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Antique Bargains of a Lifetime

Antique Bargains of a Lifetime

We live at a unique junction in financial history – a time when antiques as an asset class are the cheapest they’ve been in decades, if not centuries.

Want an example?

How about diamonds?  These gemstones par excellence have been known as symbols of love and wealth since medieval times.  And although I’m not a big fan of investing in modern white diamonds, I do love their antique cousins: old mine cut and old European cut diamonds.

Before the discovery of major deposits in South Africa around 1870, diamonds were one of the world’s rarest gems.  In fact, only the very wealthiest people in the noble or merchant class could afford to own a diamond (even a fairly small one) in the pre-1870 era.

But fast forward to today, where $15,000 is enough to buy you a gigantic old mine cut diamond weighing between 2 and 4 carats.  This is the kind of stone only the richest of the rich would have been able to afford in days past.  Sure, $15,000 isn’t particularly cheap on an absolute basis, but at only 1/4 to 2/5 of the typical annual salary of a U.S. middle class worker, a sizable old mine cut diamond is still far more approachable than at any previous time in human history.

Today’s antique bargains aren’t limited to old diamond jewelry though.

Discerning collectors can currently buy a complete antique sterling silver service for 12 people (consisting of 60 to 90 individual pieces) for between $2,000 and $3,000 – generally less than a month’s gross wage.  Contrast this with the $400 to $600 price tag of a similar service purchased new in the late 1930s.  Of course, the average American wage at that time was just $1,368 a year, meaning that a complete silverware set cost more than 4 full months of labor.

But I’m particularly fond of 19th century French silverware sets.  The French had (and still do have, to be honest) an artistic flair that makes their old silver one of the great antique bargains of the modern era.  It is possible to pick up a set of elegantly-wrought Belle Époque solid silver teaspoons for just a few hundred dollars (and sometimes less).  As an added bonus, some of these sets are fire gilt – a silversmithing technique that was abandoned in the mid 19th century for inferior (but cheaper) gold electroplating.

This pricing is insanity.

In some instances, you are paying as little as double melt value.  I’m not sure how much French silverware cost in the 1830s or 1860s or 1880s, but I’m absolutely certain that it sold for far, far more than double melt value.

It is difficult to convey in words how anomalous the situation in the antiques market is right now.  Average people have the ability to afford objects that would have only been accessible to dukes and duchesses in past ages.  And although I’ve only given a couple examples above, the situation is similar across a broad swath of the antiques industry.

But how did this happen?  How did unrivaled antique bargains become a seemingly ordinary fixture of the modern world?

I think that we can safely lay the blame for these stunningly low valuations on the onerous economic backdrop of the last 20 years.  The average household has taken on more and more debt in order to maintain their lifestyle in the face of stagnant wages and ever rising costs.  This excessive debt has gradually choked consumer demand as people have prioritized the mortgage payment and grocery bill above all else.

Things came to a head during the Great Recession of 2008-2009 when many households simply collapsed financially.  The U.S. Federal Reserve boldly rode to the rescue, but only for the banking system.  Our monetary authorities effectively printed money and handed it out to their banking buddies, while leaving average Americans desperate for even the smallest of financial crumbs.

Under these circumstances, it becomes easier to see how such beautiful and desirable antiques came to be esteemed so shabbily.  In effect, we have been experiencing a soft depression where all the usual economic indicators – the stock market, unemployment rate and GDP – are solidly green.  But this obscures the true financial condition of the average household, which is poor – bordering on insolvent.

In reality, the present economy is much closer to that of the 1930s – the era of the Great Depression – than it is to some bold new 21st century economy.

So what’s the takeaway here?  It’s pretty simple.  Antique bargains abound today – fine vintage items are simply dirt cheap no matter which valuation methodology you choose to use.  The only items that have been bid up these days are one-of-a-kind trophy antiques or artworks – the kind of things that billionaires display in the cavernous foyers of their $100 million beachfront homes in order to impress other billionaires.

This leaves us with some good news and some bad news.

Here’s the good news first.  If you’re looking to buy vintage items at more realistic prices – say anything less than about $100,000 – then you’re in luck.  Antique bargains can be found in everything from old furniture to vintage jewelry to 20th century Japanese woodblock prints.  The only caveat I would give is to bias your purchases towards pieces that meet the Antique Sage’s 5 rules for investment grade art and antiques.

Now for the bad news.

It is almost a foregone conclusion that a recession is coming.  And given the frailness of the world’s ailing financial system, it is likely to be global in nature.  This will mean mass layoffs, falling stock markets and widespread corporate bankruptcies.

The time to prepare for this outcome is right now.  Sell some of the stocks in your retirement or brokerage account.  Make sure that you have sizable cash reserves.  Don’t take on frivolous or unnecessary debts.

Antique prices have a tendency to stagnate or fall during recessions.  This makes it an ideal time to buy.  But you can only take advantage of the fire sale pricing if you have some free cash when the time comes.

I believe that the coming recession will be so severe that the Federal Reserve (and most other central banks around the world) will eventually resort to dropping helicopter money on the public in an attempt to improve the dire economic situation.  But the period leading up to this unconventional monetary policy will be absolutely brutal for most people.  Only those with their financial houses in order going into the crisis will be well-positioned to take advantage of the tumultuous situation.  There will be tremendous antique bargains to be had, but only for those who are prepared.

 

Read more thought-provoking Antique Sage investing articles here.

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Read in-depth Antique Sage investment guides here.

A History of the End of Circulating U.S. 90% Silver Coinage

A History of the End of Circulating U.S. 90% Silver Coinage

With the central banks of the world embracing negative interest rates and endless balance sheet expansion, currency debasement is an issue that is especially relevant to today’s investors and savers.  So I wanted to write a brief historical review of how the United States removed 90% silver coinage from circulation in the 1960s.  Read on to find out more!

From the 1930s through the 1950s, the U.S. Treasury was a net buyer of silver on a truly gargantuan scale.  During this time, the government acquired several billion ounces of silver via open market purchases which were mandated by the Silver Purchase Acts of 1934 and 1946.  The intent of these laws was to put a floor beneath the price of silver in order to help the Western mining industry, while also providing ample monetary silver for the growing economy.

At this time, each silver dollar or $1 silver certificate was equivalent to 0.77344 troy ounces of fine silver.  Subsidiary coinage (dimes, quarters and half dollars) contained slightly less silver per $1 face value – 0.7234 troy ounces.  These traditional ratios established two vitally important silver price points: $1.293 and $1.382.  $1.293 was the level at which the bullion content of a silver dollar equaled its face value, while $1.382 was the corresponding price level for 90% silver dimes, quarters and halves.

As long as the silver market stayed below these price points, 90% silver coinage would freely circulate in the United States.  But if the price of silver ever rose above these levels, then silver coins would be hoarded by the public.  This would create tremendous economic problems; a loss of faith in the currency combined with a dearth of small change might choke-off commerce.

All remained well until the 1960s dawned.  It was then that the U.S. Treasury suddenly realized it had a major problem on its hands.  In spite of a brief and shallow recession from April 1960 to February 1961, the U.S. economy was booming.  This was generally a good thing.  But it did create an unforeseen side effect – a massive shortage of silver coins in circulation.

The first culprit in this silver shortage was dramatically expanding industrial demand for the precious white metal.  The burgeoning manufacturing-based U.S. economy of the mid-20th century needed huge and ever increasing quantities of silver for photography, electrical contacts, brazing and soldering alloys, mirrors and chemical catalysts.  This was in addition to more traditional sources of silver demand from increasingly wealthy American households, such as jewelry and sterling silverware.

The industrially-driven scarcity of the lunar-themed metal was further compounded by an absolute explosion of newly-installed, coin-eating vending machines.  Between the early 1950s and the early 1960s it was estimated that vending machines sales – including parking meters, phone booths and snack and drink dispensers – tripled to $3.5 billion annually.  All of these vending machines sequestered enormous quantities of silver coins (primarily dimes and quarters) for extended periods of time.

The final component of the crisis was a boom in coin collecting, which increased from an estimated 2 million participants in the early 1950s to perhaps 8 million collectors by the early 1960s.  Although many of these new collectors were children looking to fill out their coin albums with pennies, nickels or dimes pulled from circulation, others were adults who specialized in speculating in rolls or bags of modern (i.e. 1950s and 1960s) coinage.  While the drain on the nation’s silver coins from young collectors was probably modest, the hoarding of millions of bags and rolls of silver coins by numismatic speculators was undoubtedly a significant factor behind the silver coin shortage of the time.

 

1950s & 1960s U.S. 90% Silver Proof Sets for Sale on eBay

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

 

All of this meant that the global supply of silver was increasing at a much slower rate than silver demand.  By the late 1950s, silver production was expanding at about 1.5% per annum versus consumption growth of 4.0% annually.  The monetary status quo in the United States was quickly becoming untenable.

As early as 1961, the Kennedy Administration determined that the only logical recourse was to cease striking 90% silver coinage.  On November 28, 1961, President JFK wrote to the sitting Treasury Secretary that: “[I have] reached the decision that silver metal should gradually be withdrawn from our monetary reserves.”

The iconic U.S. silver dollar was the first casualty of the 1960s silver demonetization trend.  At the beginning of 1963, the U.S. Treasury held a seemingly robust 94 million silver dollars as reserves against outstanding silver certificates.  By the start of 1964, that number had precipitously dropped to 28 million coins.  As the weeks passed, a run on silver dollars quickly developed. By March 1964, a mere 3 million of the silver cartwheels were left in government vaults, prompting the U.S. Treasury to abruptly suspend silver dollar redemptions on March 25, 1964.

But the silver dollar wasn’t the only U.S. 90% silver coinage experiencing supply problems.  After JFK’s assassination in 1963, there was widespread public support for honoring the fallen president in some way.  Congress reacted by authorizing a change to the design of the half dollar.  The old Franklin half dollar would be retired after 1963, to be replaced with the new Kennedy half dollar in 1964.

An old saying comes to mind here: “The road to hell is paved with good intentions.”

The public immediately hoarded the hotly-anticipated Kennedy half dollars as they hit circulation, sequestering the coins in sock drawers, closets and safe deposit boxes across the land.  People were eager to have a memento of the slain president and the freshly redesigned half dollar seemed like the perfect keepsake.  Speculators also did their part by hoarding freshly minted rolls of the new half dollar with the intention of re-selling them for higher prices later on.  Despite the fact that over 429 million of the new coins dated 1964 were struck, Kennedy halves simply did not circulate.

In fact, it would not be a stretch to say that the ill-timed release of the Kennedy half dollar killed the 50 cent denomination as a regularly circulating coin in the United States.  Before 1964, half dollars had passed right alongside dimes and quarters in everyday transactions in most parts of the country.  But after 1964, they were rarely found in circulation.

Although the U.S. Government was at least partially culpable for the early 1960s silver coin shortage, it reacted to the emergency in a predictably self-serving way – it blamed the little guy.  Coin collectors and speculators were repeatedly singled out by government officials as the chief culprits behind the rising price of silver bullion.  Meanwhile, the U.S. Treasury conveniently ignored the far larger contribution to the crisis from the out-of-control vending machine industry and commercial silver users.  This was undoubtedly because the moneyed interests behind these groups could afford to buy the silence of the political establishment.

But all this finger pointing did nothing to solve the underlying problem.  By early 1963 the price of silver was only being held at the magic $1.293 rate by the U.S. Treasury freely selling silver to all bidders from the government’s rapidly depleting stockpiles.  It was a situation that could not persist for long.

As 1964 progressed and the crisis deepened, President Lyndon B. Johnson signed legislation on September 8th that permitted the U.S. Mint to implement a date freeze.  As a result, all U.S. 90% silver coinage struck after 1964 continued to bear the frozen 1964 date.  This was intended to dissuade collectors and speculators from hoarding these coins.

Of course, numismatic speculation, although problematic, was a relatively minor issue in the grand scheme of things.  This meant that the date freeze wasn’t terribly effective in relieving the coin shortage by itself.  The primary issue was really the inexorably rising price of silver and the fact that too many silver certificates had been issued against the government’s reserves.  The only reasonable way to resolve this problem was to remove silver from the nation’s circulating coinage – in other words to devalue the U.S. dollar.

Enter the Coinage Act of 1965, which LBJ signed into law on July 23, 1965.  This legislation authorized the U.S. Mint to begin striking dimes and quarters in a cupro-nickel clad alloy with a pure copper core.  Half dollars were to be minted from a debased, 40% silver composition.  The law also prohibited the use of mintmarks on freshly-struck coins for the next several years – another largely senseless jab at coin collectors.

The first of these debased cupro-nickel coins (quarters) was not struck until August of 1965, with a subsequent release date in November 1965.  Cupro-nickel dimes and 40% silver halves were first struck in December 1965 and only released into circulation in early 1966.  Contrary to popular wisdom, practically all higher denomination coins in circulation throughout the entirety of 1965 were 90% silver.

All of the debased, cupro-nickel coins were dated 1965 (or later), which allows modern-day silver stackers to easily distinguish them from 1964-and-earlier dated 90% silver coinage.  In addition, a quick look at the edge of a questionable coin will quickly reveal its composition as well.  Cupro-nickel coins readily show a telltale copper sandwich (sometimes derisively called a “Johnson sandwich” after President LBJ) when viewed along their edge, an effect not visible on 90% silver coinage.

The last of the United State’s circulating 90% silver coinage was struck in early 1966.  The country’s final 90% silver quarters rolled off the line in January 1966, while the last 90% silver dimes plunked into fresh mint bags in February of that same year.  The end for the 1964 dated 90% silver Kennedy half dollars came just a little bit later, in April 1966.

 

Old U.S. Silver Morgan & Peace Dollars for Sale on eBay

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

 

During this changeover period in late 1965 to mid 1966, the U.S. Treasury and President LBJ both publicly avowed that the old 90% silver coinage would continue to circulate side-by-side with the new cupro-nickel slugs for many decades to come.  This was, of course, a great lie.  Gresham’s Law – which states that bad, debased money drives out good money – ensured that any desirable silver coins would quickly be pulled from circulation.

In addition, government officials knew that the Treasury’s rapidly dwindling silver reserves would soon shrink to the point where they would no longer be capable of suppressing the market price below the critical $1.293 threshold, where silver dollars would start being profitable to hoard.  The next important price point wasn’t much higher, at $1.382.  This was the level where 90% silver dimes, quarters and halves would be sequestered en masse by the public.

After their hurried introduction in 1965, the U.S. Mint took great pains to produce absolutely massive quantities of its new cupro-nickel coins.  From 1965 to 1967 the U.S. Mint struck over 4.1 billion Washington quarters and more than 5.2 billion Roosevelt dimes.  By June 14th, 1967, the U.S. Treasury felt that enough of the new debased coins were in circulation for it to stop holding down the price of silver.

After this seminal event, the price of silver quickly rose above the all-important $1.293 barrier.  Indeed, by the end of 1967, silver was over $2.00 per troy ounce.  This meant that all 1964 and earlier U.S. 90% silver coins – dimes, quarters, half dollars and silver dollars – were quickly hoarded by the American public for their intrinsic value.

Once the U.S. Treasury let silver prices run in mid 1967, the age of circulating silver coinage in the United States came to a shockingly definitive end.  Silver only very briefly dipped below the pivotal $1.382 level once for a handful of months in late 1971, where 90% silver subsidiary coinage could theoretically circulate.  It never again touched the $1.293 price point that would have made silver dollars uneconomic to hoard.

The only loose end left now was the remaining silver certificates in circulation.  Even though the U.S. Treasury had stopped paying out silver dollars to holders of these certificates back in March of 1964, it was still obligated by law to redeem them for the appropriate legal weight (0.77344 troy ounces per $1) of silver granules (for smaller sums) or silver bars (for larger sums) at the New York and San Francisco Assay Offices.  However, this final contractual link between the U.S. dollar and silver was set to expire on June 24, 1968, per Congressional decree.  After that time, the U.S. Treasury would no longer honor its obligation to redeem silver certificates for bullion (although the notes would continue to be legal tender).

In the months leading up to the historic date, enterprising entrepreneurs widely advertised their willingness to buy silver certificates for anywhere from 10% to 60% over face value in newspapers and magazines.  They would then travel to New York or San Francisco to redeem these accumulated notes at the Assay Offices for bullion worth even more than they had paid.

In the few weeks before the final June 24th redemption date, people desperate to redeem their silver certificates mobbed the New York and San Francisco Assay Offices nearly every business day.  On the morning of the deadline itself, hundreds of people lined up around the block at both Assay Offices for their last chance to exchange their paper silver certificates for silver bullion.

In the aftermath, silver was well on its way to being completely demonetized in the United States.  By the late 1960s, silver dollars simply couldn’t be found anywhere in circulation.  And subsidiary 90% silver coinage was rapidly being pulled from the banking system by both an enthusiastic public and a disingenuous Federal Reserve (which shamelessly “mined” the remaining silver coins in circulation in order to reap a profit for the Treasury).

 

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

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

 

The final act in this sad drama played out in 1969.  At this point, the only circulating U.S. coin that still contained any silver was the 40% Kennedy half dollar.  But the perpetually rising price of the white metal made it apparent that this token coin would soon have to be sacrificed at the altar of fiat currency as well.

The end for 40% silver Kennedy halves came not with a bang, but with a whimper.  In 1969, its last year of commercial production, nearly 130 million pieces were struck.  But in 1970 the 40% Kennedy half was restricted to mint and proof sets; none were released for general circulation.  Only 2.1 million specimens were struck in this final year, making it one of the key dates in the series.  When commercial Kennedy half dollar production finally resumed in 1971, they were struck from the same miserable cupro-nickel alloy already found in the dime and quarter.

And with that the glorious 178 year history of circulating U.S. silver coinage came to a pathetic close.  Although 90% silver coinage could still sometimes be found in circulation in the late 1960s, by the early 1970s the monetary system had effectively been picked clean of these high value coins.  Even the debased 40% Kennedy halves didn’t last much longer, as their silver content exceeded their face value by January 1974.

From that point on, only dedicated coin roll hunters picking through the dustiest, most undisturbed corners of bank vaults could hope to find the occasional silver treasure.  The age of circulating U.S. 90% silver coinage was over.

 

Read more thought-provoking Antique Sage history articles here.

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Read in-depth Antique Sage investment guides here.


Forecasting Real Returns for Investments in the 2020s

Forecasting Real Returns for Investments in the 2020s

There’s an old financial saying that you can’t time the market.  And while I’ve found this dictum to be largely accurate, it does ignore one almost surefire way that investors can boost their investment results over the long haul.

I’m referring to allocating your portfolio based on broad valuation metrics.  If you overweight asset classes that are undervalued while shunning those with overvalued, you simply can’t help but make money over long periods of time.

Perhaps the best way to do this is by forecasting real returns for asset classes.  The word “real” in this context means returns that have been adjusted for inflation.  For example, if you expect inflation to run at 2% per annum but your bond has a yield-to-maturity of 5%, then your real return is the difference between the two: 3%.

Now that 2020 is here, I thought it would be interesting to examine the major asset classes and project their real returns over the next decade.

The results are surprising, but not in a good way.  Despite the 2019 stock market melt-up, investors in conventional assets have a whole lot of nothing to look forward to over the next 10 years.

You can see this for yourself in the chart at the top of this article.  It details my personal return projections across 6 popular asset classes between 2020 and 2030.  These assets are: stocks, real estate, cash, corporate bonds, U.S. Treasury bonds and TIPS (U.S. Treasury inflation-protected bonds).

As an aside, my projections for stocks and real estate are based on a formula provided by the money manager John Hussman, founder of the Hussman Funds.  You can read more about his methodology in an article I wrote back in 2017.

Now onto the crux of this article – the implications of my projected 2020s investment real returns.

First up are stocks, which are represented by the S&P 500 Index.  The picture here is not pretty.  According to my calculations, stocks are likely to decline by -3.38% in real terms every year during the 2020s.  Ouch!

Of course, this estimate is just that – an estimate.  If inflation or nominal GDP growth is different than my forecast (2.0% and 4.0% per annum, respectively), then the outcome will be different as well.

But the really big question mark regarding stocks is the multiple they trade at.  At the end of 2019, the S&P 500 surpassed its highest price-to-sales multiple ever.  Yes, higher than even the 1929 stock market peak or the 2000 Dot Com bubble.

Right now the index trades at 2.35 times sales, versus a more normal ratio of 1.0.  In fact, if you discount the last 20 year period of market history (which has just been one long asset bubble train wreck), the average price-to-sales ratio is closer to 0.8.  So I’m being quite generous by spotting the market a 1.0 multiple here.

In case you’re wondering, I use price-to-sales rather than price-to-earnings because earnings are much more volatile and easy to manipulate compared to revenue.  And honestly, most other valid valuation measurements will give you similar results anyway, including price-to-tangible-book-value, Tobin’s Q ratio or market cap-to-GDP.

That last ratio, market cap-to-GDP is an interesting case.  This valuation metric, which is favored by Warren Buffett, indicates that stocks (as represented by the Wilshire 5000 Index) will decline by a nominal 2.8% per annum over the coming years.  Once you subtract the expected 2% inflation rate from this number, you end up with a dreadful -4.8% real return.  This is actually worse than my already rather pessimistic stock market projections using the price-to-sales ratio!

Real estate is no safe haven either.  I’ve averaged the valuations of two best-in-class REITs to represent this asset class: Reality Income Corp. (ticker “O”) and National Retail Properties (ticker “NNN”).  According to my projections, real returns for REITs are likely to be an abysmal -3.25% per year in the new decade.  This is almost as bad as stocks.

I do realize that real estate is a very diverse asset class and that a couple REITs, regardless of how well chosen, can’t possibly represent every niche.  So if you happen to own rental properties far from the overpriced U.S. coastal markets that are cash-flowing nicely, then you might very well be justified in ignoring my real estate return forecast.  Just don’t expect to buy a convenient REIT security in your IRA or 401-k account and walk away with positive real returns after inflation.

The situation improves a bit with cash.  This asset class should return an uninspiring -0.43% per annum after inflation through the 2020s.  And although real returns on cash might be better than what you’ll get in stocks or real estate, they still aren’t positive.

The real return on cash is derived from the 3-month Treasury bill interest rate (1.57%) minus the assumed future rate of inflation (2.0%).  Of course, that assessment relies on 3-month Treasury bill rates staying where they are right now.  And that, in turn, is a function of what the Federal Reserve decides to do with interest rates.  And the open secret there is that the Fed will only drop short-term interest rates in the future.

So that nice safe -0.43% annualized real return actually has downside risk!  Of course, cash is nice because it can allow you to pick up investment bargains on the cheap later.  But you’ll bleed purchasing power little by little until that day finally arrives.

Next up is corporate bonds, which are represented by the S&P 500 Bond Index.  This is a fixed-income index composed of over 5,400 securities issued exclusively by S&P 500 companies.  Right now the yield-to-maturity on this index is 2.87%.  Subtract inflation from this and you end up with 0.87%.

But that isn’t the end of the story.  You also have to account for default risk.

Unfortunately, corporate America has levered itself to the moon since the last financial crisis, increasing its aggregate debt load from $6.3 trillion in 2007 to $10.1 trillion in 2019.  As a result, default risks have increased dramatically (although you wouldn’t know it from watching CNBC).

 

FRED - Nonfinancial Corporate Debt & Loans

Photo Credit: FRED

In light of these facts, I applied a rather modest 1.1% default rate to the S&P 500 Bond Index, bringing the expected real returns on corporate debt down to -0.23% per annum.  In other words, corporate bonds will probably lose you money over the next decade after accounting for inflation.

The next stop on our whirlwind tour of future asset class returns is treasury securities.  These ultra-safe bonds are backed by the full faith and credit of the U.S. Government.

However, because they are ultra-safe, you can’t expect to get rich from them.  This is reflected in their real returns, which are currently negative.  The 10-year Treasury Note trades with a yield-to-maturity of 1.88%, giving a paltry annualized real return of -0.12% over the next 10 years.  This is not the stuff that investor’s dreams are made of.

The last asset class I wanted to examine is TIPS, or Treasury Inflation-Protected Securities.  These are U.S. Government securities that earn a guaranteed real return that is then adjusted (upward) for inflation.  That means that if you hold a TIPS bond until maturity, you will always get a positive real return (assuming its real interest rate was above zero when you purchased it).

TIPS is the only asset class that currently has a positive real return, making it unique among conventional paper assets.  Of course, the 10-year TIPS note is only priced to yield 0.15%.  But hey, at least it’s positive!

Investment returns this low are just depressing; they make building wealth almost impossible.

But there is an alternative for the sophisticated investor: tangible assets.  I’m talking about things like gold and silver bullion, antiques, gemstones and fine art.  These are the assets that have been ignored in our crazy, over-the-top “Everything Bubble”.

Now I can’t accurately predict the future returns of tangible assets with any degree of precision, which is why I haven’t included them in the chart above.  Antiques and other tangibles are difficult to value because they don’t have cashflows like stocks (dividends) or bonds (interest payments).  So you can’t apply traditional valuation metrics, like discounted cashflow analysis or net present value calculations.  This is, incidentally, one of the reasons that Wall Street tends to ignore this asset class.

But I can tell you that antiques, gold, fine art, silver and gemstones are all ridiculously undervalued right now.  They have simply been forgotten in our collective rush to find the next Amazon, Uber or Google.  In addition, tangible assets have no risk of default – an investment attribute that will become increasingly attractive once our current securities market mania collapses in tears.

So while I don’t know exactly what the real returns on antiques and other tangibles might be in the 2020s, I can confidently say that they’ll easily beat all of the 6 conventional asset classes that I’ve outlined in this article.  A nominal return of 4% or 5% per annum should be easily achievable.  This translates into real returns that are at least 500 basis points higher than anything the stock market casino can muster and a full 200 to 300 basis points better than bonds of even the highest credit quality.

Investors who want to play it safe can buy gold and silver bullion.  Those who are more adventurous can load up on antiques like vintage Must de Cartier wristwatches, World War II era U.S. military insignia or Japanese Edo era samurai sword fittings.  The sky is the limit for the savvy connoisseur.

Just don’t keep your money in conventional paper assets thinking that it will make you rich.

 

Read more thought-provoking Antique Sage investing articles here.

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Read in-depth Antique Sage investment guides here.

How to Buy Modern Jewelry with Return Potential

How to Buy Modern Jewelry with Return Potential
Photo Credit: Marietta Wülfing

I was surfing through Etsy listings the other day when I came across a masterpiece.  It was an opulent Modernist 18 karat gold and sterling silver pendant set with a massive rough peridot gemstone.  The artist who handcrafted this treasure is Marietta Wülfing, a jeweler who owns a boutique atelier called Sinnlích.   Wülfing’s retail operation is located in Buggingen, Germany, a small municipality just a couple miles from the French border that is sandwiched in between the picturesque Rhine River and the famous Black Forest.

But the truly shocking thing about this candy-colored treasure of a pendant was the price – only $876 on Etsy (note that the price fluctuates slightly based on the current dollar/euro exchange rate).

All this got me thinking.  Although I typically gravitate towards vintage or antique jewelry for investment purposes, I will certainly consider a piece of modern jewelry if it has the right attributes.  Much like a different handmade Etsy piece that I highlighted in a previous article, this scintillating peridot pendant hit all the right notes.

The contrast between this magnificent Modernist pendant and the nasty jewelry you’ll typically find in chain stores like Zales or Kay Jewelers couldn’t be more extreme.

First, this gorgeous pendant has a very high intrinsic value to price ratio, which is one of the primary things I look for when buying an investment grade piece of modern jewelry.  A really good piece of jewelry will have component elements – gold, silver, gemstones, etc. – that constitute a significant portion of its value.  Although it can take some searching, it is possible to find modern jewelry selling for no more than twice its intrinsic value.

In other words, for every dollar you invest in a good quality piece of modern jewelry you can expect to immediately “recover” 50 cents or more in melt/scrap value.  This means that if you were forced to panic liquidate your jewelry, it would be possible to literally rip it apart and sell the component metal and jewels for at least a 50% recovery rate.  Of course, we would never want to do this, as a fine piece of jewelry is always worth more than the sum of its parts.  Nonetheless, it is comforting to know that your downside risk is limited in a worst case scenario.

The second attribute I value when shopping for contemporary jewelry is whether the piece is one-of-kind.  We live in an age of mass production.  As a result, I believe that unique, handcrafted jewelry will tend to appreciate in value much more quickly than similar pieces that are factory made.  The handcrafting process really allows a jeweler’s creative artistry to shine through, producing jewelry that is often closer to a miniature work of art than merely a ring or a necklace.

As an added bonus, handmade jewelry is invariably finished to a much higher standard than chain store jewelry.  The artisans who create these masterpieces usually go to incredible lengths to ensure their work is both flawless and visually appealing.  Unlike more pedestrian jewelry, you won’t find pitted metal, sloppily-cut gems or bulky prongs on fine handmade jewelry.

The final hallmark of investment quality modern jewelry is the presence of one or more large gemstones.  Gems are often the most expensive component in a piece of fine jewelry.  Indeed, it isn’t uncommon for a jewelry setting to serve primarily as a vehicle to display a particularly fine gemstone.  In fact, this is undoubtedly the case with the rough peridot pendant pictured above.

But decades of unrelenting consumer demand has steadily sucked up all the fine colored gems the world can produce and then some.  Every 10 to 20 years we discover new gemstone deposits (most recently Ilakaka, Madagascar in 1998 and Mahenge, Tanzania in 2007) that dribble out relatively small quantities of new stones into the gem starved jewelry market.  But in spite of this additional supply, colored gemstone prices have more than doubled over the past 15 years.

Large jewelry manufacturers have compensated for this gem drought by designing settings that use a multitude of small, melee stones instead of a few larger stones.  But make no mistake – this mass-produced jewelry, although impressive at a distance, is absolutely inferior to jewelry mounted with fewer, larger gems.  Modern jewelry set with small stones without a large, central gem is a cost cutting measure that the serious jewelry aficionado should avoid by any means necessary.

 

Hand-Crafted Marietta Wülfing Earrings for Sale on Etsy

(These are affiliate links for which I may be compensated)

 

So when I invest in modern jewelry I focus on artisan jewelers who set their pieces with larger gemstones.  Because of cost constraints, it is rather rare to find jewelry set with any of the big four gems (diamonds, rubies, emeralds and sapphires) at a reasonable price.  Therefore, many of the handmade pieces I gravitate towards use somewhat less expensive second-tier gemstones such as aquamarine, tourmaline, fancy garnet, peridot, spinel, tanzanite, etc.

These stones may not be as famous as the big four, but are nonetheless quite desirable in their own right.  As an added bonus, many of these lesser-known gemstones are all-natural, completely-untreated stones.  Nearly all rubies, sapphires and emeralds found in modern jewelry have been subjected to artificial treatments that can impact their durability and long-term color stability.  Even diamonds, which were largely untreated up until the end of the 20th century, are increasingly lasered or fracture filled to improve their clarity.  Treated stones, regardless of their type, are obviously worth less than comparable untreated gems.

So let’s put everything together that we’ve learned in order to analyze the Marietta Wülfing peridot pendant pictured at the top of this article.

The rough peridot used in the piece is a top gem quality specimen from Pakistan (a classic location for high grade peridot).  In addition, it is a huge stone, measuring 27 mm across by 18 mm high and weighing 28.3 carats.  As a result, I’m willing to assign a value of around $5 per carat to the gem – about $141.  If this peridot was given to a knowledgeable gem cutter, you could expect it to realistically yield two to three faceted stones totaling somewhere from 6 to 10 carats.

Although the item description doesn’t state how much gold was used in this fine piece of modern jewelry, I’m going to take a guess that it has perhaps 8 grams – just over 1/4 of a troy ounce – of 18 karat gold.  I’m guessing fairly high here because 18 karat gold is very high density stuff (about 15.5 gm/cm3), so it doesn’t take a lot of volume in order to have quite a bit of weight.

In any case, according to this estimate there is $284 worth of gold in the pendant (with spot gold trading at $1,470 an ounce).  I would also estimate the piece contains about $5 worth of sterling silver (which isn’t visible in the photo, as it is used to back the gemstone).  If you were really interested in purchasing this pendant, it would make sense to contact Marietta and ask her for the weight of the metals used in order to derive a more accurate intrinsic value calculation.

If we total all of these individual components together we get the following:

Peridot ($141) + 18K Gold ($284) + Sterling Silver ($5) = $430 Total Intrinsic Value

Our result gives us an estimated intrinsic value equal to almost 50% of the $876 cost of the piece.  This is an excellent result, especially considering that the typical piece of modern jewelry will have an intrinsic value of only 5% to 20% of its cost – even for diamond encrusted engagement rings!

Our handmade peridot pendant also eschews small accent stones in favor of a single, huge primary gem.  This is exactly what we want to see.  And while large peridot gemstones are rather common, it is still somewhat unusual to find such a gigantic specimen of such fine color and clarity.

Finally, it is obvious that Marietta Wülfing is a master jeweler who has taken great pains to ensure that this handcrafted pendant is immaculately finished.  Seriously, this thing is utterly superb in terms of its workmanship.  In addition, this piece is a breathtaking example of Modernist design, which has been the dominant style used in fine handmade jewelry (as opposed to mass-produced factory jewelry) since the 1960s.

All in all, this peridot pendant is a great example of investable modern jewelry.  It is the kind of piece that you can feel good about spending hundreds of dollars on because you know it is worth hundreds of dollars.  In another 50 to 100 years, jewelry like this will find a ready market among vintage jewelry aficionados as superlative antiques.

 

Hand-Crafted Marietta Wülfing Rings for Sale on Etsy

(These are affiliate links for which I may be compensated)

 

Read more thought-provoking Antique Sage gems & jewelry articles here.

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