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American Gold Eagle Coins – the Treasury Bonds of Alternative Assets

American Gold Eagle Coins - the Treasury Bonds of Alternative Assets

Photo Credit (CC 2.0 license): Eric Golub

U.S. Treasury bonds are the 800 pound gorilla of the modern securities market.  With the sole exception of global FX markets, the U.S. sovereign debt market is the deepest and most liquid of the capital markets.  As of Q4 2017, there are a whopping $14.5 trillion of U.S. Treasury bonds held by the public.  The average trading volume in the U.S. Treasury market is a monstrous $500 billion turnover every single day.

The reason that U.S. Treasury bonds hold this hallowed position in the securities markets is because they are direct obligations of the United States, with a superb credit quality rating to match.  Of course, the interest and principal of these sterling securities are payable in U.S. dollars – currently the world’s reserve currency.  And to date, the United States Government has never defaulted on its debt obligations.

Consequently, U.S. Treasuries are almost universally accepted to settle financial transactions.  They are also widely used as collateral in financial transactions, most notably repurchase agreements and reverse repurchase agreements.  Both buyers and sellers know that U.S. Treasury bonds are money good.  They are the very highest quality investments available in the world of paper assets.

But U.S. Treasuries aren’t the only high quality securities out there.  For those investors interested in alternative assets, there is another intriguing option: American Gold Eagle coins.  These bullion coins have been issued by the U.S. Government since 1986.  They are struck to exacting standards by the U.S. Mint in solid 22 karat gold.  The most common size is 1 troy ounce of fine gold, but 1/2, 1/4 and 1/10 troy ounce fractions are also minted.  The weight, purity and gold content of all American Gold Eagle coins are explicitly guaranteed by the U.S. Government.

These superlative attributes make American Gold Eagle coins the alternative asset equivalent of U.S. Treasury bonds.  For example, the U.S. Treasury market is liquid and deep, meaning that you can place large buy or sell orders without moving the market.  American Gold Eagle coins hold a similar position in the precious metals complex.

Between 1986 and 2016, over 25.4 million troy ounces, or 792 metric tonnes, of American Gold Eagle coins were struck.  Today, with the spot price of gold trading at around $1,300, this translates into a total market capitalization of over $33 billion.  This ensures that there is always a ready supply of these coveted bullion coins available for investment, commerce or any other financial need.

American Gold Eagle coins are also the most internationally recognized form of gold bullion today, giving them a distinct advantage over other gold bullion bars and coins.  In decades past, the honor of the world’s most well known bullion coin was held by other market participants.  From the late 1960s until the early 1980s the South African Krugerrand was the world’s gold bullion coin of choice.  Then, in the early to mid 1980s, the Canadian Maple Leaf usurped the Krugerrand’s title.

But by the mid 1990s, American Gold Eagle coins had come to dominate the global gold bullion coin market.  Yes, Canadian Maple Leaf and South African Krugerrand gold coins are still struck today and are widely available in the bullion marketplace.  But none of them have the international prestige, instant recognizability and impeccable reputation of American Gold Eagle coins (although the Canadian Maple Leaf comes very close).

Another edge that American Gold Eagle coins have over the competition is their resistance to counterfeiting.  Over the last decade or so, fraudulent tungsten-filled gold bars have become an increasingly severe problem in the precious metal market.  Most of these fake gold bullion products originate from China, where sophisticated manufacturing equipment and techniques are used to create these counterfeits.

However, gold bullion coins are much harder to convincingly counterfeit than gold bars.  In addition, when gold bullion coins are counterfeited, they are less profitable to fake than gold bars due to their smaller sizes and higher technical requirements.  But not all gold bullion coins are equally resistant to counterfeiting.

American Gold Eagle coins are some of the most difficult gold bullion coins to convincingly forge.  In contrast, the South African Krugerrand has suffered from a significant number of counterfeits because it is less technically challenging to forge.  Having said that, there are a few examples of counterfeit American Gold Eagle coins floating around.  But these fake American Gold Eagles are generally fairly easily to distinguish from genuine coins due to their lack of crisply struck details and off-color gold.

Up until now, this article has been exclusively about the bullion version of American Gold Eagle coins.  And while they are certainly an excellent choice for alternative asset investor, I also want to take a moment to talk about their close cousins – proof American Gold Eagles.

Proof coins are pieces that have been specially struck in order to appeal to coin collectors and connoisseurs.  The proof versions of American Gold Eagle coins have superb details, frosted finishes and have been hand inspected for defects.  In short, proof American Gold Eagles are the very best coins that the U.S. Mint can strike.

Some gold buyers dislike these coins because they are priced (slightly) higher than their bullion counterparts.  As a result, if you only want to acquire the maximum number of ounces of gold for the minimum amount of money, proof gold coins of any type make little sense.  However, I have a different viewpoint.

I believe that proof American Gold Eagle coins are the alternative asset equivalent of Treasury Inflation Protected Securities (TIPS) in our Treasury bond analogy.  TIPS are bonds that pay interest based on a fixed real rate and a floating inflation-linked component.  Many investors like TIPS because they offer an explicit, after-inflation return and can potentially outperform traditional Treasury bonds under the right circumstances.

Similarly, proof American Gold Eagle coins give savvy investors two different vectors for appreciation.  Like other gold bullion coins, proof American Gold Eagles benefit from any increase in the price of gold bullion.

But they also have the potential for numismatic appreciation – the possibility that their embedded collector’s premium will increase.  This second avenue of return potential is completely independent from the underlying price of bullion – an attribute known in the financial industry as non-correlation.  Non-correlation is a highly prized attribute among alternative assets.

With so many excellent attributes, it is easy to envision a future where American Gold Eagle coins are the bedrock of the alternative investment industry.  A variety of different sizes, from 1/10 to 1 troy ounce, are available in large quantities in the marketplace.  They are always struck to the very highest standards, with a gold content that is guaranteed by the U.S. Government.

I believe it is obvious that American Gold Eagle coins will naturally become the alternative asset of choice for investors seeking a safe, low-risk, cornerstone investment for their portfolios.  Regardless of whether you choose the bullion American Gold Eagle or the proof version, I don’t think you can go wrong.

 

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Should You Invest Like the Russian Gokhran?

Should You Invest Like the Russian Gokhran?

The financial world has undergone some pretty dramatic changes over the past 20 years.  And, by all indications, the next 20 years will most likely be just as turbulent, if not more so.  For investors, the coming monetary upheavals will undoubtedly require an iron will and a deft hand to navigate successfully.

So what is a good practical way to safely negotiate the future financial tribulations that await us?  I have an unusual suggestion: we should strive to invest like the Russian Gokhran.

Now I know what you’re wondering.  Why is the Antique Sage off his medications again?  And what in the world is the Russian Gokhran?  While I can’t help you with the first question, I can certainly shed some light on the second one.

The Gokhran is a state investment fund run by the Russian Ministry of Finance that exclusively buys tangible assets like precious metals and gemstones.  More specifically, it purchases institutional-sized amounts of gold, silver, platinum, diamonds, emeralds, rubies, sapphires, alexandrites, natural pearls and amber.  It also purchases jewelry and objets d’art crafted from these precious materials.  The Gokhran even holds many of the Czarist-era Russian Crown Jewels.

The Russian Gokhran’s hard asset approach to investing is unique among global central banks.  Most central banks investments (which are usually funded by international trade surpluses) are funneled into U.S. dollar and euro denominated bonds.  These foreign currency reserves are important because they project an image of financial strength to the international community.  This helps deter speculative attacks against a country’s currency.

Some countries use a different kind of investment vehicle known as a sovereign wealth fund.  Sovereign wealth funds are much less conservative than central bank foreign exchange reserves.  They often invest heavily in international stocks, real estate, venture capital and private equity.  This is meant to grow national wealth aggressively, unlike foreign exchange reserves which are meant to instill confidence in a country’s currency.  Norway, China, Singapore and various Middle Eastern oil producers control some of the world’s largest sovereign wealth funds.

The Russian Gokhran, however, is neither a sovereign wealth fund nor a foreign currency reserve fund.  Russia actually has both types of these other investment vehicles, but they are completely separate legal entities from the Gokhran.

And here is the interesting part.  Nobody (except the Russians) knows the value of the assets in the Gokhran (although they are assuredly many billions of dollars, if not more) or even exactly what assets it holds!

So why is there so much secrecy surrounding this little-known Russian hard asset investment fund?  In order to answer that question, we need to know a little bit about the history of Russia and the Gokhran.

The Russian Kammer Collegium was the original forerunner of the Gokhran.  This predecessor institution was found in 1719 by Peter the Great and enjoyed great prestige, particularly during the 18th century when a series of jewelry-loving empresses sat on the Russian throne.  According to legend, all valuables in the Kammer Collegium were securely held in a vault behind three different locks – each with its own unique key – which were split between three trusted senior ministers.

Even after the fall of Czarist Russia in the early 20th century and the establishment of the Soviet Union, the idea of a state repository of tangible assets persisted.  As a result, the Soviets created the Gokhran in 1920 and decreed that all existing assets inherited from the Czarist crown should be held in trust for the Soviet people.

This was especially important starting in the 1950s, when large diamond deposits were discovered in Siberia.  The Soviet Gokhran ended up purchasing many of these Siberian diamonds in subsequent decades, including the largest rough diamond ever found in the Siberian Mir mine.

Today’s incarnation of the Gokhran was formed in 1996, a few years after the fall of the Soviet Union.  But even though its official name may have changed many times through the centuries, the Gokhran’s mission remained the same: buy and hold high value tangible assets for the benefit of the Russian people.

Basically, the Russian government has a tradition of maintaining wealth in a portable physical form.  And it is a good thing too.  Russia’s history over the 20th century has been particularly tumultuous.  Institutions (or people) that saved in Russian paper money or financial assets tended to do poorly.  The Gokhran was a natural and successful strategy to preserve wealth in such an uncertain world.

It isn’t a great intellectual leap to apply the same logic to our financial situation in the West today.  We face a precarious future, where many solemn financial promises will be broken, if for no other reason than that they cannot possibly all be kept.  And while you and I might not be able to afford to build a billion-dollar fund like the Gokhran, we can certainly create our own miniature versions.

As an aside, if our central bankers were really smart, they would be buying hard assets hand over fist in preparation for our inevitable economic unhinging.  For example, a great addition to any central bank’s vault would be the 910 carat gem quality rough diamond that was recently pulled from the Letseng mine in Lesotho, Africa.  This absolutely colorless, nearly flawless diamond is substantially larger than a golf ball and has an estimated auction value of $40 million.   Even though it is the 5th largest gem quality diamond ever found, it would still be easily affordable for many of the world’s central banks.

This unnamed 910 carat diamond would look great in the U.S. National Gem Collection at the Smithsonian Institute, sitting alongside other illustrious gemstones like the Hope Diamond and the Hooker Emerald.  Its purchase would be a boon to U.S. citizens.  Unfortunately, I have little hope that U.S. government officials will take me up on my advice.  They would have to invest like the Russians do, and I find that highly unlikely in today’s politically-charged climate.

 

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The Worrying Decline of Tangible Household Wealth

The Worrying Decline of Tangible Household Wealth

An unfolding financial trend that has caught my attention lately is the decline of tangible household wealth.  Now, when I talk about tangible household wealth in this context, I am not referring to houses or other real estate.  Instead, I am referring specifically to portable tangible assets – basically anything found in a household that can be picked up and moved.

This includes items such as furniture, antiques, jewelry, fine art, etc.  But I’m intentionally excluding vehicles, like cars, pickup trucks, RVs and heavy equipment because they are outside the boundaries of this discussion.  Now that we have the ground rules out of the way we can plow into the heart of the topic.

Most middle class households have become progressively poorer from a portable tangible asset perspective over the last couple decades.  If you were to take an inventory of the average person’s home today, you would find precious few items worth more than $100.  And if we were to ignore rapidly depreciating electronics and appliances, the amount of tangible household wealth would be embarrassingly small.

Let me give you an example.  A few months ago I helped clean out my grandmother-in-law’s house as she transitioned into a long-term care facility.  Her home was a modest two-story colonial with three bedrooms and one bathroom.  She is a typical middle class woman who lived a typically middle class lifestyle.

But the tangible household wealth contained in her physical estate was surprisingly small.  Nearly all her tangible net worth was tied up in her house and car.  Once we exclude these two items, there was precious little left over, even after a lifetime of accumulation.

The family ended up hiring an auctioneer to sell everything in the house.  The results of the auction amounted to a meager $1,100.  And that sum is before the auction company took its cut.  Although I don’t know exactly how much the auction netted after fees, $500 or $600 would be a reasonable guess.

Just imagine!  All the physical objects this 90 year old woman (and her now deceased husband) accumulated over her entire lifetime (with the exception of her house and car) were worth a grand total of $500 after fees.  That is a shockingly small amount of money!

Of course the whole story is a little more complicated.  Relatives did go through her house first, taking anything that had sentimental (and occasionally monetary) value.  A few pieces of furniture, a handful of jewelry and some Christmas ornaments comprised the bulk of stuff that was removed.  But honestly, I doubt these items in aggregate were worth more than $500 to $1,000.  A total portable physical estate with a gross value of $1,500 or $2,000 still isn’t very much.

I suspect that many other middle class households across the United States are in a similar situation.  And that possibility should be deeply troubling.  After all, portable tangible household wealth has acted as a traditional buffer against financial misfortune for centuries.  But after peaking sometime in the 1990s, U.S. tangible household wealth has been in decline.

This de-emphasis of portable tangible assets in the net worth of average people has taken on renewed importance due to today’s rampant asset bubbles.  Many people have been seduced into keeping their entire net worth tied up in paper assets like stocks and bonds.  In addition to outsized appreciation during recent financial bubbles, paper assets are also perceived as efficient and trouble-free.

But the problem with bubbles is that they always burst eventually, leading to devastating financial losses.  Even investors who try hard to avoid buying bubble assets might find themselves caught in the economic fallout via a job loss or other unforeseen event.  A few gold coins or pieces of valuable jewelry could act as a welcome portfolio counterweight in these circumstances, offsetting some of the unavoidable risks associated with traditional asset markets.

But I also think it is important to ask why tangible household wealth has declined.  Although I more fully explore this topic in an article I wrote titled “Society’s Tangible Wealth Building Escalator Is Broken“, I will hit the highlights here.

First, cultural trends over the last few decades have de-emphasized portable hard assets in favor of financial assets like stocks and bonds.  In particular, the rise of the internet and its associated technologies has absolutely dazzled modern society.  The resulting rise of digital assets, most notably crypto-currencies, has prompted some people to ask why they need to hold any tangible assets at all.

I also believe that intense economic pressure due to the fall-out from our serial boom-bust economy has negatively impacted tangible wealth accumulation.  Simply put, many people don’t have the means to purchase high value physical goods anymore.  High quality jewelry, sterling silverware or a nice painting to hang over the fireplace are simply too luxurious when the mortgage or car payment come due.

Millennials have it even worse.  They are laboring under the burden of onerous student loans, poor job prospects and near zero-interest rates on savings.  None of these factors is conducive to being able to afford fine antiques or any other valuable tangible assets.  You’re simply not interested in buying a late 18th century, curly-maple, slant front desk when you are struggling to pay off your student loans.

Unfortunately, I fear that the decline of tangible household wealth is far advanced by this point.  We have collectively, as a society, spent the past 25 years slowly liquidating our physical inheritance.  I believe this is a trend we will come to bitterly rue the next time the financial markets crash.

 

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Your Hopalong Cassidy Collectibles Are a Bad Investment

Your Hopalong Cassidy Collectibles Are a Bad Investment
Photo Credit (CC 2.0 license): Dennis Amith

I was recently a guest on Harry Rinker’s antique-themed radio talk show “Whatcha Got?”  We had an animated discussion about a range of antique-related topics, and I encourage you to listen to the archived show if you haven’t already.

Unfortunately, I felt that Harry and I sometimes talked past one another due to our different perspectives on the industry.  Harry is one of the venerable old guard, having been in the industry since the 1970s.  My background is a unique fusion of traditional financial services professional, precious metal historian and antique collector.  It isn’t surprising that Harry Rinker and I have differing viewpoints on the antiques industry.

To me the antiques market breaks down into two major categories: investment grade pieces and everything else, which I generally refer to as collectibles.  To Harry, every individual antique category (glassware, furniture, etc.) is sovereign, with a low-end, mid-range and high-end all to itself.

During our talk, Harry made one statement related to these implicit beliefs that stood out to me in retrospect.  It was about Hopalong Cassidy, a heroic cowboy character whose adventures in novels, movies, television and radio made him wildly popular with children from the 1930s through the 1950s.  I will fully quote Harry’s comment here for context:

I sold off my Hoppy [Hopalong Cassidy] collection way too late, but I could buy it back today for 10 cents on the dollar because people who collect Hopalong Cassidy stuff are gone.

Now, I don’t want anyone to think I am belittling or ridiculing Harry Rinker.  He was nothing but a gracious host to me during our talk.  And he has decades more experience on the dealer side of the antiques industry than I have (or probably ever will).

But believing, implicitly or otherwise, that your Hopalong Cassidy collectibles will appreciate in value over time is just bizarre to me.  In my opinion, there is no such thing as an investment grade Hopalong Cassidy collectible.  It is sort of like thinking your collection of 1980s Alf memorabilia or your modern-day shrine to Katy Perry are good investments.  You can certainly hold that opinion, but it is unlikely to be validated over time.

Does pop culture memorabilia occasionally appreciate in value?  Sure!  But it is generally driven by demographics and fads.  And, as Harry Rinker so perceptively noted, the people who grew up with Hopalong Cassidy are either dying off or not collecting anymore.  Unless that fading demographic trend gets an unexpected assist from an oddly specific mid-20th century children’s television hero revival, there will only be fewer Hopalong Cassidy fans in the future.

Alf collectibles and Katy Perry memorabilia are no different.  They will each have their day in the sun as kids who grew up with them reach middle age (Alf is there right now).  Then they will ride off into a long, slow metaphorical sunset.  In short, pop culture collectibles don’t make any sense as long-term investments!

As an aside, because the subject of Alf came up, I feel compelled to insert a Simpson’s quote here.  As Bart’s friend, Milhouse, stated so eloquently, “Remember Alf?  He’s back…in pog form.”  Now that I have that out of my system, we can go back to talking about serious adult things again!

We can objectively evaluate the desirability of Hopalong Cassidy collectibles in greater detail by referring to the Antique Sage’s 5 rules for investment grade antiques.  In order to be desirable, an antique must have portability, durability and scarcity, in addition to being high quality in both materials and craftsmanship.  Finally, it must also possess good zeitgeist, or cultural relevancy to the period in which it was created.

How do Hopalong Cassidy collectibles measure up?  Unsurprisingly, they fail the 5 rules of investment grade antiques.  First, primarily being children’s toys and accessories, they are almost universally poor quality, having been made from plastic, die cast, paper and other low-end materials.  Now, vintage Hopalong Cassidy memorabilia might be good quality relative to the junky Chinese toys that are foisted on us today, but the Antique Sage quality metric is an absolute standard, not a relative one.

As a consequence of their low quality materials and middling construction, Hopalong Cassidy collectibles have poor durability as well.  Another investment grade attribute, scarcity, is also lacking due to the mass produced nature of these children’s toys.  The overwhelming abundance of Hopalong Cassidy memorabilia is particularly apparent when compared to lackluster (and falling) demand.

We can check this assertion by performing a quick eBay search, which reveals over 4,600 Hopalong Cassidy collectibles available on the online platform as of the spring of 2018.  That hardly seems scarce to me!

These 20th century children’s accessories do better on the final two traits, portability and zeitgeist.  I would say that Hopalong Cassidy collectibles maybe score a 3 or 4 out of 5 on the zeitgeist scale.  This is good, but not perfect.  For example, I think vintage baseball cards from the same time period (the 1930s through the 1950s) have better zeitgeist.

As for portability, Hopalong Cassidy collectibles tend to be compact and, therefore, score fairly well here.  Of course, this is cold comfort to any Hopalong Cassidy fans who might have had visions of selling off their extensive collections in order to fund a cruise around the world.

My conclusion is straightforward.  In order to be considered investment grade, an antique should ideally score well on all five of the Antique Sage’s requirements.  As a concession to reality, however, I do allow for a mediocre score on any one attribute.  Unfortunately, Hopalong Cassidy collectibles falls well short of these requirements.

 

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