Old Poured 1 Kilo Johnson Matthey Silver Bar

Old Poured 1 Kilo Johnson Matthey Silver Bar
Photo Credit: Coin-Exchange-NY

Old Poured 1 Kilo Johnson Matthey Silver Bar

Buy It Now Price: $798.78 (price as of 2017; item no longer available)

Pros:

-This impressive, old 1 kilo Johnson Matthey silver bar is a poured, .999 fine, precious metal masterpiece made by Johnson Matthey Canada, most likely in the 1980s.

-Johnson Matthey, along with Engelhard, was the most well known and respected name in precious metal refining during the 1970s, 1980s and 1990s.

-In 2015, Johnson Matthey exited the precious metal refining business by selling its refining subsidiary to a Japanese competitor, Asahi Refining.  Asahi Refining currently produces silver bars under the Asahi nameplate, having discontinued the Johnson Matthey brand.

-It is always nice to be able to pick up a vintage silver bar with an individual serial number!  While serialization was fairly uncommon on classic silver bars fabricated in the 1970s and 1980s, it is almost never done today due to cost constraints.  Certain poured silver bars from Yeager’s Poured Silver, a contemporary artisan specialty fabricator, are an interesting exception to this rule.

-If there ever was a blue-chip investment in vintage silver bars, this 1 kilo Johnson Matthey silver bar is it.  Not only was it made by one of the premier precious metal refiners, but, in my opinion, it is also nearly the ideal size for a silver bar.  Vintage silver bars weighing between 20 troy ounces and 1 kilo (32.1507 troy ounces), offer a perfect combination of impressive size, substantial heft and reasonable pricing not available in smaller or larger bars.

-1 kilo vintage silver bars are generally scarcer than other sizes, such as 5, 10 or 100 troy ounce bars.  It is estimated that this old 1 kilo Johnson Matthey silver bar had a mintage of less than 3,000 pieces.  This is a very modest mintage, and is substantially less than many other popular vintage silver bars.

-With silver trading at $17.10 per troy ounce, this poured 1 kilo Johnson Matthey silver bar has an intrinsic value of about $550.  This represents a premium of 45.3%, or about $7.75 per troy ounce, over the spot price of silver.  I think the asking price of $799 is quite fair considering the history, character and gravitas of this classic silver bar.

 

Cons:

-Vintage 100 troy ounce Johnson Matthey poured silver bars are readily available in the marketplace for much smaller premiums over bullion value than this 1 kilo Johnson Matthey silver bar.  They generally only cost 5% to 12% over melt value, but that is because they are much more common, with mintages for some series ranging from 50,000 to 500,000.  In addition, these 100 troy ounce behemoths are a little too large for most collectors; each one is the size of a small brick and tips the scales at almost 7 pounds.

-10 or 15 years ago you might have been able to pick up this old 1 kilo Johnson Matthey silver bar for only a $1 or $2 per ounce over spot.  But vintage silver bullion bars have since developed a devoted collector base.  I’m afraid the days of buying these wonderful old poured silver bars for close to spot price are gone forever.

Bondholders, Capital Structure and the Coming Stock Market Crisis

Bondholders, Capital Structure and the Coming Stock Market Crisis

While I don’t normally write exclusively about paper assets, I see a coming disaster involving shareholders and bondholders that I feel compelled to talk about.  In my opinion, there is a dangerous situation evolving in the U.S. and global capital markets that is obvious once it is pointed out.  And yet, I have not seen a single article in the mainstream financial press discuss this topic.  I hope to do my part to address this deficiency.

But before I can describe my worries, we need to have an intimate understanding of corporate capital structures.  Many average people who invest in the stock market in their retirement accounts do not understand the importance of a company’s capital structure.  The capital structure is the way that a company finances itself.  More specifically, it is the breakdown between the different tiers of financing that a corporation uses to fund its operations.

The most secured part of a company’s capital structure is composed of senior secured bonds.  Senior secured bonds are corporate debt that has specific property pledged as collateral.  This collateral can be anything from office buildings to factories to oil pipelines – any tangible property with a market value will work.  Senior secured bondholders face little risk of loss in a bankruptcy due to the pledged collateral.

Next in a corporation’s capital structure are senior unsecured bonds.  These debt instruments are very similar to senior secured bonds, except that they have no specific collateral pledged against them.  This means that in a bankruptcy senior secured bondholders take their collateral first, leaving senior unsecured bondholders with whatever corporate assets are leftover.  In the event of bankruptcy, senior unsecured bondholders generally sustain losses that range from modest to significant.

Moving further down the capital structure we come to convertible and subordinated debt.  These fixed income instruments are similar to unsecured debt, except that they sometimes contain provisions that allow a company to suspend interest payments if they have cashflow problems.  Even so, convertible and subordinated bonds are contractual obligations of the issuing company.  In bankruptcy proceedings though, convertible and subordinated debts are junior to senior unsecured debts.  Bondholders holding this slice of a company’s capital structure usually face large losses in bankruptcy restructurings.

Going one rung further down the capital structure we come to preferred stock.  Preferred stock is considered a “hybrid” security.  This means it has both debt and equity characteristics simultaneously.  Preferred stock usually has fixed, periodic dividend payments.  But it is also counted as equity for the purposes of measuring corporate leverage.  Preferred stock payments can generally be indefinitely suspended if a company runs into financial trouble.

Some preferred stock is “cumulative”, meaning any missed interest payments must be made to the preferred stockholders before dividends can be paid on common stock.  However, most preferred stock is non-cumulative in nature.  Preferred stockholders are usually wiped out in bankruptcy.

Common shareholders are at the very bottom of the corporate capital structure.  Common shares, also called stocks or equity, pay a variable dividend that is completely at the discretion of a company’s board of directors.  When business is good, a company might pay very enticing dividends that increase over time.  However, when business goes bad, dividends can be quickly cut or even eliminated altogether.  In a corporate bankruptcy, common shareholders inevitably lose everything.

As you can see, a company’s capital structure is a lot like a ladder.  The higher up you are on the ladder, the more secure your investment is and the lower your chances for loss in the event of bankruptcy.  The flipside of this is that only the bottom rung – common stock – has a claim on the excess cashflow generated by a successful company.

And here’s where the problem lies.  For the last decade the stock market has done wonderfully.  Shareholders have enjoyed strong returns with modest volatility.  Much of this has been driven, either directly or indirectly, by the world’s central banks, which have acted in concert to suppress global interest rates.

Although many investors don’t realize it, companies have benefited dramatically from lower interest rates as well.  First, many companies have been able to refinance their high interest bonds into low interest bonds.  This has been bad for bondholders, but great for shareholders.

However, corporate executives and directors couldn’t keep their hands out of the honey pot.  Instead of simply refinancing their existing debt, many corporations have used cheap and plentiful debt to lever up their balance sheets.  They largely used this onetime financial windfall to A) buy back common shares on the open market; B) pay out dividends to common shareholders; or C) buy rival companies in an attempt to gain market dominance.

All of these debt financed corporate activities have been beneficial to shareholders in the short term.  But, they risk the solvency of many of these companies in the long term.  The numbers are sobering.

According to the U.S. Federal Reserve’s Z.1 report, total non-financial corporate bond and loan liabilities outstanding as of March 31st, 2017 were over $8.6 trillion.  This number has increased by a staggering 2.8 trillion dollars – almost 50% – over the course of the last 10 years.  This is particularly telling because many financial pundits have claimed that U.S. balance sheets deleveraged substantially since the Great Recession.

But the numbers don’t lie.  U.S. Corporate leverage is higher than it has ever been before.  And overseas companies have largely engaged in the same destructive financial behavior as their U.S. counterparts.

Some people may point to healthy corporate cash balances as a mitigating factor in this situation.  On the surface, this argument seems to have some merit.  According to the U.S. Fed’s Z.1 report again, non-financial corporate cash is a robust 2.1 trillion dollars at March 31, 2017.  In an attempt to be as lenient as possible about the definition of cash, I not only included traditional cash instruments in this amount – bank deposits, CDs, money market funds, repurchase agreements and commercial paper – but also longer dated “savings” vehicles companies sometimes use, like corporate bonds, municipal debt, agency bonds and treasury securities.

Over two trillion dollars of cash on corporate balance sheets sounds great, until you realize that those cash levels have only increased by $0.6 trillion over the last decade.  This cash addition was completely swamped by the $2.8 trillion in debt these same companies have built up over the same period.

A Forbes article from 2016 makes those numbers look even more ominous.  Most of that cash is held by only a handful of the largest and most successful U.S. multi-national corporations.  According to the Forbes article, the 50 biggest cash hoarding U.S. non-financial companies held $1.14 trillion at December 31, 2015.  This means that actual cash balances for the 4,000 odd remaining U.S. listed companies are collectively less than one trillion dollars.  There goes the myth of cash-laden, rock-solid corporate balance sheets.

The consequences of this excessive corporate leverage have been repeatedly delayed.  And, as long as the capital markets are happy to throw fistfuls of money at junk rated companies or anything that pays a dividend, not much will change.  But everything in finance is cyclical, and all debt-fueled, corporate borrowing binges must eventually come to an end.

When that day finally comes, the place your investments hold in the corporate capital structure will matter a great deal.  As cashflows shrink, companies naturally retrench.  They spend less on advertising, R&D, mergers and employee wages and benefits.  They also cut back, oftentimes dramatically, on the two things that tend to support share prices – stock buybacks and dividends.

If you hold common shares, which are the lowest rung of the capital structure, you will be disproportionately affected by these developments.  Unlike interest payments to bondholders, corporations have no legal obligation to pay dividends to common shareholders and only very limited legal obligation to make payments to preferred shareholders.

As I like to put it, common stockholders hold the “business end” of the stick when it comes to the capital structure.  What I mean by this statement is that while owners of common stock can potentially reap the greatest rewards if a company succeeds, they also simultaneously occupy the riskiest part of the corporate capital structure if anything goes wrong.

If the coming liquidity crisis is severe enough, there is a non-trivial chance for widespread bankruptcies in our over-levered corporate sector.  Common and preferred shareholders would bear the brunt of the losses in this situation.  In fact, it is normal for stockholders to have their shares cancelled outright in bankruptcy without any compensation.

Under these circumstances, a company’s bondholders are usually equitized, meaning all or part of their bonds are exchanged for new common stock in order to recapitalize the company, effectively making them the new owners of that company.  The “haircut”, or loss, that bondholders take is proportional to the amount of assets the corporation has, its level of leverage and where the bonds stood in the old capital structure.  The higher your bond in the capital structure of a company facing bankruptcy, the better.  Shareholders almost always get nothing.

Even if an over-levered company isn’t forced to declare bankruptcy, it doesn’t mean that its common shareholders are free and clear.  Many times, highly leveraged companies become zombie companies.  This term was first popularized in Japan in the 1990s in the wake of its collapsed stock market bubble.

A zombie company is one that is kept on life-support by its lenders or bondholders.  These lenders continue renewing loans to zombie companies to keep them out of bankruptcy when there is otherwise little hope of them paying down their debts.  In return, a zombie company becomes the de facto property of the lenders.  The lenders appoint representatives to the company’s board of directors and essentially have veto power over any major corporate decisions.

In addition, and perhaps most importantly for shareholders, effectively all future cashflows of a zombie company are redirected to the bondholders.  The shareholders are owners of the company in name only, with few rights and no realistic hope for future financial gains.  Dividends are almost always suspended in this situation, as well.

I suspect that when our current economic cycle finally turns, there will be widespread corporate bankruptcies.  Many, many companies that do not declare bankruptcy will instead become zombie companies.  Common and preferred shareholders will be all but wiped out by these developments.  Instead, bondholders will usurp their privileges wholesale and effectively take ownership of a huge swath of corporate America.  In the end, only bondholders will inherit the stock market.

A Detailed History of the Platinum Gold Ratio

A Detailed History of the Platinum Gold Ratio

Out of all the precious metals, none have been as exalted in the modern age as platinum.  For more than a century this most desirable of precious metals has been coveted by people as diverse as Hollywood movie starlets and titans of industry.  Incredibly rare, this dense, chemically-stable, gray-white metal has an occurrence of only 0.003 parts per million in the earth’s crust.  Platinum is so rare, in fact, that its annual mine production is less than 1/15th that of gold.

Platinum has been used in fine jewelry, luxury watches and high-end objects d’art for well over a century.  And yet, shockingly, platinum used to be considered a junk metal.  This, along with many other interesting tidbits, is reflected in the historical record of the platinum gold ratio.  The platinum gold ratio expresses the value of a single troy ounce of platinum in terms of gold and is often used by precious metal investors to gauge relative value between the precious metals.  A high ratio means that platinum is expensive compared to gold, while a low ratio means that platinum is cheap in relation to gold.

The chart above shows the platinum gold ratio from 1880 through 2016.  By closely examining the graph, there are a few important observations we can make.  For example, the platinum gold ratio has been extremely volatile.  Over the past 135 years it has been as low as 0.05 in 1885 and as high as 6.63 in 1968.  However, within the last 40 years, the ratio has traded in a far more constrained range, generally hovering between 0.8 and 2.0.

Although it may seem odd to us today, the platinum gold ratio was extremely low in the late 19th century.  This was because the relationship between platinum and gold was fundamentally different before the 20th century.  Before 1900, platinum was something of a scientific oddity while gold was universally considered money.

In pre-modern times, platinum had been used by various pre-Columbian South American civilizations.  Later, Spanish explorers panning for gold in South American alluvial deposits were perplexed by the strange white metal and, believing it to be immature gold, often threw it back into the streambeds so that it could “ripen”.  Although platinum was first officially noted by the Italian scholar Julius Caesar Scaliger in 1557, it languished unappreciated for centuries due to its extremely high melting point (1,768.3° C or 3,214.9° F) which made it very difficult to fabricate.

But people did try to find uses for the enigmatic metal.  Foremost among these was employing platinum to counterfeit gold coins!  Because many nations were on the gold standard in the 19th century, gold coins circulated freely.  At this time platinum traded for just a fraction of the value of gold, as evidenced by the extremely low 19th century platinum gold ratio.  However, platinum (21.45 gm/cm3) happens to possess a similar density to gold (19.3 gm/cm3).  This made platinum the perfect metal to counterfeit gold coins during the 19th century.  Today, these contemporary platinum counterfeits are quite rare, and usually command higher prices than genuine gold coins of the time!

 

Platinum Bullion Coins for Sale on eBay

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The 19th century Russian Czars took this trend one step further and actually introduced platinum coinage for general circulation.  In the early to mid 1800s, large quantities of platinum-alloy nuggets were recovered from alluvial deposits in the Ural Mountains.  The Russian Czars hoped to take advantage of this by turning the unusual metal into coins.

Between 1828 and 1845, Russia struck a series of circulating platinum-alloy coins in 3, 6 and 12 ruble denominations.  Unfortunately, the Russian people, having no familiarity with platinum, rejected the unusual platinum coins wholesale.  Relatively few coins were struck and specimens command exorbitantly high prices today when they come up for sale.

It was only around 1900 that the technology to easily work platinum was first developed.  It arrived in the form of the super-hot, oxy-hydrogen melting torch.  Only an oxygen-enriched hydrogen stream burned at a hot enough temperature to melt the recalcitrant metal.  This invention finally democratized platinum, allowing the gray-white precious metal to be worked by jewelers and other craftsmen.

As a direct consequence of this development, demand for platinum in high end jewelry skyrocketed.  Platinum was perfect for the application.  The metal was chemically inert; it neither tarnished nor corroded.  In addition, platinum is harder than gold, giving it better wear characteristics.

The gray-white precious metal is also extremely strong, which was a boon to early 20th century Edwardian and Art Deco jewelry designers.  Jewelers used platinum to create fabulously complex pieces using platinum wire, sheet and gauze that would have been impossible with traditional gold or silver-topped gold alloys.  The fashion for “white look” jewelry reached its apogee during the Art Deco period of the 1920s, when platinum was de rigueur.

At the same time that jewelry demand for platinum was taking off, the industrial applications of the metal were becoming apparent as well.  Platinum is an excellent chemical catalyst and was instrumental in the growth of the fledgling oil and chemical industries.  The scientific community also adopted platinum for crucibles, electrodes and thermocouples due to its durability, resistance to corrosion and high melting point.

These fresh sources of demand drove the platinum gold ratio to elevated levels above 2.0 from the 1910s through the 1920s.  However, with the advent of the Great Depression both industrial and jewelry demand for platinum collapsed.  As a result, the platinum gold ratio declined until it hovered close to parity from the 1930s until the end of World War II.

 

Platinum Bars for Sale on eBay

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In the aftermath of World War II, global economic growth accelerated again, underpinning demand for platinum.  During this time it was also discovered that platinum could be used in catalytic converters to reduce pollution from automobile exhaust.  Robust demand for the unique industrial metal sustained the platinum gold ratio between 2.0 and 3.0 from the late 1940s until the early 1970s.

The highest annual value recorded for the platinum gold ratio was a spike to 6.63 in 1968.  This was undoubtedly the result of attempts by the U.S. and Western European central banks to suppress the gold price in the 1960s via the London Gold Pool, while the platinum price was free to rise in the highly inflationary environment of the time.

The platinum gold ratio then flat-lined around parity from the mid 1970s until the late 1990s, as both precious metals endured brutal bear markets after 1980.  Starting in 2000, rising industrial demand for platinum, coupled with stagnate gold demand, combined to elevate the platinum gold ratio until the Great Recession hit the global economy in 2008.

Since that time the platinum gold ratio has collapsed below 1.0, reflecting sluggish demand for the industrially-oriented white metal.  In contrast, gold has enjoyed a safe haven bid as a monetary metal in recent years, propelling it to a higher value than platinum for the first time on a sustained basis since the mid 1980s.

Today, during the fall of 2017, the platinum gold ratio is lingering around 0.72.  This is an exceptionally low value, historically speaking.  In fact, ratios this persistently low were last seen in the late 19th century, before platinum’s unique usefulness was fully realized!  Although no one can predict the future, I suspect that platinum bullion is a better long-term buy right now than gold bullion, where you have to mind the stairs.


Artisan Carved Contemporary Nephrite Jade Pendant

Artisan Carved Contemporary Nephrite Jade Pendant
Photo Credit: alifballangrud

Artisan Carved Contemporary Nephrite Jade Pendant

Asking Price: $425 (price as of 2017; item no longer available)

Pros:

-Here is a magnificent, artisan hand-carved, contemporary nephrite jade pendant that sensuously portrays ginkgo biloba leaves and fruit.  It also comes with a smaller, celadon-colored jadeite jade bead as an accent piece.

-This contemporary nephrite jade pendant measures 6.1 cm (2.4 inches) tall by 3.8 cm (1.5 inches) wide by 1.35 cm (0.53 inches) thick.  It weighs 2.9 ounces, or approximately 82 grams.

-This contemporary nephrite jade pendant was carved from a marvelous slab of high quality green nephrite jade mined from the Mount Ogden region in British Columbia, Canada.  British Columbia is the world’s most important source of gem quality nephrite jade, with perhaps 75% of global production.

-Nephrite jade originating from North America is almost always untreated, which is very positive.

-The quality of the nephrite jade used in this piece is excellent, with a pleasing, even color and good translucency.  It is approaching the quality of the very finest British Columbian nephrite jade available in the market today, which is referred to as Polar Jade.

-The workmanship of this contemporary nephrite jade pendant is absolutely phenomenal.  Jade is notorious for the great skill and tremendous patience necessary to successfully create a fine piece.  This piece of jade has been superlatively carved, as evidenced by the delicate veining on the gingko leaves and the subtle undercutting of the forms in relief.

-A lot of jade available in the Western market today is carved in Chinese workshops and exported.  Most of these modern Chinese jades are stiff and uninspired pieces of poor to mediocre quality that use recycled traditional motifs.  Of course, there are some truly exquisite Chinese jade carvings being produced today, but their prices are astronomically high and they are almost always reserved for the East Asian market.

-The artist who created this masterpiece is a self-taught jade carver and lapidarist from Oregon named Alif Ballangrud.  I find that some of the finest contemporary art available today, like this piece, is created by non-traditionally trained artists who work in a variety of unusual mediums.

-Carved jade and rough jade are both interesting investment plays on the future growth of the Chinese economy.  The Chinese have a tremendous cultural affinity for jade because it represents virtue, loyalty and perfection in traditional Chinese culture.  As the Chinese economy has expanded, pricing for high quality jade has reached dizzying heights there.  In fact, I am certain that if this contemporary nephrite jade pendant was for sale in a jewelry shop in Hong Kong, Shanghai or Beijing, the price probably wouldn’t be a penny less than $1,000.

-This is one of those slam-dunk, no-brainer investments.  The artist is pricing this contemporary nephrite jade pendant to cover the cost of his materials and labor, but this masterpiece is worth much, much more.  I don’t care whether you choose to throw it in a safety deposit box, wear it, give it to your spouse as a gift or display it in a curio cabinet.  Just pay the nice man his $425 and take this treasure home!  I am almost certain that you will double, triple or quadruple your money within a decade.

 

Cons:

-Nephrite jade is one of the two types of true jade, the other being jadeite jade.  All else being equal, the very best quality jadeite jade, known as Imperial jade, is considerably more valuable than the finest nephrite jade.  However, Imperial jadeite jade is so expensive that it is invariably purchased, carved and sold exclusively in the Chinese market at this point.

-A critic could argue that the sunken fields of this contemporary nephrite jade pendant have been left “unfinished” by the artist.  I disagree, as I believe that the rough background was intentionally left in place in order to provide visual contrast with the exquisitely refined gingko leaves and berry.  In any case, it highlights the massive amount of effort that went into this artwork; each square millimeter of that background had to be tediously, yet carefully, excavated using a small drill bit repeatedly bored into the surface of the stone.