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The U.S. Dollar and the Coming Monetary Reset

The U.S. Dollar and the Coming Monetary Reset

We live in interesting financial times.  That’s a kind way of saying that the global monetary authorities are in the process of trashing the U.S. dollar (along with every other fiat currency out there).  Over the past decade plus our central bankers have imposed just about every form of financial repression/money printing known to man (and a few additional types they just developed especially for the occasion).

What’s the upshot of this rant?  There is an impending global monetary reset coming, and it will change all the existing rules about saving, investing and wealth.

What is a monetary reset?  Simply put, it is the long-overdue realignment of the value of fiat currency in our financial system vis-a-vis gold, silver and other tangible assets.

The first indicator that we are careening towards a monetary reset is the rapidly deteriorating U.S. budget deficit.  Now I would like to state upfront that I’m not a fiscal hardliner.  I don’t believe that a country must run budget surpluses in order to enjoy a stable and sustainable fiscal position (although it does help).  No, all a country needs to do in order not to blow itself up, fiscally speaking, is to grow its economy at a faster rate than it grows its outstanding sovereign debt.

Unfortunately, the United States (along with nearly every other developed nation in the world) hasn’t been able to do this.  Instead, U.S. spending has spiraled out of control over the past decade.  At first this overspending was in response to the Great Financial Crisis of 2008-2009.  But a funny thing happened as that financial crisis faded into the rear view mirror – the U.S. government kept on spending!

Indeed, the economy has needed an almost never ending parade of stimulus measures in order to keep its head above water.  Most recently, the 2017 Trump tax cut goosed the economy by slashing income tax rates for corporations and many households.  But it did so at the cost of a ballooning budget deficit, which surpassed -$1 trillion in both 2018 and 2019.

Surprisingly, I am not terribly concerned by our current fiscal profligacy.  Instead, I am much more worried about what comes afterwards in the 2020s.

Social Security is one of our most obvious impending fiscal disasters, but one that will only fully unfold over the next decade.  This bedrock U.S. entitlement program will devolve from a relatively modest -$80 billion negative annual cashflow position in 2019 to a staggering -$400 billion annual deficit by the early 2030s.  Of course, this Social Security-specific deficit will end up being rolled into the general budget, putting even greater pressure on U.S. government finances.

But the real coup de grâce will come when the economy next enters recession.  You see, it has been more than 12 years since the last recession hit and we are overdue for another one.  When it finally arrives, all the negative trends currently in place will be supercharged into a perfect financial storm.

A recession would cause tax revenue to plummet at the same time that government expenditures explode.  In fact, it is probable that government deficits will blow out to -$2 or -$3 trillion dollars per annum in such a scenario.  At that point, deficits of only -$1 trillion a year like we have today will seem like a sweet, distant dream.

That would be bad enough by itself, but there will be other ugly economic dynamics at work as well.  For instance, the market value of stocks and bonds will plunge during a recession, revealing most corporate, state and local government pension funds to be woefully underfunded.  Many of these pensions will subsequently fail, with their obligations absorbed by the Pension Benefit Guaranty Corporation.  As you might have already guessed, the U.S. taxpayer will ultimately be on the hook for making good on these unrealistic promises.

But perhaps the greatest contributor to a future monetary reset will be the eradication of the profitless prosperity sector in the next recession.  Uber, Netflix, WeWork and Tesla are just a handful of well known profitless prosperity mega-companies.  Most of these corporations don’t make any profits, while the few that do only possess the illusion of profitability.

This is because a decade of Fed-driven easy money policies has fundamentally reordered our economy into a bubble-addled monster.  It only works as long as investors – speculators, really – are willing to throw nearly unlimited amounts of free money into capital-burning ventures.  The moment they stop, however, the wheels will come off the magic school bus we call an economy.

But the governments and central banks of the world will not stand idly by while the financial world burns down around them.  Instead, they will crank up the printing press and spew trillions of new dollars, yen, pounds and euros into the world in an ill-fated attempt to avoid the natural consequences of earlier bad policy decisions.

In other words they will print a lot of money, devaluing the currency in the process.

In fact, they’ve already started.  The Federal Reserve recently announced that it will purchase $60 billion of Treasury bills every month until Q2 2020.  They have also assured the markets that this does not represent quantitative easing (aka money printing), even though the operations look to be more or less identical.  How much do you want to bet that when the time comes to wind down the operation in 2020, they will find an improbable reason to just keep going?  That has been their modus operandi so far and it is unlikely to change now.

In any case, it is pretty obvious that a monetary reset is coming.  This means the economy will be rocked by widespread debt defaults, a universal debt jubilee or oodles of helicopter money thrown to the masses – and possibly even all three!

This is bad because in our financial system one person’s debt is another person’s asset.  If you want to erase a bunch of debt, which our overleveraged economy desperately needs, then it also means writing down a lot of assets to zero.  Printing money and handing it out to people so that they can pay their debts might preserve the nominal value of many assets, but only does so at the cost of widespread inflation that will destroy the real value of those same assets.  To paraphrase former President Franklin D. Roosevelt, this generation has a date with monetary destiny.

The real question is what should you do about this impending disaster?

I think that answer is pretty easy: buy bullion, antiques, gemstones and fine art.  In a monetary reset scenario, conventional assets like stocks and bonds won’t perform very well.  If you are really concerned with protecting your wealth, it will be necessary to diversify into hard assets that can’t be printed by incompetent central bankers.

I have a soft spot for U.S. 90% junk silver coins because they are readily available, highly liquid and also sell for low premiums over spot.  But of course, there are many other hard assets that would do wonders for your portfolio as well.  For example, antiques such as vintage mechanical wristwatches, antique sterling silverware and fine estate jewelry would all effectively inoculate you against the coming monetary reset.  Plan accordingly.

 

Read more thought-provoking Antique Sage investing articles here.

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How to Buy Gold below Spot on eBay

How to Buy Gold below Spot on eBay
Photo Credit:  James St. John

I would like to make a public service announcement.  Right now it is possible to purchase gold below spot on eBay with very little effort.  In my experience this is an almost unprecedented situation.  Sure, sometimes bullion dealers have specials where they sell gold coins for a couple percent over spot.  But selling gold below spot?  It’s simply unheard of…until now at least.

Before I give the big reveal, I’d like to talk a bit about the circumstances behind how this somewhat bizarre situation came to be.

When most of us think of gold bullion, we picture 1 troy ounce bullion coins struck by sovereign governments.  Some popular examples are the American Gold Eagle, the Canadian Maple Leaf, the Australian Kangaroo, the British Britannia and the Chinese Panda.  There are others, of course, but this short list will keep things simple.

Gold bullion might also bring to mind bullion bars or rounds struck by private refiners and mints.  Pamp Suisse, the Scottsdale Mint, Valcambi Suisse, the Perth Mint and Johnson Matthey are some of the better known names in gold bullion.  These gold bars and rounds are equivalent to government issued bullion coins, with very little difference in quality and no difference in gold content.

But all conventional bullion bars, rounds and coins are sold above spot.  This is because the government or private mint that strikes them, along with the distributing wholesale dealer, needs a profit margin and the only way to get that margin is by charging a price that is higher than spot.  It might be a small profit margin – often between 2% and 5% for a 1 troy ounce piece – but it is a positive number nonetheless.

So the real question is why would anyone ever sell gold below spot?

Sure, you might occasionally find gold jewelry scrap sold below spot.  But scrap jewelry isn’t an ideal form of gold to hold because it isn’t widely recognized or accepted.  This is because the gold content can be difficult to verify.  In addition, a refinery charge must be taken into account if you ever want to process the scrap into a usable form.

But I’m not talking about buying scrap gold jewelry here.  I’m talking about buying a legitimate gold coin with a known weight and fineness struck by a well-respected government.  Buying gold coins below spot is far superior compared to stocking up on junk jewelry.

Once again we are faced with the question, why would anyone ever sell gold below spot?

The magical answer to this conundrum is a concept known as sunk costs.  If a coin was minted long enough ago – usually many decades – then no one is trying to make a profit on its manufacture any longer.  These coins have passed through many hands over the years.  All the time, effort and expertise consumed during the long-ago production of an older gold coin is considered a sunk cost.  This means that the premium on common older gold coins can actually go negative in some circumstances, although typically not by very much.

But I have another trick to get these coins even cheaper.  EBay allows its users to supercharge their bullion purchases through the use of its eBay Bucks program.  EBay bucks rebates normally accrue on eligible purchases at the rate of 1%.  But if you wait for a promotional period, it is fairly common to get special bonuses of 10%.  You can then combine this with a cash-back credit card rewards program to enhance your leverage in acquiring gold below spot.

I will use an enhanced 10% eBay Bucks rate in conjunction with 1% credit card rewards as my baseline assumption for all premium calculations below.

 

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

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

 

Using these criteria, generic pre-1933 U.S. gold coins are at the top of my shopping list.  These iconic coins were struck from the 19th century right up until the Great Depression in the early 1930s.  Denominations range from the small $2.50, or quarter eagle gold piece, right up to the massive $20 double eagle gold coin.

But the best thing about common-date pre-1933 U.S. gold coins is their price.  These unique mementos of Americana can be found on eBay in circulated XF to AU condition at 3% to 8% below the spot price of gold (once incentives are factored in).

For example, I spotted a random-date $20 Liberty Head in AU condition (which contains 0.9675 troy ounces of pure gold) for 4.3% over spot.  After accounting for eBay Bucks and credit card rewards, you could buy this coin for -3.6% under spot.

If you don’t have the $1,500 to splurge on a gigantic double eagle gold coin, you could always get yourself an XF $5 Liberty Head half eagle (containing 0.2419 troy ounces of gold) for around $400.  This coin sells for 7.0% over spot without eBay Bucks and -4.8% with them (at the time of writing).

But the best deal I found in pre-1933 U.S. gold coins is a $10 Liberty Head coin (with 0.4838 troy ounces of fine gold) in AU condition for 4.2% over spot before eBay Bucks and -7.3% under spot with them.

Now here is where things get really interesting in our search for gold below spot.

If you are willing to be open-minded, you can find foreign gold coins that trade for even lower negative premiums!  I’m referring specifically to British gold sovereigns, 22 karat fine coins containing 0.2354 troy ounces of pure gold.  These classic gold coins circulated throughout the British Empire during the 19th and early 20th century and were considered the soundest money in the world for well over a century.  Gold sovereigns were even struck during the mid-20th century, primarily for use in certain Middle Eastern/South Asian countries that traditionally favored these coins above all others.

 

British Gold Sovereigns for Sale on eBay

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

 

Right now you can get yourself a random date BU sovereign from the reign of Queen Elizabeth II for only 3.5% above spot before incentives and -7.9% below spot after eBay Bucks and credit card rewards.  This nearly 8% discount to spot means that you are buying each ounce of gold for about $118 less than the going spot price of gold when it is trading at $1,500.  Now that is a bargain!

But before you dive in, please read the fine print on the eBay Bucks program.  It does have some stipulations and exclusions, as will any credit card rewards program that you use.

Also keep in mind that these gold coin deals are so good that they regularly sell out.  That’s why I don’t link to the specific coins I’ve found, because I know that by the time I post this article they will all be gone.  But there will be other deals of the same type that will be just as good, provided you exercise a little patience.  And anything that allows you to buy gold below spot is worth the wait in my book.

 

Read more thought-provoking Antique Sage investing articles here.

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Read in-depth Antique Sage investment guides here.


Escaping our Rotten Banking System

Escaping our Rotten Banking System
Photo Credit: Tim Green

The global banking system is sick.  In fact, it is so sick that it wouldn’t be a stretch to say that many of our financial institutions are terminally ill.  This phenomenon has largely been driven by absurdly low interest rates – perhaps the lowest across 5,000 years of recorded human history according to some financial commentators.

And it doesn’t look like the decline in yields is done quite yet.

Global bond yields plunged again in August 2019.  The yields on German, French and Japanese 10-year notes plowed into negative territory during this time, while Swiss yields went even more negative than they had already been.  The United States, that last bastion of positive return in a yield-starved world, saw its 10-year bond yields decline a stunning 100 basis points over the course of just a few months – from over 2.5% to an anemic 1.5%.

In Denmark right now one bank is offering negative-yielding mortgages, meaning that the bank will pay you to take out a loan!

This is crazy stuff.

So crazy, in fact, that the global banking system can’t survive in this environment long-term.  And it isn’t just banks that are suffering, but also insurance companies and pension funds.  All of these firms rely on significantly positive-yielding assets in order to survive.  If negative yields persist for too many years, the financial industry will simply bleed capital until a crisis comes and knocks the entire rotten edifice over.

This alarming situation has created a desperate search for yield across the world.

But this reach for yield has prompted some banks to originate questionable commercial real estate loans (among others).  The world only needs so many dollar-stores, fast food eateries and quaint cafes – a point we passed long ago.  The only problem is that the yield-starved banking system didn’t quite get the message.  Just like a shark has got to swim to stay alive, a bank has got to lend to keep its doors open – even it if means piling bad loans onto an already problematic balance sheet.

The situation in Europe isn’t any better.  The newest global regulatory framework for banks (Basel III) gives financial firms wide latitude to determine the risk weighting applied to sovereign debt.  The practical consequence of this loose regulatory regime is that most southern European banks have loaded up on their home country’s government bonds.  This is an issue because the Portuguese, Spanish and Italian governments, while not currently in explicit default, are more or less insolvent.  But banks located in those countries are stuffed to the gills with their national debt all the same.

It is an accident waiting to happen on an almost unimaginably grand scale.

In order to understand how the banking system came to such dire straits, a quick history lesson is in order.  I will concentrate my historical financial analysis on the United States, which is also a reasonable proxy for the rest of the developed world in most cases.  Although little known, the U.S. has actually experienced four distinct monetary regimes since the beginning of the 20th century.

 

Old European Gold Coins for Sale on eBay

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

 

The Classical Gold Standard Era (before 1934): Under this financial regime the U.S. dollar was explicitly linked to gold, with $20.67 exchangeable for 1 troy ounce of the precious metal.  The currency’s required gold-backing kept the dollar strong and stable.  Foreign exchange rates were largely fixed because most nations had their currencies pegged in terms of gold.  Interest rates were relatively low in absolute terms, but because inflation was so low, real (inflation-adjusted) yields were solidly positive.  Governments typically ran small surpluses during this period (except during times of war).

The Bretton Woods Era (1934 to 1971): During the Bretton Woods period the U.S. dollar was still linked to gold, albeit at a reduced rate ($35 equaled 1 troy ounce).  This precious metal link restrained money issuance and, by extension, inflation.  U.S. citizens could not own gold or exchange their dollars for gold, however.  Instead, only foreign governments and central banks could redeem dollars for gold.  Global exchange rates were typically fixed against the U.S. dollar, providing stability in international trade and investment.  Most governments ran balanced budgets outside of wartime and savers were consistently rewarded with positive real interest rates.

The Bretton Woods II Era (1971 – 2008): From the early 1970s until the 2000s, the world operated under a floating currency regime that was sometimes known as Bretton Woods II.  The U.S. dollar was no longer pegged to gold or exchangeable for it.  But both nominal and real interest rates were often quite high in order to instill confidence in this untested, pure fiat system.  Governments were able to run increasingly large budget deficits, which was acceptable if the interest rate on the national debt was lower than the nominal growth rate of the economy.  Central banks adamantly refused to monetize (print money to buy) government debt.

The Central Bank Era (2008 – present): Our newest currency regime is a pure fiat monetary system characterized by floating foreign exchange rates and non-convertibility, just like the Bretton Woods II era.  However, real interest rates are almost always negative today, with nominal interest rates sometimes being negative as well (most notably in Europe and Japan).  This is incredibly punishing for not only savers, but ultimately the banking system too.  Governments run persistently massive budget deficits, leading to ballooning national debt loads.  Central banks happily monetize government debt in size, raising the specter of future currency devaluations or hyperinflations.  Outrageous securities market bubbles are embraced as a desirable growth transmission mechanism by increasingly desperate central banks.

 

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

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

 

As you can plainly see, our current monetary regime (the Central Bank Era) is incredibly unstable.  It is not a question of if it will fail, but simply a question of when and how it fails.

This is why I believe it is imperative for everyone to move some money out of the banking system.  A financial disaster of some description is on its way and when it finally arrives it will be ugly beyond belief.  It could take the form of a stock market crash, a bank bail-in or capital controls – no one really knows.  But we do know that conventional financial products like stocks, bonds, CDs and savings accounts will not offer the protection that they might have in the past.

Instead we need to look to unconventional tangible assets like bullion, antiques, gemstones and fine art to help protect our net worth.  And honestly, prices for hard assets are so low right now that you can buy practically anything in that list and expect to do well from a future return perspective.  This means you can indulge your passion for antique samurai sword fittings or medieval European woodcut prints, safe in the knowledge you’re accumulating valuable financial assets that are completely independent from our teetering banking system.

Of course, if you’d like to pursue a more conservative course by purchasing gold and silver bullion, I can wholeheartedly recommend that as well.  I’ve recently written an article on how to stack vintage JM & Engelhard silver bars in your retirement account.

I don’t really think it matters which specific strategy you choose, just as long as it involves getting some of your precious dollars (or euros, or pounds) out of our necrotic banking system and into something tangible.  It is far better to be prudent today, rather than sorry tomorrow.

 

Read more thought-provoking Antique Sage editorial articles here.

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Antiques Are a Sterling Investment Opportunity

Antiques Are a Sterling Investment Opportunity
Photo Credit: ravengem01

Due to my interest in the antique market, I end up spending a lot of time on eBay.  And there is something very interesting that I’ve noticed on the platform.  Antiques are cheap right now.  Really cheap.  Super cheap.  It is a superb time to accumulate high quality antiques, but how did this marvelous investment opportunity originate?

In my opinion, the antique market is currently experiencing the final low in a triple bottom sequence that dates back 20 years.  The first low coincided with the original, late 1990s Dot Com bubble.  At the time precious metals were trading for ridiculously low prices: $300 an ounce for gold and $5 an ounce for silver.  This meant that a lot of antiques containing precious metals were very inexpensive.  But very fine antiques or those created by famous makers still commanded healthy premiums.

The second low in the antiques market hit during the financial chaos of the 2008-2009 Great Recession.  This economic downturn was the most severe to hit the United States since the Great Depression of the 1930s.  Many good antiques dropped in price due to forced liquidations by people who were selling everything in order to raise much-needed cash.  Precious metals also took a brief dip during this downturn, making antique silver and vintage jewelry more affordable.  In addition, the collectibles market more or less imploded during this episode, never to recover.

We are now in the midst of the third, and in my opinion, final bottom of the last two decades.  The antiques market has been absolutely ravaged by the weak economy of the last decade.  The middle class has experienced a relentless decline in its purchasing power, which has greatly curtailed most discretionary spending.  This is one of the reasons that retailers as varied as Sears, Payless Shoes, Radio Shack and Barney’s New York have all gone bankrupt.  People are reserving their precious dollars for the bare necessities: mortgages, utility bills, food, etc.  Antiques are simply one casualty among many here.

The investment opportunity provided by this third dip is your best chance – and perhaps last chance – to buy high quality antiques at knock down prices.  Tremendously desirable fine antiques are selling for sums of money that put them well within the reach of regular people like you and me.  Items that would have previously only been affordable to the wealthiest echelons of society are out there waiting for bids – oftentimes any bids!

Want proof?  Here is a small selection of the deals I’ve come across on eBay in the last few months.

I found a fantastic lot of vintage U.S. Navy military insignia from World War II.  Every piece was made from sterling silver, with at least one of them being gold-filled over sterling.

Now I usually advise against purchasing gold-filled antiques, but gold-over-silver is a different animal.  It is the absolute finest form of gold-plating in existence (along with now long-defunct mercury-gilding).  Because so few vintage military insignia were crafted from solid karat gold, gold-filled over silver is often the best a collector can hope for.  As an added bonus, the set even included a couple of rare Ballou sterling silver clutches that were only briefly produced during 1942/1943.

Amazingly, this lot of 8 pieces was selling for a buy-it-now price of only $75 – less than $10 per pin – hardly more than garage sale pricing!  This feat is even more impressive when one realizes that these tangible pieces of World War II history are becoming increasingly scarce with the death of the Greatest Generation.

Incidentally, this lot of vintage military insignia was a great example of the benefits of super-sizing your antique purchases.  Instead of buying a single vintage pin for $15 or $20, it makes a lot more sense to do volume buying in order to get the best price on a per-item basis.

Alas, for all you militaria buffs out there, this fine collection of World War II sterling Navy insignia (pictured at the top of this article) sold just a couple days after I stumbled across it.  I can’t say that I’m surprised, given how low the price was.  The antiques market can be an unforgiving place for procrastinators.

But that wasn’t the only intriguing antique investment opportunity I stumbled across.  I also unearthed a beautiful Edwardian British sterling silver snuffbox engraved with a stunningly ornate monogram.  It had a thick layer of rich gilding on the interior, which was standard practice to ensure the silver didn’t corrode from contact with the tobacco snuff it carried.  According to its hallmarks, this piece was made in Birmingham, England in 1900 – right at the height of the grandeur of the British Empire.

Under normal circumstances, a monogram is considered a negative by many antique silver enthusiasts.  But in this case, the elaborate monogram complemented the silver snuff box’s streamlined design, considerably enhancing its desirability.  It wouldn’t be a stretch to say that the monogram (along with the applied decorative thumb-catch) made the box.

Although this piece would have been an absolute gem for any tobacciana aficionado, it might leave non-tobacco enthusiasts cold.  But it shouldn’t.  After all, one doesn’t need to indulge in smoking, cigars or snuff to appreciate the tremendous artistic beauty of this 120 year old silver box.  In addition, this snuff box could easily have been repurposed to hold your pills, keepsakes, personal stash or any other small, precious item you might have on hand.

The price?  A stunningly cheap £105 – around $129 at then current GBP-USD exchange rates.  This is about equal to one month’s cell phone or cable bill for the average American family.  Unfortunately, this Edwardian treasure has sold too.

The final investment opportunity I want to highlight today is an 1886-S U.S. half eagle $5 gold coin certified MS-63 by NGC.  At today’s prices, pre-1933 U.S. gold coins are one of the greatest numismatic bargains of the last several decades.

And this particular example had it all.  It was third-party certified as being Mint State – among the highest grades assigned.  Now a lot of old gold coins get slabbed as MS-61s or MS-62s, however these lower Mint State condition coins aren’t usually the prettiest specimens.  But with few hairlines and frosty original mint luster, this 1886-S half eagle went above and beyond, truly earning its MS-63 designation.

Yet despite being in great condition, it wasn’t terribly expensive at only $535.  This is because 1886 half eagles struck at the San Francisco mint are considered “common-date” in the world of numismatics.  I use the term “common-date” in quotation marks here because a grand total of just 3,310 1886-S $5 gold pieces have been graded by NGC and PCGS in MS-63 or higher condition.

Let’s take a moment to compare this “common-date” gold coin, with 3,300 extant high grade examples, to something like Amazon stock.  Amazon is currently trading for over 3x as much per share as the 1886-S half eagle in question ($1,801 vs $535), even though there are 510 million shares of Amazon outstanding (as of June 30, 2019).  Oh, and the 130 year old Mint State half eagle also contains $360 worth of gold (with gold spot hovering around $1,485), which puts a hard floor underneath its price.  I seriously do not see how you lose with this proposition.

In fact, this investment opportunity was so much of a no-brainer that I bought the coin myself!  I waited for a 10% eBay Bucks promotion, which brought my effective purchase price down to only $482.  And while you may no longer be able to buy the exact same coin I did, there are many other MS-63 certified “common date” pre-1933 U.S. gold coins that can still be purchased for ridiculously low premiums over their melt value.

Today’s antiques market is truly a paradise for the intelligent hard asset investor.  But there is one catch.  If you want to benefit from this sterling investment opportunity, you must take action now.  It is far too easy to simply sit on the sidelines, believing that today’s great deals will always be available.  I can assure you that they will not.

If you have ever had any desire to buy antiques, now is the time to do so.  If you ever wanted to own a vintage 1950s Omega wristwatch, or a genuine 19th century Japanese samurai sword tsuba, now is your best chance.  Don’t make the mistake of waiting; this unique investment opportunity won’t stick around forever.

 

Read more thought-provoking Antique Sage editorial articles here.

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Read in-depth Antique Sage investment guides here.