Minimizing financial insecurity. How hard it is to hang onto hard assets.

20240229

Thomas Pierce and I had a recent exchange about where one should invest to best safeguard one's savings. We agree that there is no single good place.

I had been looking at Bitcoin for a few months. Unfortunately, I didn't buy any. Most of my money is in precious metal ETF's, and that's where I have left it.

The price of gold has remained in the range of $2,000 an ounce over the three years in which Bitcoin has tripled. With the usual caveats about investment advice, I'd like to offer why I think gold is about to move.

Here is a chart of the gold price for the past five years. It broke $1600 in 2020 and fell again to that level in early 2023. In general, it has remained in the range of $1900-$2000.  During that time there has been far more investment advice to the effect that it was time to buy gold than to sell it. Pessimists have been relatively few.

The little bars at the bottom of the chart indicate the volume of gold changing hands. You notice that volume jumped in early 2020 at the beginning of the march up from $1400-$2000. Though volume fell, it stayed above the earlier figures. In early 2022 there was tremendous volume as gold fell from the $2000 level back to the $1600 level. Since that time, it has been higher than before, but still relatively stable. The 332.034K figure at the bottom right shows the number of ounces traded daily as of today; the $2034 figure shows the current price.

What can we glean from this? More and more gold is changing hands despite the fact that the price isn't rising much. More and more voices are advising people to invest in gold. Their reasoning is similar to that that I presented a couple of days ago. Who, then, is selling?

Prices for used jewelry have been high. Some gold is being recycled. Some gold comes from mining. But there is not enough from these two sources to have satisfied the demand. It appears that organizations that own a lot of gold have been selling.

Why would they do that? Governments have been manipulating the price of gold in order to prop up the perceived value of their fiat currencies since the London Gold Pool of the 1960s. They know how to do it. They use sophisticated market operations such as selling at night when there are few buyers and buying back during the day when there is a lot on offer. They play the futures and derivatives markets. Ultimately, however, they have to be net sellers in order to hold the price down. In my opinion that is what the volume shown in this graph means.

In early 2022 a high-volume of trading brought the price of gold down from about $2100 to about $1600 over the course of a couple of months. For the time being the price and volume are stable. Meanwhile, across the street in the Bitcoin market things are going wild.

Bitcoin volume is high and the price is jumping around wildly. Yesterday it spiked to $64,000, after which it was pounded down to $59,000 in about half an hour. Somebody stepped on the brakes pretty hard. But the people who control the fiat currencies do not own that much crypto currency. They simply did not control enough to employ the same level of manipulation that they do in the metals markets. As I write this the price is back up to $63,000. The people they meant to scare are simply not scared.

The jump in Bitcoin makes it obvious that ordinary people do not want to hold fiat currencies. The fear of inflation is spreading. It is only a matter of time until people figure out that the next big thing has to be precious metals. My guess is that the financial powers that be will not be able to sell enough to hold the price down. Therefore, the next big thing is likely to be gold.

Gold itself has drawbacks. Government confiscated gold from the citizenry in 1933.  One could say that Nixon did it again in 1971 when the government decided that paper currency could no longer be converted to bank metals.

A lot of gold is held in exchange traded funds – ETFs. Those ETFs are mostly held in the name of brokerage funds. The government knows exactly who owns what. Probably a majority of gold coins and ingots have been bought in traceable credit card transactions. As a parallel, one may observe that the government knows pretty much who has bought firearms. A fair percentage of the gold owned by private individuals is kept in bank vaults. The government can and does ask banks to open those vaults upon occasion.

What about the alternatives to gold? Diamonds are out of the question. Laboratory grown diamonds are of about the same quality as mined diamonds and much cheaper. Moreover, every diamond is uniquely defined by the four C's: color, clarity, carat weight and cut. Whereas 99% pure gold is a commodity, diamonds can only be reliably bought and sold through dealers. Same for other jewels, works of art and such.

Silver and platinum are industrial metals. It would be harder for government to demand that private citizens sell them at a fixed price. These metals can also be bought through ETFs. Owning a bit of them is probably a pretty good hedge, just in case the government does something funny with gold.

It can be unsafe to keep valuables such as gold in your home. You risk burglary and robbery. All precious metals represent something you could bury in your backyard. The fact that metallic silver and platinum are harder to sell, while frustrating for you, could also be frustrating for a thief.

There are companies that for a monthly fee will help you buy and store your precious metals in vaults in overseas locations such as Ireland, Canada, and Switzerland. These alternatives also present difficulties. How do you deal with a company in a foreign jurisdiction? How do you get your hands on the metals you own there? What do you do with them if you get them? Through whom do you sell them? The advantage that they offer is allocated storage. The stuff you own is identified, by ingot number if it is a precious metal, and stored separately. Unlike with a brokerage account and ETF's, you still own the metals if the company goes bankrupt.

Real estate is the last hard asset to consider. As the realtors tell you, they aren't making any more land. However, the value of real estate depends on the market. You can take quite a bath selling into a bad market. The costs of buying and selling real estate run around 3%-5% of the transaction. The value of real estate depends on the neighborhood. If the police stop enforcing the law, as has happened in many big cities, renters will not be attracted to your property. If the house remains empty, the police may not even help you evict squatters. There is no ceiling on the level of property tax set by local governments.  They can literally tax you to death.

Countries such as France have enacted wealth taxes. There is talk about taxing unrealized capital gains in the United States. Obviously, government will have the most success taxing highly visible assets such as real estate and bank and brokerage accounts.

Governments throughout the world are unable to balance their budgets. The United States government spends about three dollars for every two dollars it takes in in taxes. They are faced with the difficult alternatives of raising existing taxes, such as capital gains, imposing new taxes, such as a wealth tax or tax on unrealized gains, or allowing increasing rates of inflation.

So, what should a person do? My thoughts at this point in history would favor buying gold and precious metals ETF's in the short term, using your existing brokerage accounts. As you do so, consider ways of converting this ownership to physical metal in a safe place in the United States or overseas. As for Bitcoin? I think it has farther to run, but my bet would be that gold, then later other precious metals will probably do a bit better.

That's the view from Lake WeBeGone, where the children are off getting an education, we are all securely at home, vastly grateful to the soldiers who are defending us, and the strong man is spending his time trying to figure out how to make sure there will be a place to live and money enough for their educations.

Graham