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Understanding the Great Silver Shortage of 2020

Driven by crashing markets and a viral pandemic, March 2020 is proving to be the United State’s deepest financial crisis since the Great Depression. And that is saying something, considering that the 2008-2009 recession was a near-death experience for the capitalist system. Global stock markets are plummeting, corporate bond markets are freezing and bid-ask spreads in all asset classes are blowing out in truly historic moves. And all of this is happening in spite of the fact that the Federal Reserve is printing money as fast as it can.

So it shouldn’t come as a surprise that near-chaos has arrived in the U.S., with people hoarding toilet paper, food and ammunition. Precious metals have also seen skyrocketing demand in these troubled times, leading to massive premiums for physical gold, silver and platinum bullion.

Silver, in particular, has been in extraordinarily high demand. In fact, demand for silver has been so high that it wouldn’t be an exaggeration to say that we are currently experiencing a silver shortage of incredible proportions. Some bullion dealers have simply run out of inventory – an unprecedented event to the best of my knowledge.

Under normal circumstances a large dealer will have hundreds of different kinds of silver products available for sale – everything from government-issued coins to privately-minted rounds and bars of all sizes. But worried investors have been buying with both fists as the economic situation worsens. As a result, dealers have had an incredibly difficult time keeping anything in stock.

Let’s walk through some examples of just how crazy the silver shortage has become.

Junk silver, old 90% silver U.S. coins struck before 1965, is front and center in this unfolding disaster. These coins used to be one of the cheapest (and best) ways to stack silver before the Coronavirus/financial crisis hit. But now premiums have shot through the roof. A $1,000 face value bag containing 715 troy ounces of pure silver could be purchased for $12,500 in early March – 12.5x face value. This represented a premium of about $0.50 an ounce, or around 3% over melt at the time.

By late March that same bag of junk silver cost you $17,800 (17.8x face value). But the real problem is that the spot price of silver dropped considerably during the month, from around $17 an ounce to only $14.50. As a result, the premium for junk silver bags exploded to over $10 an ounce – a stunning 70% premium over spot!

American Silver Eagle bullion coins are no less expensive. Before the crisis hit it was common to find these popular coins for around $3 over spot, or a 17.5% premium. But now they costs anywhere from $9 to $11 per coin over bullion value. This comes out to a prodigious 62% to 75% premium over spot.

And this assumes you can find silver to buy at all. Many silver bars and government-issued bullion coins are unavailable at any price due to a stampede of buyers, coupled with insufficient supply. In many ways, the present situation mirrors what happened in the precious metals market during the 2008 financial crisis – except on steroids. Premiums exploded on many silver products back then too. But the key difference is that our current silver shortage is much more likely to be a long, drawn out affair.

Before I delve into why I believe that is the case, I think it would be useful to examine the details of why we are seeing a silver shortage right now.

The first explanation for our current silver shortage is the collapse of global stock markets. The S&P 500 experienced a 35% peak to trough decline in early 2020, which is troubling in its own right. The real problem is that this drawdown occurred over the course of just a single month! That sort of volatility is unprecedented, especially when you consider that investors had been lulled into a false sense of security by equity markets that persistently wafted higher for years beforehand.

People who were spooked by losing a third of their life savings in the markets in a mere 30 days naturally looked around for more tangible investments to balance their paper-asset-skewed portfolios. Silver was one of the obvious choices, leading to exploding demand for physical coins and bars.

The next contributing factor to the silver shortage of 2020 is the specter of zero interest rates. As recently as late February 2020, the Federal Funds rate was still at a (relatively) robust 1.5%. This meant that prudent savers could expect some return on their rainy day fund, albeit a modest return.

But as the largest market dislocation since the Great Depression tore through the economy, the Federal Reserve went back to one of the only tools it has: lowering interest rates. The first cut came on March 3rd, when the Fed lowered rates from 1.5% to 1.0%. As the economic situation continued to rapidly deteriorate, they followed up with a panicked intra-meeting cut to 0% barely two weeks later.

Now we’ve seen this story before.

The first time around was during the 2008 financial crisis. At that time the Federal Reserve swore up and down that lowering rates to 0% was an extraordinary measure that would be rolled back the moment the economy stabilized.

The Fed was lying of course.

It took them almost 8 long years to raise interest rates off the zero bound. And during that time savers received no interest on their CDs, savings accounts and money market funds. This wasn’t an accident. The Federal Reserve consciously used this immoral policy as a way to recapitalize the criminal, too-big-to-fail banks in the wake of the 2008 collapse.

Here is the federal funds rate from 2008 to 2020. Don’t be fooled by the chart’s deceptive endpoint at 1.5%. The rate actually dropped to zero, but hasn’t had time to be reflected in the chart yet.

And like a sick dog going back to eat its own vomit again and again, the Fed is once more resorting to this same discredited zero interest rate trick.

Except this time average people know that interest rates are going to stay at the zero bound forever, or at least until we have a new monetary system in place – whenever that is!

Consequently, smart savers have begun the process of converting some of their savings from dollars into precious metals. After all, a zero interest rate policy pretty much ensures that any fiat-currency savings you have will shrink in purchasing power over time due to inflation. So you’re better off buying physical gold, silver or platinum, rather than holding onto steadily depreciating dollars (or euros, pounds or yen, for that matter).

The final reason for the ongoing silver shortage is a little more complex than the first two. The capital markets experienced a liquidity crisis of epic proportions during March 2020 – an event on par with financial dislocations last experienced during the Great Depression of the 1930s.

This liquidity crisis occurred when levered institutional financial players (like hedge funds) needed to sell assets in order to meet margin calls. In other words, they had to post additional cash collateral against their outstanding loans as markets fell off a cliff.

Before the crisis hit many hedge funds were loaded up with junk bonds, CDOs, over-the-counter derivatives and other undesirable, illiquid assets. As these poor quality assets declined in value during the crisis, funds naturally received margin calls on any borrowed money. But the funds couldn’t sell their really nasty securities to raise cash because no one wanted them.

So instead, hedge funds sold whatever assets could catch a bid. Unsurprisingly, the assets that remained liquid in the depths of the crisis were few and far between. In fact, the short list is only two assets long: U.S. Treasury bonds and precious metals, including silver.

Now you might reasonably ask yourself how hedge funds selling silver could possibly lead to a silver shortage. Well, it can’t…at least not directly. But it did contribute to the massive divergence between spot prices and the cost to acquire physical silver, leading to exploding premiums.

This is because when hedge funds and other institutional investors buy precious metals, they almost never buy physical metal. Instead, they purchase paper metal – usually futures contracts. So when they liquidate silver to meet a margin call, they are actually selling futures contracts rather than real, physical metal.

But the public understandably wants to buy physical silver, not empty paper promises. As a result, premiums skyrocketed and we found ourselves in the strange situation where the spot price of silver hit an 11-year low under $12 a troy ounce on March 19th while you couldn’t touch American Silver Eagles for less than $20 to $25 a piece.

Now that we know the why of our current silver shortage, we can talk cogently about when it might be resolved.

I have bad news for all you silver stackers out there. I don’t think we are ever going to go back to the good old days of junk silver selling for $0.25 to $0.50 an ounce over spot. And I think it will be a long, long time before government-issued silver coins and privately-minted silver rounds and bars are available for less than $2 or $3 an ounce over spot.

The silver shortage is likely to be a long, drawn-out affair.

I base this assessment on a couple different observations.

The first is the sheer magnitude of demand. Every single bullion dealer has a message on their website alerting customers to product shortages, shipping delays and minimum order increases. Just read these excerpts from major bullion dealers commenting on the extraordinary situation:

“Demand for precious metals products remains incredibly strong.” – JM Bullion (3/22/2020)

“SD Bullion is experiencing a prolonged period of extremely high order volume. Last week, we received the most orders in the history of our company.” – SD Bullion (3/24/2020)

“Due to unprecedented order volumes, please expect a shipping delay of 20+ business days.” – SilverGoldBull (3/28/2020)

Everybody is buying silver right now…at least everyone who knows the score, financially speaking. This group understands that while the COVID-19 pandemic has taken a sledgehammer to the economy, the 2020 economic crisis has been a long time in coming. The Fed spent the last decade meticulously blowing the largest securities market bubble in the history of mankind. Something was going to pop the “Everything Bubble” eventually – it just happened to be a killer virus that gutted the global economy and revealed the outrageous extent of market overvaluation.

Pre-1965 U.S. 90% Junk Silver Rolls for Sale on eBay

(This is an affiliate link for which I may be compensated)

Low or inadequate precious metals output is the second major factor ensuring that the 2020 silver shortage will linger on. For example, The U.S. Mint temporarily sold out of 2020 American Silver Eagles in March. The Royal Canadian Mint also ran out of Silver Maple Leafs around the same time. This has helped contribute to the sky-high premiums for government-issued one ounce bullion coins in the market.

Now, these mints can certainly strike more coins, but they are also constrained at the same time. The entire world is operating under a pandemic watch, which severely limits industrial production. The U.S. Mint is not exempt from these realities, which could easily curb output at their facilities. Not only that, but the Mint might run into problems getting the coin blanks it sources from third-party suppliers (most notably Sunshine Minting).

For its part, the Royal Canadian Mint actually closed for two weeks in late March due to the pandemic! Other precious metal producers and fabricators, both government and private, face similar disruptions.

For instance, South Africa just announced that the entire country (including the mining industry, which produces a significant share of the world’s platinum, palladium, rhodium and gold) will shut down for 3 weeks to combat the spread of COVID-19. The three biggest Swiss precious metal refiners – Valcambi, Argor-Heraeus and PAMP – suspended operations at their factories near the Italian border in late March. And individual gold and silver mines too numerous to mention have temporarily closed all over the world due to the virus.

In other words, the production of silver bullion will only come back online slowly and haltingly in the face of overwhelming demand.

This leaves silver stackers and tangible asset investors with one burning question: how do I find and buy cheap silver? Happily, I still think there are ways to find silver bullion at (relatively) reasonable prices if you look hard enough.

But first a disclaimer – prices and availability is accurate as of late March 2020. The physical precious metals market is obviously moving very fast at this time, so anything you read here might or might not be true in future months.

My first suggestion is to buy old circulated U.S. junk silver on eBay. While bullion dealers are charging close to 18x face value (if they have any in stock), you can still find rolls of 90% junk silver for only 15x to 16x face value on eBay (with free shipping in many cases). This might still be a hefty premium over the (purely theoretical) futures-driven spot price (currently $14.50 an ounce – about 10.4x face value), but it is still one of the best deals out there if you want fractional silver.

My second hot tip is to frequent the websites of micro-foundries that produce hand-poured silver bars. These works of art usually sell for premium prices on the bullion market compared to generic silver rounds or bars. But in today’s upside-down world these small silver bar fabricators often have the best prices out there – at least for now. This includes companies like Vulture Peak Mines, Bison Bullion, Yeager’s Poured Silver and Monarch Precious Metals, among others.

If you want to know more about the world of hand-poured silver bars, you can read an article I wrote called The Investment Case for Hand-Poured Silver Bars.

My final bit of advice for the frustrated silver stacker is to consider buying gold instead of silver. Right now gold is far more available in the physical market compared to either silver or platinum.

I know, I know. The gold-silver ratio is hovering around 115 at the moment, which makes the precious white metal criminally undervalued compared to gold. But that ratio is based on paper prices, not physical prices. In reality, the gold-silver ratio is closer to 80 or 90 to 1 if you want to buy physical metals (and can find them). This still skews towards silver as being the better deal. But those prepared to push forward in their search for physical silver must accept paying premiums over spot of anywhere from 50% to 100%.

Some tangible asset investors simply can’t bear to pay premiums that high. For those people, gold is the next best thing. While premiums on gold coins are certainly elevated relative to where they were pre-crisis, they aren’t outrageously high (yet). For instance, 1 ounce American Gold Eagles are generally selling for between 10% and 15% premiums over spot at the moment.

Government-Issued Gold Proof Sets for Sale on eBay

(This is an affiliate link for which I may be compensated)

I especially like the government-issued, multi-coin gold proof sets. These sets usually contain 1 ounce, 1/2 ounce, 1/4 ounce and 1/10 ounce coins for a total of 1.85 troy ounces of pure gold (although this can vary by set; some include a 1/20 ounce coin). The most well known type is the American Gold Eagle proof set, but Australian Kangaroo, Canadian Maple Leaf, Chinese Panda, British Britannia and South African Krugerrand proof sets can also be found.

The advantage here is that these coins are all proofs, which should normally trade with a slight numismatic premium. However, because the precious metal market is so unsettled right now it is possible to buy these sets at premiums comparable to regular bullion coins. So when you buy a proof set today, you essentially get any future numismatic potential for free.

The downside is that these sets are expensive. A typical 4-coin proof set runs anywhere from $3,300 to $4,000 with spot gold trading for $1,600 an ounce. Still, it may be worthwhile if you want to invest a significant amount of money.

For those interested in this strategy, you can read a related article I wrote about investing in proof American Gold Eagles here.

The 2020 silver shortage is challenging for all of us who want to preserve our wealth. So while I understand that the options I’ve given are less than ideal, I hope they offer you some solace. Unfortunately, our present silver shortage is likely to get worse before it gets better.

Read more thought-provoking Antique Sage investing articles here.

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Read in-depth Antique Sage investment guides here.

80% Purity Canadian Junk Silver VS U.S. 90% Junk Silver

Today I’d like to talk about the other junk silver – Canadian junk silver! This form of silver bullion has most of same advantages that U.S. junk silver has, but often gets ignored by the silver stacking community. I hope to do my part to correct this by shining a spotlight on this underappreciated silver bullion option.

A Short History of Canadian Silver Coinage

The Canadian Royal Mint started striking silver coins in 1858, when Canada was still a British colony. The initial denominations were the silver half dime (5 cents), dime (10 cents) and 20-cent piece. This lineup was amended in 1870, when the 20-cent piece was replaced with the quarter (25 cents) and the half dollar (50 cents) was added. All of these early Canadian silver coins were struck in 92.5% fine sterling silver, just like the silver coinage of Canada’s parent country, Great Britain.

In the aftermath of World War I, both Great Britain and Canada debased their silver coinage due to the expense of the conflict. However, while Great Britain started issuing coinage in .500 fine silver, Canada only debased its silver coinage to .800 fine. So from 1920 until 1966, 80% purity was the standard alloy for Canadian silver coins. Purity further dropped to 50% briefly in 1967-1968 before switching over to 100% nickel in late 1968. I’ll discuss the messy 1967-1968 end period for Canadian silver coinage later on in this article.

Canada further tweaked its silver coin denominations right after World War I. The tiny silver half dime was discontinued in 1921, leaving a coin lineup familiar to most people today: the dime, quarter and half dollar. Canadian silver dollars only came a little bit later, being first struck in 1935

The 80% fine coins minted between 1920 and 1966 represent the bulk of Canadian junk silver that the average silver stacker will encounter in the marketplace. Pre-1920 sterling Canadian coins generally aren’t found in junk lots because of their higher purity and substantial numismatic value. So we’ll only concern ourselves with the 20th-century, 80% purity Canadian junk silver in this analysis.

The Advantages of Buying Canadian Junk 80% Silver Coins

One of the biggest benefits to stacking Canadian junk silver coins is that their silver content is in easy to calculate round numbers. A Canadian silver dollar minted before 1968 contains 0.6 troy ounces of fine silver and a Canadian half dollar 0.3 troy ounces, while a Canadian quarter struck before 1967 has 0.15 troy ounces of fine silver and a Canadian dime 0.06 troy ounces. These amounts apply only to Canadian silver coinage that is 80% fine. Earlier sterling silver Canadian coins contain more silver, while later 50% fine coins have less silver.

This might seem like a really small detail, but for some stackers it is a nearly indispensable advantage. It makes calculating the exact amount of silver you have in your Canadian junk silver stack incredibly easy: just multiple the face value by 0.6. So for example, $20 in Canadian 80% silver coins would be 12 troy ounces fine silver. $8.25 would be 4.95 troy ounces. $55 face value would be 33 troy ounces. The 0.6 multiplier is easy to remember and, depending on your math skills, might not even require a calculator to figure out.

This is a lot better than U.S. 90% junk silver, where the ratios are always frustratingly difficult. Circulated U.S. junk silver is assumed to contain 0.715 troy ounces per $1 face value, which is not easy to remember or calculate. The ratio for very lightly circulated or uncirculated U.S. junk silver is even more unwieldy, with each $1 face value containing 0.7234 troy ounces. There is no figuring these numbers in your head unless you are dealing with a supremely round number, like $10 face value or $100 face value.

Of course the convenient 0.6 ratio for Canadian junk silver only applies to lightly circulated coins, but I’ll address that later in this article.

Another major advantage with Canadian junk silver is that the idea of ever running into counterfeit examples is almost inconceivable. Much like the country it hails from, Canadian coinage flies underneath the radar. Because of this, the Chinese counterfeiting rings that churn out fake U.S. coins don’t bother with Canadian coins – at least so far.

I should note, though, that it is also rather uncommon to find fake U.S. junk silver coins. The profit margins for fakers are simply too low. There is one notable exception to this rule of thumb, though. Morgan and Peace dollars seem to be the only U.S. junk silver coins that have enough popularity and numismatic value to spur the production of counterfeit common-date specimens.

So it could be argued that it is almost a wash between Canadian and U.S. junk silver concerning counterfeits, with Canadian silver coinage having just a slight edge.

But there is one area where Canadian junk silver wins hands down over U.S. junk silver. Canadian silver dollars are typically much, much cheaper than their U.S. counterparts when measured by their premium over melt value.

Vintage 80% Fine Canadian Silver Dollars for Sale on eBay

(This is an affiliate link for which I may be compensated)

On bullion dealer APMEX’s website a roll of 20 average circulated Morgan silver dollars was selling (as of November 2019, which was pre-COVID-19) for a jaw-droppingly high 90% premium over its melt value. A similar roll of Peace silver dollars was selling for a still hefty 37% premium over spot. But APMEX was willing to sell you a roll of 20 average circulated 80% fine Canadian silver dollars minted between 1958 and 1967 for only a 13.5% premium over melt.

As an added bonus, Canadian silver dollars in average circulated condition will usually be in much better shape than equivalent Morgan or Peace dollars. This is because U.S. silver dollars are older and circulated for a much longer period of time. U.S. Morgan and Peace silver dollar production ran from 1878 until 1935, when minting was discontinued due to the Great Depression. However, the Royal Canadian Mint only started striking silver dollars in 1935 (the same year they were dropped in the U.S.), with the final year of regular-issue 80% fine silver dollars rolling off the presses in 1967.

And any Morgan and Peace dollars you do find in junk lots have almost always been picked over to remove higher grade specimens. This is because U.S. silver dollars in better conditions (generally XF and above) tend to sell for premium prices over more worn examples.

But this isn’t the case with Canadian silver dollars, giving astute silver stackers a very interesting arbitrage opportunity. Remember that roll of Canadian silver dollars that APMEX was willing to sell you for just 13.5% over spot? Well, they will also sell you the same roll in near-mint state AU/BU condition for only a few dollars more. Even now, these rolls of impressively large silver dollars in near pristine condition sell on the APMEX website for just 20.1% over spot. This is a criminally cheap price for so-called “junk silver” in the middle of the COVID-19 run on silver bullion products.

Canadian junk silver also offers collectors the possibility of finding numismatically valuable coins. Although uncommon, it isn’t unheard of to come across overlooked coins in Canadian junk silver lots that are worth 2x, 3x or even 4x their melt value!

In contrast, it is much harder to find numismatically worthwhile coins in rolls or bags of U.S. junk silver, although it does happen on rare occasions. This is because U.S. silver coins tend to be heavily picked over for valuable specimens, while Canadian silver coins once again fly under the radar.

The Downsides of Buying 80% Purity Canadian Junk Silver

One drawback to stacking Canadian junk silver is its potentially limited availability. While nearly all bullion dealers in North America carry U.S. 90% junk silver coins in their inventory, far fewer stock Canadian 80% silver coins. In fact, at the time of writing I could only find two major online dealers selling Canadian junk silver: APMEX and SilverGoldBull. This could very well change in the future, but it does underscore just how difficult it can be to source this type of junk silver in volume.

Happily, there are other venues available for lovers of Canadian junk silver. Many small online dealers (primarily in Canada) stock and sell the stuff. And your local coin store might also have some Canadian 80% silver that it is willing to sell for close to spot, depending on the circumstances. Lastly, eBay often has good deals on Canadian silver coins.

Another complaint about Canadian junk silver is its relative lack of liquidity; there can be wide spreads between dealers’ bid and ask prices. This means a dealer might charge you a high premium on the coins when you want to buy, but offer you well below spot when you want to sell.

This drawback isn’t set in stone though. I’ve already documented how APMEX sells Canadian silver dollars for very competitive prices (although this could change in the future, depending on availability). Well, I’ve also discovered that the well-known online dealer Kitco is normally willing to purchase 80% fine Canadian junk silver for between 3% and 4% below melt value – the exact same rate it pays for U.S. junk silver. And although this is already a pretty good buyback price, it might be possible to find private buyers who are willing to pay even more.

Vintage 80% Fine Canadian Junk Silver Lots for Sale on eBay

(This is an affiliate link for which I may be compensated)

I should also note that Kitco’s buyback price on Canadian junk silver is now (as of mid-March 2020) at an unusually wide 9.9% discount to spot due to the recent turmoil in precious metal markets.

One of the biggest issues with Canadian junk silver is the confusion surrounding 50% fine silver coins that were struck in 1967 and 1968. While all Canadian dimes, quarter, halves and dollars were minted from 80% silver from 1920 through 1966, things get a bit messy afterwards. The rising price of silver in the mid 1960s forced the Royal Canadian Mint to debase some of its coinage to just 50% fine. Even this step ultimately proved insufficient, however, and all silver was permanently removed from circulating Canadian coinage by 1969.

So here is a quick cheat sheet. All Canadian silver dollars and half dollars were struck in 80% silver through 1967, changing over to 100% nickel in 1968. There are no 50% fine silver Canadian halves or dollars.

All Canadian dimes and quarters were minted from 80% fine silver through 1966. In 1967, the Royal Canadian Mint struck them in both 80% and 50% purities. There is no easy way to tell these different purity coins apart (although testing questionable coins with a CCT silver slide might help). In 1968, the composition of dimes and quarters was either 50% fine silver or 100% nickel. A strong magnet will be able to separate these two alloys.

So dealing with Canadian junk silver isn’t so hard in the end. 1966 and earlier coins are all 80% goodness. 1967 halves and dollars are also money good. Any vintage Canadian coins that stick to a magnet are made from nickel, so they are relatively easy to weed out. Honestly, the best way to approach 1967 dimes and quarters is just to assume that they are all 50% fine and bid accordingly (if you’re still interested).

The final problem with Canadian junk silver is that it is simply less recognized compared to U.S. junk silver. A lot of silver stackers buy junk silver in preparation for natural disasters, civil disturbances, economic crashes or other disruptive events where normal payment systems might break down. As a result, some bullion buyers simply don’t like the idea of stockpiling a form of silver that other people might not recognize or accept.

Of course, if you live in Canada – or even in a U.S. state near the Canadian border – then I think this objection is largely moot. Most people living in these areas will be at least somewhat familiar with old Canadian silver coinage.

I personally feel that Canadian junk silver can be a great way to accumulate silver bullion, assuming you pay the right price for it. I’m especially fond of Canadian 80% silver dollars and half dollars, which tend to have less wear and greater numismatic potential than Canadian silver dimes and quarters. However you want to look at it, Canadian junk silver is the overlooked northern brother of U.S. junk silver.

Read more thought-provoking Antique Sage coin articles here.

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Read in-depth Antique Sage coin investment guides here.

You Need to Be Invested in Tangible Assets

You may not realize it yet, but you desperately need to diversify into tangible assets.

I know, I know. Why in the world would any investor want to diversify out of conventional assets? After all, the S&P 500 Index skyrocketed by 31.49% in 2019 while the S&P U.S. Treasury Bond Current 30-Year Index returned a robust 15.74% during that same period.

Stocks have offered investors another major benefit beyond just strong returns, though. They have also enjoyed good liquidity, with the ability to quickly buy or sell large blocks of shares at tight bid-ask spreads.

However, there are very good reasons to believe that these advantages for conventional assets might soon reverse.

For example, high returns over the past several years have been a product of ever rising valuations. Corporate earnings and revenues have both lagged badly during this time. We can see this via broad market valuation tools.

One of my favorite valuation methods is the price-to-sales ratio, which measures a company’s market cap versus its gross revenue. Revenue, synonymous with sales, is generally superior in valuation calculations because it is less volatile and more resistant to accounting fraud than earnings. As recently as late February 2020, the price-to-sales ratio of the S&P 500 sat at 2.43 – far above its long-term average of 1.0 and even higher than it was during the 2000 Dot Com bubble peak.

S&P 500 Price to Sales Ratio – February 2020

The market-cap-to-GDP ratio is my other preferred valuation indicator. This measurement tool compares the broad Wilshire 5000 Index against U.S. GDP. Market-cap-to-GDP is so reliable that it is a favorite of investing icon Warren Buffet in determining how expensive the overall equity market is. Sadly, this valuation gauge was also signaling extreme overvaluation in late February at 158% versus a more reasonable long-term average of about 75%.

Market Cap to GDP – February 2020

Even traditionally safe bonds are a bad deal right now. Due to the massive rally in credit markets during 2019 and early 2020, long-term bond yields are at all time lows. The 30-year U.S. Treasury bond has a paltry yield-to-maturity of less than 2.00% per annum. If you purchase one of these securities and hold it for the next 30 years, this abysmally-low single-digit return is without a doubt exactly what you will receive! Corporate bond spreads over treasuries are also compressed, closing off yet another potential avenue of escape.

And if there should ever be a future financial crisis – even a minor one – you can rest assured that the abundant liquidity that markets offer today will instantly disappear, evaporating like water in a scorched desert. It is probable that many small cap equities, junk bonds and ETFs will become dramatically illiquid in such a scenario, thus thwarting any attempt by panicked investors to exit those positions.

So while a conventional 60%-40% portfolio balanced between an S&P 500 Index fund and a bond fund may have worked well in the past, it sure won’t in the future. These paper assets are simply not going to give you the safety of principal and returns you need in order to preserve, much less build, your wealth.

But wait, it gets worse!

Beyond the massive overvaluation and false liquidity present in most markets, there is another critical flaw inherent to conventional assets that your financial advisor or stock broker has been all too happy to ignore. The supply of most financial assets isn’t limited by any realistic physical restriction. Instead, paper assets like stock and bonds can be effectively manufactured in almost any quantity desired.

Want proof?

As our decade-long equity bull market has boosted demand for stocks, Wall Street has responded by fabricating securities to sell to a gullible public.

Within the past year a whole host of companies with no profits and questionable business models have been taken public. For example, Wall Street unceremoniously rushed ride-sharing service Uber out the door in March 2019 (UBER: IPO price $45; current price $33.87) at the low end of its range when it became apparent that the market was starting to sour on its money-losing twin, Lyft.

A near carbon copy of that debacle occurred more recently in February 2020 when investment banks IPO’d mattress maker/retailer Casper (CSPR: IPO price $12; current price $9.02) at an underwhelming valuation, leaving some of its earlier private equity investors underwater.

But perhaps the most notorious instance of stocks being made like sausage belongs to short-term office rental company, WeWork. The Wall Street clown show heroically tried, but ultimately failed, to shove this corporate fiasco down the market’s throat in August 2019. Much to the underwriters’ chagrin, there simply weren’t enough suckers willing to buy the lie.

As an aside, what sort of dumpster fire did WeWork have to be for its IPO to fizzle during the height of one of the biggest stock market bubbles in human history?

But what I find truly frightening about modern finance is its eerie parallels to medieval alchemy. In the 16th and 17th centuries, many otherwise intelligent men wholeheartedly believed that they could turn lead into gold with the power of science. And while we now know that transmutation is technically possible (albeit uneconomic) via complex and energy-intensive nuclear fission, medieval alchemists came nowhere close to achieving this feat.

Likewise, today we have countless PHDs, MBAs and CFAs who assure us they’ve discovered the path to perpetual prosperity – usually via some ill-conceived unicorn tech IPO. Never mind that the company in question will most likely never turn a profit. Or that its market segment has few or no barriers to entry. Or that other established incumbents are preparing to spend it under the table.

And if you’re too smart to fall for their claims of lead-into-gold equity riches, they’ll happily try to con you into buying a “safe” ABS subprime auto loan with a juicy 6% coupon that sounds great…until you learn that the default rate is 23% (and rising)!

Contrary to what the Wall Street charlatans want you to believe, true wealth can’t be conjured into existence by a few computer keystrokes. Every time humanity has tried it in the past, the results have been absolutely disastrous – financial panics, depressions, market crashes or worse.

So what is an investor to do?

The answer is remarkably clear. First, we must acknowledge that wealth – real wealth – is difficult and labor-intensive to create. It is rare and consequently precious. If enduring wealth could really be casually printed up on a certificate or electronically credited to a balance sheet, humanity would have figured it out long ago.

Instead, we discovered that although hope might spring eternal, a sucker is still born every minute. Even though we know it’s a lie, we still all too often chase the dream of wealth rather than the reality of wealth.

Charles Mackay, the author of that seminal mid-19th century book on financial bubbles, Extraordinary Popular Delusions and the Madness of Crowds, once said that “Men…go mad in herds, while they only recover their senses slowly, and one by one.”

I sincerely hope that you, dear reader, are one of those individuals who regains their senses right now, while there is still time to protect yourself.

And there is no better way to sidestep the Wall Street casino than by investing in tangible assets. I’m talking about things like classic cars, vintage wine, fine art and antiques. These are the asset classes that have been neglected and forgotten while the bubble-crazed U.S. equity indices have shot to the moon.

But the best reason to own tangible assets is because they represent real wealth.

For instance, Trellis Wine Investments estimates that less than 1% of the global wine market can be considered investment grade. And the grapes that go into those exceptional wines must be picked, transported, crushed, fermented, bottled and aged. All of these steps are real, physical processes that require land, equipment, manpower, knowledge and time.

And if you happen to drink that superb bottle of wine, it is impossible to get more without engaging in real work. You can’t simply print a new bottle of 1982 Lafite when you want more.

In addition, as you can see from the 10-year chart below, there is very little correlation between investment grade red Burgundy and Bordeaux wines and the S&P 500 Index. Indeed, we could go so far as to say that the two asset classes are inversely correlated at key points of equity turmoil.

The situation is the same with antiques.

For example, high-end vintage mechanical wristwatches from the 1940s, 1950s and 1960s were never produced in large quantities. They were expensive luxury items that only the well-to-do could afford. Later, in the 1970s and 1980s, many were lost as the rising price of gold and advent of reliable quartz watches prompted people to scrap their old watches.

As a consequence, an original vintage Jaeger-LeCoultre Memovox, Breitling Navitimer or Audemars Piguet Extra-Flat is incredibly rare today. But surprisingly few people have figured out this investing secret yet. So you can still buy one of these beauties for just a few thousand dollars, even though prices should realistically be two or three times higher in a sane world.

And of course, the world will never get anymore vintage luxury watches. Whatever is out there today is all the supply there will ever be. Much like fine wine, vintage watches can’t simply be printed on demand by the Wall Street money machine.

As an added bonus, the prices of vintage wristwatches are similar to investment grade wine in that they aren’t correlated to broader market movements. For instance, the below chart shows the auction performance of a model of vintage Patek Philippe Calatrava watches since 2006 (ref. 2406; the pictured 1940s specimen is pink gold, which was quite popular in the post World War II era). Notice how prices for these classic timepieces barely dipped when the 2008 Great Recession hit and have subsequently trended steadily upwards.

What’s the upshot of all this?

You need to be invested in tangible assets. I don’t care if it’s only 5% or 10% of your portfolio as an insurance policy/hedge position. You need to have exposure to them. They are the antithesis of the Wall Street sausage factory. The fact that tangible assets are criminally undervalued in today’s all-equities-all-the-time world is just icing on the cake.

The Curse of the Kickstarter Wristwatch

A lot of people – particularly younger, tech-savvy men – are watch lovers. And I certainly can’t blame them for this particular addiction. Fine mechanical watches are one of the great luxury goods of the modern era. Unfortunately, some of these young wristwatch aficionados are occasionally tempted to get their mechanical wristwatch fix on Kickstarter.

What is Kickstarter?

Kickstarter is an online crowdfunding platform where regular people can pledge their monetary support for almost any type of creative venture under the sun. And, unsurprisingly, luxury wristwatches happen to be one of the more popular projects on Kickstarter.

But I’m here to tell you that it’s a very bad idea to buy a Kickstarter wristwatch.

Why? Well for a lot of different reasons, actually. Let’s go through the list.

First, there have been hundreds of wristwatches funded via the Kickstarter platform over the years. When I did a search on the Kickstarter website, I came up with 1,062 – over a thousand – fully funded projects through February 2020. Now, how can a thousand different types of watches all be unique or highly desirable? The brutal answer is that they can’t, although that reality might not become apparent for a number of years.

The next thing to hate about the average Kickstarter wristwatch is the gimmicks. Nearly every single one of these watch projects got funded because of some over-hyped hook. Want a Kickstarter wristwatch with a carbon-fiber/Damascus steel/titanium case? You can have it! Do you possess a burning desire for a wristwatch that was hand-assembled in Geneva, Switzerland by alpine gnomes? Kickstarter has it! Do you have an unquenchable thirst for a watch inspired by a vintage World War I trench/pro-diver automatic/luxury ultra-thin wristwatch? Step right up and choose from dozens of different (yet all vaguely similar) Kickstarter models!

There is also the issue of the name brand (or lack thereof) attached to the typical Kickstarter wristwatch. You see, when an individual or company goes to Kickstarter for funding, it is generally because they can’t get the funding elsewhere.

Why is this a problem?

Because in the world of collectible watches, name brands matter. Rolex watches consistently sell for higher prices in the secondary market than Bulova watches because of the difference in the prestige of the two name brands (among other reasons). The same thing applies to vintage watches, where a no-name chronograph wristwatch by Liban, Hilton or Clebar will sell for much less than a comparable Seiko or Omega chronograph.

Can you imagine trying to sell a Kickstarter wristwatch in 30 or 40 years? “I know it looks just like a 1970s Omega chronograph wristwatch, but this one was made in Todd’s garage in 2017, so it must be better!”

These selling points would not go over well, especially when you consider that there will be dozens of mid-market and luxury watch brands of a similar vintage (not to mention better quality) to choose from. So the average Kickstarter watch will not only be competing against mid-tier brands like Raymond Weil, Tag Heuer, Bell & Ross and Breitling, but also high-end brands such as Cartier, Rolex, Patek Philippe and Blancpain.

The final nail in the coffin for Kickstarter wristwatches is that their movements are, almost out of necessity, mass-produced calibers that can be commercially sourced by anyone. A Kickstarter wristwatch is really more accurately described as a Kickstarter-cased watch. The mechanical movement found in a Kickstarter wristwatch will invariably be a Seiko, Venus, ETA or some other third-party caliber. And that assumes you aren’t dealing with a cheap $10 Chinese quartz movement!

As a result, the prognosis for recovering whatever money you spend on a Kickstarter wristwatch is not good.

So why do people buy watches from Kickstarter if they are such money pits?

I think there are a couple of reasons.

First and foremost, Kickstarter wristwatches are inexpensive in a relative sense. Maybe you can’t afford that brand new $6,000 Panerai watch from the dealer that you’ve been salivating over, but a $400 Panerai look-alike from Kickstarter may be in the budget. Kickstarter watches can be had for amounts starting as low as just $100. Of course, you’ll get a quartz monstrosity with effectively no resale value for that price, but you’ll still get a functioning watch.

Second, I think a lot of younger watch enthusiasts simply don’t know how reasonably priced many vintage watches are. $500 to $1,000 is enough to allow you to choose from a wide variety of different brand name, mechanical wristwatches produced between the 1920s and the 1970s.

You can find beautiful vintage Longines, Ulysse Nardin, Hamilton and Jaeger-LeCoultre watches in this price range. They can be your choice of dress watches, divers or chronographs. While many of these wonderful older watches are cased in stainless steel, it is possible to find some in solid 14 or 18 karat gold for that added bit of sophistication.

Of course, if you have your heart set on a Kickstarter watch based solely on its own merits, then by all means go ahead and buy it. Just know that your chances of ever recouping your money are slim to none.

That seems like cold comfort to me when there are so many better options available.

Why throw your money away on a $300 or $400 Kickstarter wristwatch that will never be worth anything, when you can invest in a genuine vintage mechanical watch from a well-known maker for just a few dollars more? Kickstarter may be great for funding some projects, but not for funding watches.

Read more thought-provoking Antique Sage editorial articles here.

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