their adult children don’t want to bother with them. But, if an estate sale is going to happen anyway, isn’t it better that you and I stand ready with fistfuls of dollars to pick up whatever treasures we can on the cheap?

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Pondering Gold Confiscation in the 2020s

Photo Credit: Wikipedia

The possibility of gold confiscation is every precious metal investor’s worst nightmare. And this fear is solidly based in historic fact. During the depths of the Great Depression, President FDR issued Executive Order #6102 on April 5, 1933. This questionable law required all U.S. citizens to surrender their gold coins, gold bullion and gold certificates to the Federal Government.

This blatant gold confiscation was tantamount to outright theft. People were given less than a month to comply with the order. If their gold was not promptly delivered to a Federal Reserve Bank, branch or agency thereof, they could face stiff penalties. Failure to obey this draconian law carried the threat of a $10,000 fine (a massive amount of money back in the 1930s) along with 10 years imprisonment. The only realistic exemptions were for gold coins with numismatic value or non-numismatic coins in amounts not exceeding $100 face value (about 4.8 troy ounces).

The Federal authorities even moved to confiscate silver in addition to gold. On August 9, 1934 FDR promulgated Executive Order #6814, which mandated that all silver bullion be delivered into the coffers of the U.S. Federal Government. Happily, circulating U.S. silver coins (dimes, quarters, half dollars and silver dollars) were specifically exempted from this executive order to minimize its the disruptive effect on the public.

In practice, very little silver bullion was seized under Executive Order #6814. Instead, the government passed the Silver Purchase Act of 1934, which included a 50% windfall profit tax on the sale of silver bullion payable via revenue stamps. This silver bullion tax, which wasn’t repealed until 1963, effectively blunted any speculative impulses towards the noble metal for several decades.

So asking whether gold confiscation (or even silver confiscation) can happen again is something that understandably preoccupies many of today’s precious metal investors. And the United State’s steadily deteriorating fiscal condition certainly suggests it could be a possibility sometime before the end of the 2020s.

Vintage U.S. Silver Tax Revenue Stamps for Sale on eBay

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Right now U.S. Federal debt is a mind-blowing $23 trillion, well on its way to $40-something trillion by 2030. State and local debt, although smaller in absolute terms, is still precariously inflated. We could see those municipal debts double from today’s $3 trillion to perhaps $6 by 2030.

Federal entitlement spending (primarily Social Security and Medicare) is perhaps the worst debt bomb of all, with an estimated unfunded liability somewhere between $47 and $210 trillion, depending on who you want to believe. And the political will to reform entitlement programs simply does not exist in Washington at the current time. This means that meaningful change will only realistically come via a financial crisis of some description.

And don’t even get me started on the stock market, which is currently experiencing the largest bubble in all of human history. Being priced to perfection, the equities markets are incredibly vulnerable to a synchronized crash that would devastate Federal tax revenue.

So as the 2020s progress, it is obvious that some sort of financial calamity, or series of financial calamities, will almost certainly occur. Under these circumstances, it is not so far-fetched to believe that the U.S. government could once again seek to solve its financial problems via gold confiscation. After all, relatively few households own significant quantities of gold, silver or platinum at the moment (although that might change as average people realize just how bleak our national fiscal situation is). So seizing precious metals would have the political advantage of filling government coffers while only directly impacting a minority of the populace.

Having said that, I think there will be a specific order to any gold confiscation, if it were to occur. Our current crop of sleazy politicians may be corrupt narcissists, but they aren’t chumps. They understand that some forms of precious metal seizure will play better in the public arena than other types. Keeping this in mind, I’ve constructed a list of gold confiscation targets in the probable order they would occur:

1) Precious Metal ETFs

Precious metals held by ETFs (Exchange Traded Funds) are the logical first step in any gold confiscation scenario. ETFs are stock-like vehicles held in brokerage accounts by speculators, traders and investors. But almost everyone buying gold ETFs is interested in paper profits, not actual physical ownership of gold.

This is just as well, because it is an open question as to just how much physical gold these ETFs actually hold. A large portion of their purported precious metal holdings may simply be paper futures contracts or other incorporeal gold derivatives.

Regardless, when the time comes it will be easy for politicians to mandate the seizure of any ETF-linked physical precious metal holdings. As long as any seized gold is immediately replaced with piles of freshly printed fiat money, everything will remain copacetic. Most people who own these ETFs won’t complain, provided they realize a paper profit.

2) Commodity Exchange Warehouses

The U.S. commodity exchanges, like the COMEX, CBOT and NYMEX, all have warehoused silver, gold and platinum that they use to back futures contracts traded on their platforms. The ostensible purpose of these commodities marketplaces is to allow miners, recyclers and industrial consumers to hedge their precious metal exposure in a convenient paper contract.

But in reality, the futures market is a cesspool of speculators, gamblers and manipulators, with very few legitimate users. In addition, only a tiny fraction of futures contracts are physically settled; up to 98% of contracts settle with cash instead. This is fortuitous in a perverse way because the physical precious metal holdings stored in the commodity exchange warehouses represent a miniscule percentage of the outstanding paper contracts at any given point in time. In other words, there are far more gold future contracts than there are gold bars to delivery into them – yet another prime example of modern day institutionalized financial fraud.

Consequently, it would be fairly simple to decree a gold confiscation edict focused on the commodity exchanges. There would be very little blowback from a public relations perspective and only a relatively small number of real industrial participants would be impacted. But it is an open question just how much physical gold the government could derive from this move.

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3) Mining Companies

I would like to preface this by saying that I believe the seizure of gold mining companies to be rather unlikely.

However, mining companies would be the next rational target for a resource-starved government contemplating gold confiscation. Unlike with ETFs and commodity exchanges, we know for a fact that gold miners actually possess sizable quantities of physical gold, albeit locked in the ground. A gold confiscation applied to gold mining companies could take a number of varied forms, not all of which would be obvious theft.

For example, politicians could mandate that all domestically domiciled miners sell their production exclusively to the government for a predetermined (almost certainly below-market) price. Or the government could demand that miners issue them a “golden share”, which would entitle the holder to a significant ownership interest in the underlying company (perhaps 10% to 25%) along with a veto on any undesirable corporate activity (like fleeing offshore). The government could even outright nationalize gold miners, buying out former shareholders with rapidly depreciating fiat currency.

There are a lot of different directions a bankrupt government could take here that would only raise a moderate amount of dissent, making this a reasonably attractive proposition.

4) Private Bullion Dealer Inventories

Now we are beginning to really scrape the bottom of the barrel in terms of gold confiscation. Once the government has raided precious metal ETFs, commodity exchange warehouses and mining companies, it becomes much harder to get more gold without looking like an insatiable, thieving monster.

Nevertheless, a further possibility is the inventories of private bullion dealers. These would be the holdings of retail-facing companies like KITCO (yes, I know they’re Canadian, but some of their gold is stored in the U.S.), APMEX, Provident Metals and JM bullion. These companies undoubtedly hold substantial quantities of physical precious metals, so a destitute government might be tempted to seize their inventory.

But the public opinion blowback would be substantial, in my opinion. These are not massive, unethical corporations or unsympathetic, day-trading speculators. These are small-to-mid-sized, privately-held companies that operate on paper-thin margins to provide everyday people reasonably-priced access to gold and silver bullion. Subjecting them to a gold confiscation edict would be like sending up a signal flare letting the public know that the government is (eventually) coming for their personal precious metals stash.

5) Gold IRAs

Now things get downright ugly. If the government has churned through all its other options, it might resort to seizing physical precious metals held in self-directed gold IRAs. On the upside (from the government’s perspective), there is actually real gold and silver held in these accounts, not paper contracts. On the downside, there is probably not very much gold or silver in these accounts in aggregate, at least not when compared to some of the juicier gold confiscation options higher up on this list.

But most importantly, the optics of a precious metal nationalization involving gold IRAs would be abysmal. The government would be outright robbing small investors who are trying to save for their retirement. It would be utterly impossible to spin this public relations disaster in any kind of a positive way, so I think it would definitely be a last resort.

Pre-1933 Semi-Numismatic U.S. Gold Coins for Sale on eBay

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6) Foreign Central Bank Reserves Held in Custody

Another potential target for gold confiscation would be foreign central bank reserves held in the New York Federal Reserve’s high security underground vault in downtown Manhattan. Although the Fed does not disclose exactly how much gold it holds in custody or who owns it, as of 2016 there was an estimated 6,000 metric tons of gold in the New York Fed’s vaults.

The largest holders are believed to be the IMF (International Monetary Fund) at around 2,000 tonnes, followed by Germany at 1,347 tonnes, Italy at 1,000 tonnes and the Netherlands at 190 tonnes. Other minor holders are thought to be Sweden, Finland, Greece, Lebanon, Afghanistan, Ghana, the BIS (Bank for International Settlements) and the European Central Bank.

A gold confiscation that seized these holdings would have major international repercussions, which is why I’ve placed it so low on my list. Having said that, if the U.S. government was desperate enough, they might consider seizing gold held in custody for one or more smaller countries. The aggrieved nations would have no recourse other than to lodge a token diplomatic protest.

Another possibility is the confiscation of IMF and BIS gold holdings if the international trade/monetary system were to utterly implode during a future financial crisis. Under this scenario there would presumably be less of an international outcry as these institutions would have outlived their political usefulness. It’s also possible that this form of gold confiscation could actually happen before gold IRAs were seized, depending on geopolitical circumstances.

7) Private Gold Holdings

The surrender of private gold holdings by ordinary citizens is the Big Kahuna – the gold confiscation that precious metal investors everywhere dread the most. This is the type of confiscation that occurred during the 1930s. However, I don’t think it is very realistic today.

For one thing, I don’t think it would be remotely enforceable. Even back in the 1930s, there were many, many people who simply did not turn in their gold coins. And there was only ever a single Federal prosecution under Executive Order #6102, which resulted in an acquittal (although the gentleman did lose his gold).

Today’s average citizen trusts the government far less than the everyman of the 1930s. A mere trickle of gold would make its way into government coffers if a modern-day, blanket gold confiscation law was promulgated. All the gold currently in private hands would simply disappear into basements, closets and safe deposit boxes.

And things would turn ugly in a hurry if the government pressed the issue. A systematic search of safe deposit boxes for gold would turn the public virulently against the entire banking system, undermining the government’s already precarious financial situation even further. If an even more heavy-handed gesture were implemented – like Federal agents being sent door-to-door to seize gold – open revolt would undoubtedly spread throughout large swathes of the country.

The outcome of a renewed nationalization of private gold holdings would be so bad that I don’t think any government would be stupid enough to try it. Of course, if the U.S. government were flat broke and desperate, no one knows just how dumb they might get. That’s one reason why some precious metal investors still buy pre-1933 semi-numismatic U.S. gold coins. These older coins would presumably have a numismatic exemption from any theoretical future gold confiscation.

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The Social Security Cashflow Bomb

To say that the future of Social Security is contentious is an understatement. We’ve been hearing for decades that the government entitlement program faces a looming cashflow crunch. Proponents of Social Security point to its gargantuan $2.9 trillion trust fund, while detractors say the trust fund is an accounting fiction.

And to be honest, for a long time I just didn’t care. For decades the system has simply kept humming along as if nothing was wrong. The sun rose in the east every morning, Social Security checks were direct-deposited like clockwork and life went on.

Then, out of sheer curiosity, I compiled historical and projected cashflow data on the pension program. I was shocked by what I discovered. This is the kind of information that you won’t find discussed by a panel of experts on CNBC or splashed across the front page of the Wall Street Journal.

The chart at the top of this article shows annual Social Security cashflow for the historical period from 1957 to 2018, as well as the program’s projected cashflows from 2019 to 2034 (according to the Trustees’ 2019 Annual Report). It considers payroll taxes, income taxes on benefits and Federal reimbursements for payroll tax holidays (as occurred in 2011 and 2012) as positive cashflows to Social Security while benefit payments, administrative expenses and transfers to the Railroad Retirement Program are counted as negative cashflows.

You’ll notice that I’ve intentionally excluded the interest earned on the Trust Fund from the calculations. This is because any interest earned on the Trust Fund doesn’t change how the Federal government ultimately funds the program. When the time comes to payout benefits, the government must either do so from collected taxes or the proceeds of Treasury bonds sold to the public. Interest income and bond redemptions generated by the Social Security Trust Fund must be paid out of the government’s general fund – generally via the sale of an equivalent amount of Treasury securities to the wider public.

So for all the attention it gets, the Social Security Trust Fund really doesn’t matter very much. You could lop a zero off its $2.9 trillion balance sheet without changing the program’s funding requirements very much. Likewise, you could add a zero to the Trust Fund and get the same result. In the end, the money for benefits comes from current taxes and bond sales to the public, Trust Fund be damned.

This is all tediously academic…at least until you take a good look at the chart above. It shows how Social Security went cashflow negative in 2010 in the aftermath of the Great Recession, never to go cashflow positive again. For the last 10 years the entitlement system has been persistently cashflow negative – so much so that it is quite easy to dismiss as immaterial.

And I would agree with that assessment, up to a point. The annual Social Security cashflow deficits from 2010 until the present have been quite manageable, generally fluctuating between -$40 and -$80 billion in any given year. And the system will remain completely viable for a few more years in its current form. According to projections, the deficit will remain under -$100 billion through 2021.

But after that things start to get ugly. Social Security’s cashflow deficits will deteriorate from around -$100 billion in 2021 to -$400 billion in the early 2030s. As if that isn’t bad enough, the projections don’t take into account the possibility of an economic recession, which is a ridiculous assumption. If a recession were to occur anytime over the next 15 years, the situation would quickly go from dire to disastrous.

And a recession is coming, you can count on it.

This is why I find the Social Security Trustees’ projections that the Trust Fund will last until 2035 to be laughable. What will really happen is that we’ll most likely have a severe recession over the next few years which will accelerate all of the negative trends we see in the chart above. We’ll probably be seeing -$400 billion cashflow deficits in the program by the late 2020s and I find it reasonable to assume that the Trust Fund will be exhausted around the year 2030, give or take.

Now you may be wondering why I care when the Trust Fund runs out of money, considering I’ve openly stated that’s its size is immaterial. The answer is quite simple. The existence of the Trust Fund provides political cover for Congress to ignore the festering negative cashflow issue. Social Security is famously known as the third rail of American politics. Any politician who tampers with it gets permanently booted out of office, never to be re-elected again.

So the path of least resistance is to just ignore Social Security’s impending issues and pretend everything is alright. It is only once the Trust Fund is empty sometime between 2030 (in my estimation) and 2035 (according to the Social Security Trustees who assume no recessions) that ugly reality will stare us all in the face.

What does this mean for you and me?

If you are currently receiving Social Security payments, you are probably golden for the next 10 years. Even after that, there is a good chance you will be grandfathered into any reforms, meaning that you may well continue to get your checks on time and in the expected amount. Of course, this good news may seem like a Pyrrhic victory once you read what comes next.

If you aren’t old enough to draw on Social Security yet, then I suggest you start making other arrangements. The U.S. government is currently running a budget deficit of around -$1 trillion in 2019. This is a shockingly high number against the backdrop of a purported economic expansion. Thus far, negative Social Security cashflow has been a relatively minor part of this general budget deficit, contributing between 4% and 8% of the total.

However when the current Everything Bubble bursts and the economy inevitably enters a major recession, these numbers will deteriorate far more rapidly than most people expect. The Federal deficit will simply blow-out to -$2 to -$3 trillion per year, with Social Security making a significant (negative) contribution.

The only reasonable solution will be for the government to engage in money printing, aka helicopter money. In fact, academics have recently been attempting to rehabilitate the long-sullied reputation of money printing. Now they call it Modern Monetary Theory (MMT for short), claiming that it isn’t evil, just misunderstood. This is meant to fool the historically ignorant. But the results will be the same – the more money the government prints, the less value your existing dollars will have.

This is why I advocate that forward-looking individuals invest in tangible assets like antiques, bullion, fine art and gemstones. These hard assets can’t be printed at the whim of desperate central bankers or corrupt politicians. As a result, they will retain their value in a scenario where more traditional financial assets – like cash, stocks and bonds – crash and burn.

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