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The Hard Assets Alliance Blog

Chuck Ponzi Treks to the Oil Patch: A Dangerous Corporate Debt Bubble

The Wild Ride

On any given day, you can find numerous articles about the hazards posed by our federal debt, municipal debt, consumer debt, and so on. The list is long and plenty scary.

But there is surprisingly little talk about one of the most dangerous situations of all: the trouble in America’s recently booming oil patch.

Most people may not realize that the largest oil producer in the world today is not Saudi Arabia, nor Venezuela, nor Russia. It’s the U.S.  

The extraction of fossil fuels from shale formations, via fracking and horizontal drilling, has sparked a revolution so all-consuming that it’s forged an entirely new reality. About 20 years ago, fracking technology hit a point where it suddenly started to make a lot of economic sense. It “crossed the chasm” as they say in Silicon Valley, going from an expensive developing technology with its roots back in the 1960s to a mature and (frankly) cheap way to extract a familiar resource more easily (much like LED lights, which came out of RCA in 1964, but have only recently become ubiquitous).

Since then, the drilling of fracked wells has proceeded in earnest, exploding over the past decade.

What an amazingly fast, wild ride it’s been. It has:

  • catapulted the U.S. from back in the pack to the top of the list of global oil and natgas producers, with the Dept. of Energy (perhaps through slightly rose-tinted glasses) predicting the country would be a net exporter of both by 2022.
  • transformed obscure rural areas like Williston, North Dakota into rowdy, populous frontier towns.
  • provided high-paying jobs to those willing to relocate to Texas and North Dakota. The latter vaulted from 45th in the nation in per capita income in 2004 to 2nd in 2013; though it’s since pulled back, it’s still 6th as of 2017.

This has not happened without controversy. Objections have been raised about earthquakes, air and water pollution, disturbances to land and animals, and exploding pipelines. Environmental concerns have, if anything, intensified. Though they have not yet disrupted the industry, neither are they going away.

Like information technology saw setbacks in the early 2000s only to continue apace, the fracking boom experienced its own short-lived crash from 2014-16, when a global supply glut drove the price of oil as low as $26/barrel. During this period, according to The Economist, writing in March of 2017: “The number of drilling rigs in America dropped by 68% from peak to trough. Companies slashed investment. Over 100 firms went bankrupt, defaulting on at least $70B of debt.”

Yet today, the boom goes on. And on. Again, in The Economist’s wry words of 18 months ago: “Exploration and production (E&P) companies are about to go on an investment spree. Demand is soaring for the industry’s raw materials: sand, other people’s money, roughnecks and ice-cold beer.”

That’s just what has happened. Written off as dead in 2016, the fracking industry has roared back to life. In a 2018 forecast, the Energy Information Administration predicted that production across the U.S. oil patch is expected to average almost 10.6 million barrels per day this year, and to reach 12.1 million barrels a day by 2023. That’s about two-thirds of U.S. national usage.

The Rub

But no new industry—no matter how productive or essential to American security—can endure while ignoring the basic laws of finance. And that’s where we find the rub.

Very few E&P companies in the fracking space actually make money. It doesn’t matter which of the four major extraction areas they’re located in—the Permian Basin (the biggest, in west Texas); the Bakken (North Dakota); Eagle Ford (southeast Texas); or the Niobara (Colorado/Wyoming). Look at this graphic, courtesy of Bloomberg:

As you can see, that graphic is based on 33 shale-weighted E&P companies. But if you widen the view, and nearly double the number of companies, things don’t look any better. The 60 biggest E&P firms, between mid-2012 and mid-2017, had negative free cash flow of $9 billion per quarter.

Cash flow is what you need to cover operating and capital expenses. Clearly, they aren’t making it.

Even some on Wall St. have taken notice. “The industry has a very bad history of money going into it and never coming out,” says Jim Chanos, legendary short-seller and founder of hedge fund Kynikos Associates.

One of the primary reasons for this is that fracked wells have an extremely rapid decay rate, as opposed to traditional drill sites. All fossil fuel deposits are finite, of course. Typically, a conventionally-drilled well will reach peak production in the first couple of years, then fall sharply. After that, though, its decline tends to level off, and can proceed (i.e., remain economically viable) over a long period of time. At worst, there might be a 10%/year decline. But some U.S. wells have remained in production for over 100 years.

Fracked wells are far more volatile. After the first year, they go into what is known as “hyperbolic decline,” with production losses ranging from 50% to as high as 70%. After three years, they may be off by as much as 85%.

Analyst Nick Cunningham, writing on Oilprice.com, sums up: “A rush of output occurs at first, but almost immediately after the well comes online, the flow rate drops off precipitously. And within just a few months the well is a shadow of its former self. That is typical.”

Because the technology is so new, we have no data on what happens after 10 years, but it seems safe to say that none of today’s fracked wells will still be operating half-a-century down the road, like we find for big mid-century oil discoveries like aforementioned Saudi Arabia, Venezuela, or the greater OPEC regimes.

Moreover, the pace of decline seems to be accelerating, as the industry becomes something of a victim of its own success. Analysts say this only makes sense. Producers, trying to stay ahead of decay rates by opening new wells, are placing them ever closer together. Those in close proximity then reduce pressure in each other, reducing the amount of oil that can be recovered from either.

As Russell Clark, investment manager at Horseman Capital Management, puts it: "New well production is increasingly cannibalizing legacy production." Or, as Alice learned in Wonderland, you must run faster and faster to remain in the same place.

It’s a situation that reeks of the rapid and unexpected turn from euphoria to panic that characterizes the bursting of a bubble.

The hard truth is that the fossil fuel business is highly capital-intensive. It takes boatloads of cash (i.e. debt) to explore, drill, and then if you’re lucky, put your wells into production. The major oil giants stay in business because they go after elephant deposits, ones that will continue to gush profit, year after year, for decades on end. Yes, they have to find replacements as their resources are drawn down, but it’s a long-term venture.

E&P fracking is a short-term game. Thus companies in the space have to come up with a different strategy. However, the evidence suggests that while they are desperately trying to generate positive cash flow, they are actually falling further and further into a financial black hole.

They lose money one year, and then more the next. How can this be?

The Fed Helps Out

The needed capital does not derive from cash flow. So where is it coming from? Or, to put it baldly: who’s propping them up?

Here’s a shocker. The answer is: Wall St, with a little help from Washington, DC.

Let’s return to those 60 leading E&P firms we referenced earlier. According to Reagan’s former OMB Director, David Stockman, “From 2012 through 2017, these 60 E&Ps burned [through] $212 billion in the shale patch. Half of that came from the liquidation of balance sheet capacity through borrowing and asset sales. The other half was through new equity issue. Yes, the ‘shale revolution’ put the U.S. on a path toward ‘energy independence.’ All it took was the massive falsification of asset prices on Wall Street.”

That’s quite a charge, Mr. Stockman. But it’s spot on. In fact, it may turn out to be a bit of an understatement.

First, Washington: As we all know, the Federal Reserve responded to the financial crisis by dropping interest rates to around zero. The idea was to stimulate the economy by encouraging borrowing. Which many did, especially in the burgeoning frack patch.

Writes Bethany McLean, in the New York Times: “Amir Azar, a fellow at the Columbia University Center on Global Energy Policy, calculated that the industry’s net debt in 2015 was $200 billion, a 300 percent increase from 2005. But interest expense increased at half the rate debt did because interest rates kept falling. Dr. Azar recently called the post-2008 era of super-low interest rates the ‘real catalyst of the shale revolution’.”

The italics are ours. They explain why the oil glut that drove prices below $30/barrel by the end of ’15 didn’t kill the U.S. shale business. The glut was orchestrated by Russia and Saudi Arabia with that specific intent. And they almost succeeded. But not quite. Although the more marginal companies were unable to stay afloat as the market price fell below the cost of production—something state-owned producers like the Saudis don’t have to worry about, as we know—others retrenched and just kept borrowing from that well of nearly-free money.

Ok, you will remember that we mentioned Charles Ponzi at the outset. It was for a reason, and here’s where he makes his appearance.

What’s happening in the oil patch is not precisely a Ponzi scheme, i.e. one in which new investors are lured in by promises of outsized returns and then their money is used to pay off earlier investors. But when you are consistently paying off earlier debt by taking on new debt, and not because your cash flow is increasing, that’s close enough.

And pretty soon we run smack into what Bloomberg calls the Debt Wall.

Under this projection, the bond debt rockets from $110 billion this year to $260B in 2022.

Granted, this debt is spread across all energy companies, but which ones do you think comprise the great majority of those below investment grade? You guessed it.

But remember, shale oil and gas producers are using most of their free cash flow to drill more wells, to try to produce more oil and keep the scheme running.  Little or none of their profits or free cash flow are going to pay down debt. Worse yet, rising interest rates make borrowing both more difficult and more costly.

The writing is on that debt wall. At some point -- maybe in 2022 when Bloomberg projects, maybe much sooner, they’ll be overwhelmed by their debt load, unable to borrow more, and there simply won’t be any funds to continue drilling.

Which is when the whole thing comes crashing down.

Wall St. Chips In

But as we said earlier, Washington’s easy money policy is not the only donkey to pin the blame-tail on. There’s also Wall Street.

What do you do when your company is hemorrhaging money?

First… You borrow, as we have seen. And Wall St. has done what it’s designed to do: made that process easier. They’ve facilitated that borrowing by structuring novel high-yield investment vehicles for the E&Ps. That works well in a low-interest-rate environment when demand for above-market returns is insatiable. It works less well as interest rates rise, and investors demand either greater safety or even higher yield. Or when those debts start to turn sour faster than projected, eating into promised returns, like we saw with the last batch of novel debt securities: the mortgage-backed kind.

Alternatively…you issue additional equity. As Mr. Stockman notes, half of the operating expenses of these E&Ps is raised through new equity issues. Investors continue to line up, allowing themselves to believe that oil companies are good long-term holdings. Or that shale drillers are a new and exciting play for quick profits. Or that there will always be a greater fool. Whatever their reasoning, people continue upping their bets on companies that don’t make money and very possibly never will.

So is it a straight-up con, with shareholders playing hot potato? We don’t know. We also don’t know if Wall St. is actively pushing junk E&Ps as vigorously as it did the junk CDOs sold to naïve buyers in the run-up to the financial crisis. What we do know is that the big banks don’t care about investment quality. Why should they? They get their cut every time they float an IPO or a new stock offering; every time they raise capital in other ways, as with private placements; every time they execute a trade. But they have no real skin in the game.

What Comes Next

We can’t say when a bust is coming or even, with any measure of certainty, if it is. The Debt Wall projection is ominous, but charts are just a one-dimensional reflection of the real world. And the future is not entirely bleak. Something might still save the day.

For example, oil prices might rise so high that many more wells start becoming economical. But given the extreme recent volatility in crude (having recently hit a year-low and trading around $51/barrel as of this writing), that can't be the staple of your go-forward business plan, especially given the breakeven prices of new wells.

It's never so simple. For example, many operators entered into derivatives contracts in 2017 that ensured they could sell some of their 2018 output for $50-55/barrel, well above then depressed prices. Any rally above that level left them partially or entirely out of the market, missing out on rare profits. Ironically, belief that high oil prices were here to stay is what sparked the shale boom. And it might be the belief that low oil prices were destined to last a long time which put the nails in the coffin of this tumultuous market.

Only time will tell where the oil price goes -- again bearing in mind the mid-2018 rally has already fizzled with prices dropping from the 70s to the 50s in a matter of weeks -- and whether it justifies the debt accumulated… or if prices dip and we hit the Debt Wall.

Even if higher prices fail to save the industry, perhaps the multinational oil companies might step in, buying up properties and running them more efficiently.

Either is theoretically possible, but the former would be a little self-defeating, as higher prices mean reduced demand (and increased supply competition as more companies once again chase those prices). As for the latter, well, the majors didn’t get to be majors by buying up money losers at inflated valuations.

A much more likely possibility is that the technology will continue to improve, substantially reducing costs and allowing actual money to be made—especially in the Permian Basin. Some analysts estimate that, by itself, the Permian could hold as much as 75 billion barrels of oil. That’d make it the domestic equivalent of Saudi Arabia’s legendary Ghawar field, and if it can be profitably plumbed, we can keep the lights on for a good long while.

So we’re pretty sure the oil is there; it’s just a question of drillers getting it out without going bankrupt. We can be hopeful. Modern technological developments have tended to deliver the goods, continually providing improved hardware at lower costs. Another leap forward in tech would go a long way toward mitigation of these difficulties.

Even right now, the best-run companies in the Permian are making some money. Whether they are doing well enough to sustain the industry long term remains uncertain. And they are still a small percentage of the whole, as their less-well-run competitors sink ever further into the red. Let’s call the eventual outcome a tossup.

Worst case, though: If the industry does crash, then what happens?

It isn’t pretty.

This is not just another Enron, where the damage was limited to a wipeout for investors. Here, it’s America’s “energy independence”—touted by politicians with such bravado—that is on the line. In just 10 years, we have come to heavily rely on fracked petroleum. We need it, as demand ramps up in rapidly-developing countries like China, India and others that have little domestic supply.

As more of the world modernizes, global supplies can only become increasingly stretched, and so it becomes a matter of national security. If the situation in the frack patch becomes sufficiently dire, you can expect that the government will step in, probably with some sort of subsidy program. And if that fails to work, would Washington utter the dread word, nationalization? That seems remote, but not completely out of the realm of possibility.

But, one thing is certain: corporate debt has become a dumping ground for excess capital over the last decade of low interest rates. Shale/fracking has racked up over $100 billion worth of the demand for high-yield debt all by its lonesome. And it shows some serious signs of weakening, especially if prices don’t hold or interest rates continue to rise—or both.

It’s no longer an untapped source of yield. It’s moderately less attractive with each rate hike. And it’s certainly not a safe haven. Another serious market crash could send investors fleeing from this debt, and many other dubious sectors of “junk” bonds. Which spells good things for the few cheap assets still left in the markets today, of which gold is one of the cheapest.

 

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Decades Long Bond Market Bubble Shows Signs of Weakening (‘Nowhere to Run’ Part 3)

Virtually anyone looking at the markets today can sense that something is a bit amiss, that there is a disconnect with reality. The hard part of making use of such a sense is quantifying just how out of whack things are, and when the inevitable reality reconnect will occur. Especially when dealing with cycles that can last much longer than the typical stock market whipsaw each decade. Perspective is important, as is watching the long-term indicators — more and more of which are showing overheated markets.

We started our ‘Nowhere to Run’ series with looks at the wildly overvalued stock market, and a bubbly housing market. Today we tackle the world’s biggest market:  bonds, and their unsustainable valuation.

The policies of Federal Reserve and other governmental agencies have resulted in an unprecedented situation: bubbles that span across all risk assets, leaving investors with few places to invest their money other than in those very bubbles. With one notable exception: precious metals.

Right now precious metals are currently at historical — even multi-generational — lows vs. stocks, bonds, and real estate. Unsustainable debt issuances have underpinned the longest uninterrupted asset-price inflationary cycle ever: US federal debt, global government and corporate debt, personal debt from student loans to auto loans to credit card debt, all at record highs. The result: rarely have gold or silver looked so compelling relative to other assets.

Relative to, most certainly, the bond market.

From 15% to 0%: How the Fed Created a 37-Year Bond-Market Bubble

These days, you can find any number of talking heads who will say that this century’s great bull market in stocks is getting long in the tooth:

  • The S&P 500 cratered to 683 in March of ’09.
  • At this writing, it sits at slightly over 2650, despite having recently sold off 10% from an-alltime high reached in September 2018.

It’s essentially risen steadily for over nine years without a significant pullback, more than quadrupling in value.

Due for a more significant correction? As we discussed two weeks ago, almost certainly.

Fact is, though, there is another bull market that is less frequently talked about, even though it has been raging four times as long.

Bond prices increased by a factor of more than seven between the early ‘80s and 2018.

Here’s a picture to noodle on:

Interest rates on 30-year Treasuries peaked at 15.21% in October of 1981. That’s 37 years ago. Despite a brief spike in the mid-80s, the trendline since then has been steadily down, with the bottom reached in July of ’16 at 2.11%. At the time of this writing it’s hovering just north of 3%.

Remember that the price of bonds are  inversely correlated with interest rates. So a long downtrend in rates means an equally long bull market in prices.

That bond prices and yields are inversely related -- when one goes up, the other goes down -- is important to understand, as any movement in interest rates back up, like we’ve seen starting in the U.S. for the first time in many years, could mean deflating the biggest bubble possibly ever created.

A Little Bond Math 
 
For those who want understand why bonds move inverse to rates in such lockstep, here’s a quick primer:
A bond is a fixed-income security. It is issued with a face value (called par) that never changes, an interest rate (known as the coupon) which also never changes, and a maturity date, when you get your money back. But the bond’s actual yield does change because its price rises or falls, relative to its par value, with every fluctuation in market demand. When there are more sellers than buyers, the ask price from the seller must go down to encourage buyers; when there are more buyers, the ask price increases. The relationship can be expressed in a simple equation:
Y = C / MP X 100
Where Y is effective yield percentage, C is the Coupon, and MP is the current market price. So if you hold a $1000 par value bond with a 3% coupon at issuance, and interest rates double to 6%, then the bond’s market price drops to $500. Conversely, if interest rates drop to 1.5%, your bond will be worth $2000.

“It’s Not a Bubble and I Should Know; I’ve Been Doing This Since 1981!”

If the bond bubble is so enormous, then why isn’t the frontpage of every news site plastered with the details? Simple: recency bias on steroids. If people have short memories from one stock market crash to the next, then consider:

If you graduated college and began a career in finance or journalism in 1981, you are now nearing retirement age without ever having experienced a bear market in bonds in your adult life. If you traded them continually during those four decades, you have done very, very well, almost in spite of your abilities. If you reported on them, they’ve been nothing but Steady Eddie.

At this juncture, it’s worth clearing up one other point of potential confusion. When people refer to “bonds,” most often they are talking about Treasuries issued by the US Government. Technically, though, the only Treasury bonds are those with a 30-year maturity (T-Bonds). At the other end are those with maturities of less than one year, called T-Bills. All others in between are known as T-Notes, with 2- and 10-year maturities being the most popular.

This “long bond” rate as it’s known is commonly used as a proxy for the bond market as a whole, since interest rates for just about every item in the U.S., and much of the world, is linked one way or another to this rate. It’s the safe haven, default, background rate for the world’s reserve currency. In other words, if you are to risk your money in anything less safe than the T-Bond — such as lending your money to credit bard borrowers, auto buyers, or a basket of “junk” corporate debt —  it better yield more than the T-Bond or you’re not being compensated for that risk.

When the yield on the T-Bond falls, then the yield on that junk bond portfolio can fall with it -- as only the relative risk needs to be priced in -- and the price of the junk bonds will rise as well. Conversely, when the rates of T-Bonds start rising, then those junk bonds have to start paying more or investors just dump them for safer yield, thus prices start falling rapidly: the riskier the asset (higher rates, lower credit ratings, and longer durations) the faster they fall.  

The T-Bond’s long length also means that that bond market cycles tend to be long. Very long. Take the counterpart to our ’81 grad, the person who first went into finance shortly after the end of World War II. For the next 35 years, all he or she would have ever known was a bond bear market. Just take a gander at the same chart over a longer period:

As you can see, the glorious bond market of the past 35 years is about equally counterbalanced by the brutal performance of the previous 35. Interest rates soared from the post-WWII years to their peak in ’81 and have been declining since (or since ’85, if you want to start counting at the rebound peak).

The Fed Holds the Pin: Rising Rates Are a Bond Bubble’s Worst Enemy

Today, the Federal Reserve Bank of the United States, i.e. the Fed, is committed to raising interest rates.

What do we mean when we say that? The only interest rate it directly controls is called the Federal Funds Rate. It’s the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis. When the Fed raises this rate, other rates in the market — Treasuries, mortgages, car loans, corporates, whatever — tend to follow it up or down. Makes sense, right? Banks have to charge higher rates to consumers than they charge each other to borrow.

The Fed dropped the Funds rate in response to the 1987 stock market crash. It did the same again in response to the dotcom bubble bursting. It rose a bit between each recession, but never really back to par, hence the trend. They then responded to the financial crisis, taking it down to near zero in 2009, where it sat for the next seven years.

In 2016, the Fed’s Board of Governors decided it was time to reverse course once again, and has been pushing the Funds rate up in small, quarter-of-a-percentage-point increments since then. The latest uptick came in September, and the Fed has said it plans another in December 2018.

Bond prices have been slow to respond. Take the yield on 10-year T-notes, the usual bellwether of the overall market. Earlier this year, it punched through its 30-year trend range (though you may have to squint to see it), which is normally a signal that a reversal is on the way.

Come August ‘18, it continued to only to toy with the 3% mark.

Then, the recent volatility in stocks and other markets started hitting, trade wars heated up, and suddenly the yield moved. As of this writing, they’re above 3.15% — might not sound like much, but it’s not often the 10-year note yield changes by 5% in two months’ time.

And it may only be the beginning. Yields will be heading higher if the Fed stays the course and pushes the Funds rate to, or close to, 2.5% by the end of the year as seems to be the consensus. Prices have to fall — ending, or at least stalling, the long bull market.

But, just because it has to happen doesn’t mean it’s going to happen tomorrow or next month or even next year. Bubbles have their own peculiar ways of enduring well past the point applied logic suggests they should end; where everyone is expecting a pop.

So it’s reasonable to ask: are we in fact in a bubble?

Yes, said former Fed Chairman and ultra-low-rates enthusiast Alan Greenspan in January of ’18. He saw bubbles in both the stock and bond markets, but “the bond market bubble will eventually be the critical issue."

Jamie Dimon, the influential CEO of JPMorgan Chase Bank, concurred seven months later. “I think rates [on the 10-year Note] should be 4 percent today," he said. And, “you better be prepared to deal with rates 5 percent or higher."

That’d be a bull market killer for sure.

The Incredible Shrinking Fed Balance Sheet

But — and it’s a big but — there’s also a wild card: market distortion. And what causes that? Usually, some sort of government intervention. If you look at any of the T-note or T-bond charts, you can see that between 2009 and the end of 2017, when benchmark interest rates on the whole barely budged, the bond-price bull market continued unabated.

Why? Where the market didn’t create demand, the Federal Reserve did. The government tried to boost the economy by taking on more debt. The Treasury issued bonds in enormous numbers and, whenever outside demand dried up, the Fed bought. And bought.

During the three rounds of stimulus that began in late-2008 and concluded in October 2016, the Fed increased its balance sheet by three trillion dollars. More than half of that was government bonds, and nearly all interest-rate-linked debt securities.

Now, the Fed is shrinking its balance sheet. It began in October ’17, selling off $10 billion in assets a month — $6 billion of government debt and $4 billion of mortgage-backed securities. In a series of steps, sales have been increased to $50 billion per month come this quarter. This should shrink its balance sheet by up to $420 billion this year, and up to an additional $600 billion in 2019 and every year going forward until the Fed decides that the balance sheet has been "normalized," whatever that may mean (before the financial crisis the Fed’s balance sheet contained many less trailing zeros, and was nominally more then zero).

No central bank in the world has ever attempted a balance sheet reduction on this scale, and the consequences are unpredictable. What if, for example, no one wants to buy what the Fed is selling? We don’t know.

At the same time, foreign countries are also selling US debt. Russia reduced its Treasury holdings from $96.1 billion in March ‘18 to just $14.9 billion in May (they’ve been buying lots of gold instead). China remains the largest holder of Treasuries, remaining steady at $1.2 trillion because any massive dumping would be a big negative for them as well as us. But what that country will do as the trade disputes continue to simmer and risk boiling over remains to be seen.

Black Box Black Hole: The $1.2-Quadrillion Derivatives Market

And there’s one further wild card: derivatives.

Twenty years ago, the world derivatives market — a shadowy area with virtually no oversight — barely existed.  Then it suddenly took off, and by the crisis of ’08, it had reached a notional value of $650 trillion (with a T), and that was considered dangerously explosive territory. Though it backed off a bit during the Great Recession, it continues as an unregulated, over-the-counter market today.

And, it has shot up again in recent years, soaring past its historical peak to as much as $1.2 Quadrillion (yes, with a Q). Its segments include stocks, bonds, currencies, mortgages, energy, and just about anything else you might want to bet on.

This is completely unprecedented, and what it means for markets going forward cannot be foreseen. Some actually see the enormous derivatives market as a stabilizing force, since normal-sized fluctuations don’t budge it. Others see it as a gigantic pile of tinder awaiting the arrival of a match, such as happened with junk mortgages in ‘08.

The Twilight of a Generation-Defining Bubble

But for whatever reason, investors continue to prop up the bond market. Maybe it’s recency bias, or irrational exuberance, or faith in derivatives. Or maybe they believe that the market can absorb new debt forever, without triggering a serious rise in interest rates as holders head for the exits. Perhaps they believe the Fed will back off if inflation jumps too much. Perhaps they think they can be among the smart ones, the ones who dismount the bull at the very last minute.

Or all of the above.

To conclude: yes, we believe bonds are in a bubble. And a lot has to go right to keep the bubble inflated. And it may — many, many people’s livelihood and power depend on it. The one thing we’re sure of is that a bubble like this cannot stay inflated forever and, as the old market saying goes, it’s better to be a year early than a day late…

Open an account today and in minutes you can have a hard assets allocation in place to protect you from the inevitable end of the bond bubble. It just takes a few clicks.


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Buffett Says Sell: How the ‘Value King’ Knows Today’s Stock Market Will Correct Much Further

Is there any human whose market wisdom is more closely followed than Warren Buffett?

Probably not.

He is the undisputed king of value investors. His company, Berkshire Hathaway, is one the largest in the world, and it has made him one of the richest. Berkshire’s book value and market value have grown at ~20% per year since 1965, compared to just 10% per year for the S&P 500 (and that includes dividends!).

Buffett’s basic value investing criteria for a company are fourfold:

  • One that we can understand
  • With favorable long-term prospects
  • Operated by honest and competent people and
  • Available at a very attractive price

Among Buffett’s other investment metrics, a lot of attention is paid to his Valuation Indicator, which bears upon the last of the above. There are times when lots of companies are available at attractive prices, and times when few are. It pays to be able to tell the difference.

Buffett once remarked in an interview that the Indicator “is probably the best single measure of where valuations stand at any given moment." It doesn’t have a huge sample size—it’s only been around since the mid-20th century—but it’s proven to be highly predictive of where the overall market is headed, as opposed to individual stocks.

The Indicator is a simple calculation that anyone can make: the ratio of a country's stock market capitalization to the overall gross domestic product of the country expressed as a percentage. Is GDP a higher number, and by how much? And vice versa.

If the stock market is below 50% of GDP, Buffett believes it is very undervalued on a relative basis. Between 50% and 75%, it is somewhat undervalued. Between 75% and 90%, it is in the Goldilocks Zone—just about right. From 90% to 115%, it is overvalued. And above 115%, it is extremely overbought and a reversal should be expected.

Not that there are not anomalies. Of course there are. A trend in motion can continue on in that direction long past the point where there “should have been” a correction. As the old saying goes, the market can remain irrational longer than you can remain solvent.

For example, a buying frenzy commenced with the end of the stagflationary bear market of the late 1970s and early 1980s. Beginning with the bottom in ’83 (Buffett Indicator = 32%), the market went on a historic tear, rising with just occasional moderate setbacks for the next 17 years. It peaked in 2000, just as the dot.com crisis was about to hit (Buffett Indicator at the nosebleed level of 151%).

After that, the Indicator crashed mightily, bottoming at 68% in ’03. It rose to 110% in ’07, before the Great Recession took it down to just below 60% in ’09, as you can see in this chart of the S&P 500’s nominal value divided by GDP.
 

The Buffett Indicator - Chart


The current recovery, and concomitant bull market in stocks, is now in its tenth year. That’s meant smooth sailing for the Buffett Indicator, which has enjoyed a pretty steady rise, sailing through both the Goldilocks Zone and the area of moderate overvaluation.

Today it stands at around 144. Lower than the 2000 peak, but nevertheless a dangerous level.

Here is the Indicator charted against economic recessions:
 

S&P 500 vs. Recessions - Chart


(For those who wonder, the numerator in the chart title, MVEONWMVBSNNCB, is the Fed’s fancy title for the S&P. Again, the denominator is nominal quarterly GDP.)

As you can see, the Indicator tends to start dropping just before a recession starts, and usually starts trending up before the recession ends.

If you chart GDP against the broader Wilshire 5000, the Buffett Indicator is even higher.
 

Wilshire 5000 compared to GDP - Chart


So… where are we now? Are we in the midst of another 17-year uptrend? Or at one of those inflection points that signal a reversal on the way?

Good question. The Buffett Indicator is either close to its all-time high (S&P) or already past it (Wilshire). History suggests that a tumble should be at hand. But you never know.  Perhaps this time the Indicator will blow by its former peak into uncharted territory.

You’d think that The Man Himself might have the answer.

But Warren Buffett has never been one to make predictions. Except for this: think long term.

“America,” he said in an interview earlier this year, “is a powerful economic machine that, since 1776, has worked and it’s gonna keep working…

“You don’t want to buy to hold for a year. You don’t want to buy with the idea that you could sell it in two years or three years and make money. You could lose money that way. But if you buy [the stock market] and just keep buying the S&P 500 and forget about all the other nonsense that’s being sold to you … you’re going to do well.”

In June 2018, with his own Indicator clearly flashing red, he seemed to contradict it. He was very bullish. “Right now,” he said, “there’s no question: [the economy] is feeling strong. I mean, if we’re in the sixth inning, we have our sluggers coming to bat right now.”

Given Buffett’s analogy, if we’re in the sixth inning of a baseball game, then the ninth is still four to five years distant. That means the economic expansion would continue into 2022 or ‘23.

Well, we’re skeptical. That’s quite a stretch, and it means a lot of things have to go right.

It means that the major beneficiaries of the Trump tax cuts would have to focus on increasing shareholder value (perhaps through buybacks, at the expense of growing their businesses). It means that the Fed will have to increase interest rates at a slower rate than expected, if at all. It means that tariffs or an all-out trade war don’t decimate the economy. And it means sufficient wage growth that consumers don’t feel impelled to tighten their belts too much.

It’s a lot to ask for, and it’s why the Sage of Omaha’s time frame is long. “I’m no good at predicting out two or three or five years from now,” Buffett says. “America’s going to be far ahead of where we are … 10, 20 and 30 years from now.”

Which is fine if you have time for that kind of perspective. But many of us don’t. In contrast to Buffett, the National Association for Business Economics—in its most recent quarterly outlook—echoed the feeling of many market watchers. The NABE found that among its economists, 2/3 believe a recession will arrive by 2020, and 18% think it will hit as early as next year.

For those for whom a 5-year outlook is very important—and who can’t afford a large, short-term haircut—they may well be best served by paying more attention to Buffett’s Valuation Indicator than to his words.

Contrarian and data-driven investors that we are, we remember what happened the last time the market was this overextended. Peak to trough, the Nasdaq as a whole lost 78% of its value.

We’ll explore more of these telltale market gauges in the coming weeks. But the time to act, if you need to right-size your gold allocation for the correction to come, is right now.

Open an account today and in minutes you can have your strategic “stock-market insurance” in place with just a few clicks.

 

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The New Housing Market Bubble

The movie The Big Short explores the runup to the housing market crisis of ’07 to ’09. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her strip, but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

2018: Is It 2009 All Over Again?

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

As Banks Offload Risk, Lending Standards Plummet

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

The New Housing Bubble

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%.

Since then, ownership has been in a mild uptrend but the gap is still enormous.

An Unsustainable Market Dynamic

What does this mean? That nearly all of the volatility and price change was driven by something other than an increase in long-term home ownership: speculation, inflation, supply constraints, or some combination, just not from the demand side. In fact, the US home ownership level today is lower than it was 38 years ago, and remains near historical lows.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it is an indicator that home prices are only rising in certain regions, most likely, with already-occupied stock flipping for increasingly overvalued prices.  

This jives with data that shows only extreme markets like Seattle and San Francisco have experienced double-digit annual price increases, fueled by a self-reinforcing cycle of speculation and strict zoning rules that limit new development and freeze lower and middle-income folks out of those markets.

Demand from people buying houses they don’t intend to live in and the continued migration of people to economic hotspots is outstripping supply by so much in select areas that it’s dramatically skewing national data.

We’ve forgotten the lessons of just ten years ago, when speculative chasing of a housing market warped by well-intentioned but idiotic regulation fed a massive bubble. That’s an unsustainable trend. It must end, and will end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.

 

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Test Title for image path

here is blog body test 

 


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It’s Official: Gold & Silver Prices Now at Inflation-Adjusted 50-Year Lows

By Guest Contributor: Jeff Clark, Senior Precious Metals Analyst, GoldSilver [ Original

I’ve been watching this metric all year. And when gold and silver took their recent tumble I checked it again.

I found what I thought I would. Gold and silver prices, adjusted for inflation from a more accurate measure than the CPI, are now cheaper than when they became legal to own again in the United States.

This inflation adjustment is not based on the government’s Consumer Price Index (CPI), because it has changed the methodology for calculating inflation at least 14 times since 1980. And as John Williams of ShadowStats explains, those changes are always geared to reduce inflation readings.

How much confidence can you put in an inflation measure that has been modified, on average, every 2.7 years and in every instance was changed to yield a formal inflation number lower than the previous formula? At a minimum, the measure would be questionable; at a maximum it demonstrates clear statistical bias, manipulation, and inaccuracy. Thus, adjusting precious metals prices via the CPI can’t give us a true measure of their values.

John instead uses the same inflation methodology that was used in 1980. In other words, he uses the formula that existed before government officials started tinkering with it.

The difference is enormous: the CPI reading in July was 2.9%, for example, but the ShadowStats alternate CPI was 10.75%. Which do you think is more accurate? Heck, the average gas price alone has risen 17% since 2017 — but the core CPI reading excludes food and energy costs. Have college and healthcare costs really risen less than 3%? I don’t know about you, but my experience is definitely more in line with John’s reading.

 

Gold: Now Cheaper Than in 1970

I asked John to inflation-adjust the gold price using the 1980 formula. Here’s what that calculation shows.

 

 

That little downturn on the far right pushed the inflation-adjusted gold price to a new modern-day low. In other words, gold is now selling below its 1970 price, when it was still illegal to own in the US!

Further, you’ll see that based on July 2018 data, gold reached the equivalent of $12,687 per ounce at its 1980 peak.

This combination of data shows not only how dramatically undervalued gold currently is, but just how high it could climb if it matched the inflation-adjusted ascent of the 1970s bull market. Indeed, gold would have to climb about 960% from current levels.

 

Silver: Cheaper Than Dirt, Explosive Potential

John also adjusted silver for inflation using the 1980 formula. Its undervaluation is even more dramatic than gold’s.

 

 

The current silver price, when adjusted for inflation using the 1980 formula, is now selling below any level it has in the past 50 years.

And priced in July 2108 dollars, silver hit the equivalent of $683.22 per ounce at its 1980 high. This potential is enormous:

  • Silver would have to climb roughly 4,711% from current prices to match its peak level during the 1970s mania.

I’m not saying silver will climb to almost $700. What I am saying is that it is clearly undervalued right now and carries tremendous upside potential if it comes anywhere close to matching its 1970s performance.

Whatever your personal outlook may be for markets, economies, and currencies, there’s no denying that after adjusting gold and silver for inflation, they represent tremendous value at present levels. 


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NOWHERE TO RUN: THE HOUSING MARKET BUBBLE, PT. 2

 

The movie, The Big Short, explores the runup to the housing market crisis of 2007 to 2009. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her doff her clothes but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

Strippers were loving it.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell off a cliff during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%. That’s a lot.

Since then, ownership has been in a mild uptrend but the gap is still enormous. It’s starkly visible if you overlay the Case-Shiller Index with homeownership percentage.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it can only mean that the price surge has been primarily powered by speculation. Lots of people are buying houses they do not intend to live in.

We’ve forgotten the lessons of just ten years ago. We think the glory days of house flipping for profit are here again. And to some extent, they are. But that’s an unsustainable trend; it must end, and end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.

NOWHERE TO RUN: THE HOUSING MARKET BUBBLE, PT. 2

 

The movie, The Big Short, explores the runup to the housing market crisis of 2007 to 2009. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her doff her clothes but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

Strippers were loving it.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell off a cliff during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%. That’s a lot.

Since then, ownership has been in a mild uptrend but the gap is still enormous. It’s starkly visible if you overlay the Case-Shiller Index with homeownership percentage.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it can only mean that the price surge has been primarily powered by speculation. Lots of people are buying houses they do not intend to live in.

We’ve forgotten the lessons of just ten years ago. We think the glory days of house flipping for profit are here again. And to some extent, they are. But that’s an unsustainable trend; it must end, and end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.

NOWHERE TO RUN: THE HOUSING MARKET BUBBLE, PT. 2

 

The movie, The Big Short, explores the runup to the housing market crisis of 2007 to 2009. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her doff her clothes but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

Strippers were loving it.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell off a cliff during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%. That’s a lot.

Since then, ownership has been in a mild uptrend but the gap is still enormous. It’s starkly visible if you overlay the Case-Shiller Index with homeownership percentage.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it can only mean that the price surge has been primarily powered by speculation. Lots of people are buying houses they do not intend to live in.

We’ve forgotten the lessons of just ten years ago. We think the glory days of house flipping for profit are here again. And to some extent, they are. But that’s an unsustainable trend; it must end, and end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.

NOWHERE TO RUN: THE HOUSING MARKET BUBBLE, PT. 2

 

The movie, The Big Short, explores the runup to the housing market crisis of 2007 to 2009. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her doff her clothes but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

Strippers were loving it.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell off a cliff during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%. That’s a lot.

Since then, ownership has been in a mild uptrend but the gap is still enormous. It’s starkly visible if you overlay the Case-Shiller Index with homeownership percentage.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it can only mean that the price surge has been primarily powered by speculation. Lots of people are buying houses they do not intend to live in.

We’ve forgotten the lessons of just ten years ago. We think the glory days of house flipping for profit are here again. And to some extent, they are. But that’s an unsustainable trend; it must end, and end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.

NOWHERE TO RUN: THE HOUSING MARKET BUBBLE, PT. 2

 

The movie, The Big Short, explores the runup to the housing market crisis of 2007 to 2009. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her doff her clothes but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

Strippers were loving it.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell off a cliff during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%. That’s a lot.

Since then, ownership has been in a mild uptrend but the gap is still enormous. It’s starkly visible if you overlay the Case-Shiller Index with homeownership percentage.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it can only mean that the price surge has been primarily powered by speculation. Lots of people are buying houses they do not intend to live in.

We’ve forgotten the lessons of just ten years ago. We think the glory days of house flipping for profit are here again. And to some extent, they are. But that’s an unsustainable trend; it must end, and end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.

NOWHERE TO RUN: THE HOUSING MARKET BUBBLE, PT. 2

 

The movie, The Big Short, explores the runup to the housing market crisis of 2007 to 2009. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her doff her clothes but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

Strippers were loving it.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell off a cliff during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%. That’s a lot.

Since then, ownership has been in a mild uptrend but the gap is still enormous. It’s starkly visible if you overlay the Case-Shiller Index with homeownership percentage.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it can only mean that the price surge has been primarily powered by speculation. Lots of people are buying houses they do not intend to live in.

We’ve forgotten the lessons of just ten years ago. We think the glory days of house flipping for profit are here again. And to some extent, they are. But that’s an unsustainable trend; it must end, and end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.

NOWHERE TO RUN: THE HOUSING MARKET BUBBLE, PT. 2

 

The movie, The Big Short, explores the runup to the housing market crisis of 2007 to 2009. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her doff her clothes but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

Strippers were loving it.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell off a cliff during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%. That’s a lot.

Since then, ownership has been in a mild uptrend but the gap is still enormous. It’s starkly visible if you overlay the Case-Shiller Index with homeownership percentage.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it can only mean that the price surge has been primarily powered by speculation. Lots of people are buying houses they do not intend to live in.

We’ve forgotten the lessons of just ten years ago. We think the glory days of house flipping for profit are here again. And to some extent, they are. But that’s an unsustainable trend; it must end, and end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.

NOWHERE TO RUN: THE HOUSING MARKET BUBBLE, PT. 2

 

The movie, The Big Short, explores the runup to the housing market crisis of 2007 to 2009. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her doff her clothes but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

Strippers were loving it.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell off a cliff during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%. That’s a lot.

Since then, ownership has been in a mild uptrend but the gap is still enormous. It’s starkly visible if you overlay the Case-Shiller Index with homeownership percentage.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it can only mean that the price surge has been primarily powered by speculation. Lots of people are buying houses they do not intend to live in.

We’ve forgotten the lessons of just ten years ago. We think the glory days of house flipping for profit are here again. And to some extent, they are. But that’s an unsustainable trend; it must end, and end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.

NOWHERE TO RUN: THE HOUSING MARKET BUBBLE, PT. 2

 

The movie, The Big Short, explores the runup to the housing market crisis of 2007 to 2009. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her doff her clothes but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

Strippers were loving it.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell off a cliff during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%. That’s a lot.

Since then, ownership has been in a mild uptrend but the gap is still enormous. It’s starkly visible if you overlay the Case-Shiller Index with homeownership percentage.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it can only mean that the price surge has been primarily powered by speculation. Lots of people are buying houses they do not intend to live in.

We’ve forgotten the lessons of just ten years ago. We think the glory days of house flipping for profit are here again. And to some extent, they are. But that’s an unsustainable trend; it must end, and end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.


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...and be the first to read what we post the moment we post it!

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Your email address is safe with us. We will never rent or sell it to anyone. Period. Read our Terms of Use.

We Now Accept Bitcoin as Payment!

To learn more, call us Mon – Fri, 7AM – 4PM Arizona time.
877-727-7387 (toll-free within the US)
602-626-3022 (for international callers)
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Don’t Even Think About Selling Precious Metals Now

Virtually anyone looking at the markets today can sense that something is a bit amiss, a disconnect with reality. The hard part with such sense is often quantifying just how out of whack things have gotten, and when it might reverse. More and more we are seeing reliable indicators that show not just one but nearly all markets are overheating, leaving almost nowhere to run.

As part of an ongoing series, today we'll show how Federal Reserve and other governmental policy has resulted in an unprecedented situation: bubbles that span across all risk-assets, leaving investors with few options to invest their money other than in those very bubbles... with one notable exception: precious metals.

Right now precious metals are currently at historical — and even multi-generational — lows vs. stocks, bonds, and real estate. Unsustainable debt issuances have underpinned the longest uninterrupted asset-price inflationary cycle ever: federal debt, global debt, student debt, auto debt, and more. The result: rarely have gold or silver looked so compelling relative to other assets.

Nowhere to Run: The New Housing Market Bubble

The movie The Big Short explores the runup to the housing market crisis of ’07 to ’09. One of the protagonists is a fictionalized character (Mark Baum) based on real fund manager Steve Eisman. In one sequence, Baum meets with a Florida stripper — not to see her strip, but to talk about her investments. She tells him that she has bought several condos, with no money down, via back-loaded mortgages. She says she is going to make a fortune when they appreciate in price. In this moment, Baum realizes that when strippers are into property flipping, the housing market bubble has become really huge.

The nasty question is: are we there again? And the answer is: probably.

The signs are ominous.

With the benefit of hindsight, we can plainly see what happened at the turn of the 21st century. The dotcom bubble had popped in early 2000, sending the NASDAQ plummeting by 80% by late 2002. Over the same period, the Fed desperately lowered its funds rate from 6.5% to 1%. People distrusted stocks, but there was easy money to be had, and they needed somewhere to live.  A flood of investment poured into the housing market.

A lot of people were persuaded by unscrupulous brokers to buy properties they couldn’t really afford. Subprime loans — those made to borrowers with the worst credit histories and most likely to default — took off like a rocket. From less than 4% of the market in 2000, they shot up to 20% by 2005; in dollar amounts, subprime originations jumped from less than $100 billion to more than $600B.

And how did that bubble inflate to such an enormous degree? Yes, it was partly a result of the Fed’s easy money policy. But it was at least equally due to a fundamental change in the banking industry.

There used to be a firewall between commercial banks (those that used savings depositors’ money to make home and business loans) and investment banks (those that put client money into higher-risk, higher-return deals). The wall was erected by the Glass-Steagall Act of 1933, as federal legislators sought to prevent a repeat of the Crash of 1929. It worked pretty well for the next 65 years. Commercial banking, with its relatively low profit margins, was considered just about the most boring of businesses; investment banks catered only to the high rollers, not Joe Six-pack. Neither was allowed to poach on the other’s territory.

So a commercial bank would write a mortgage after careful consideration of the borrower’s finances. If the borrower looked like a good credit risk, the bank would make the loan and it would be paid back with interest, allowing the bank to profit off of that.

No longer. Glass-Steagall was repealed as part of the Gramm-Leach-Bliley Act of 1999.

The change was profound. Now, virtually as soon as a mortgage is written, it is sold off to an investment broker. That broker then re-sells it, often packaging it with a collection of other mortgages (called tranches), to create an investment vehicle called a mortgage-backed security (MBS). A given MBS will contain tranches of notes with different maturities and different quality ratings, but its overall rating may be far higher than many of the individual tranches inside it. (The major ratings agencies conspired to overrate a whole host of MBSs, but that’s another story.)

This is why those unscrupulous brokers — like Countrywide Credit, the largest, which in its heyday financed 20% of all U.S. mortgages —  were writing loans for anyone with a pulse. When you can immediately sell off any loan you originate to the next sucker in line, then you have a very high-yield, low-risk business. Or at least you do until the carny ride ends, which it did for Countrywide in ’08, when the company went belly up.

At the same time, the federal government became increasingly enmeshed, as the backer of last resort, in the mortgage market. Banks saddled with boatloads of crappy mortgages somehow became “too big to fail.”

That was then. What about now?

One of the best indicators of how the housing market is actually doing is the Case-Shiller Composite Index, a 20-city snapshot of home prices nationwide. Looking at it over a 20-year timespan, one can see the earlier housing bubble as the Index more than doubled from 2000 to ’07.

The Crash of ’07-’09 drove prices down by over 30%, and they remained flat until the beginning of 2012. But then, in a surge reminiscent of the century’s early years, they took off again, rising to a point that currently exceeds even the ’06 peak. That in itself is worrisome. Normally, real estate values just do not appreciate that rapidly.

But there’s something more dangerous lurking. Historically, the cost of buying a house has been positively correlated with the percent of American households that own their home. As one goes up, so does the other, and vice versa. This was true even during the prior bubble, when it was buy buy buy and so many of the financially unfit suddenly became “owners.”

It isn’t true any longer. During the escalation of 2013-present, home prices went up nearly 45%. But at the same time, home ownership, which fell during the Crisis, kept dropping even after prices began to recover.  From the time prices turned up until mid-2016, home ownership fell by 3%.

Since then, ownership has been in a mild uptrend but the gap is still enormous.

What does this mean? That nearly all of the volatility and price change was driven by something other than an increase in long-term home ownership: speculation, inflation, supply constraints, or some combination, just not from the demand side. In fact, the US home ownership level today is lower than it was 38 years ago, and remains near historical lows.

This is not normal. It’s an indicator that things are seriously out of whack. With prices steadily rising and ownership still at very low levels, it is an indicator that home prices are only rising in certain regions, most likely, with already-occupied stock flipping for increasingly overvalued prices.  

This jives with data that shows only extreme markets like Seattle and San Francisco have experienced double-digit annual price increases, fueled by a self-reinforcing cycle of speculation and strict zoning rules that limit new development and freeze lower and middle income folks out of those markets.

Demand from people buying houses they don’t intend to live in and the continued migration of people to economic hotspots is outstripping supply by so much in select areas that it’s dramatically skewing national data.

We’ve forgotten the lessons of just ten years ago, when speculative chasing of a housing market warped by well-intentioned but idiotic regulation fed a massive bubble. That’s an unsustainable trend. It must end, and will end badly for those left holding the bag.

Moreover, MBSs never went away. Despite some half-hearted reform attempts in Washington, they’re still with us. Only more so. MBSs are a part of the shadowy, unregulated, over-the-counter derivatives market. That market, which was considered at dangerous levels in ’06, with a nominal value of some $650 trillion, is almost twice as large now, at about $1.2 quadrillion.

The evidence is compelling that the housing market is once again a bubble awaiting a pin. When it pops, the prudent investor is going to want to be holding the only investment sector not currently in the midst of an extraordinary overvalued bubble scenario: hard assets.


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Childhood Lessons About Paper Money Peter Will Never Forget

Growing up in Europe, I have always been fascinated by its history and how it manifests everywhere you look. Every building, be it an ordinary house or a glorious monument, wears the marks of historic events, which remind us about past successes and failures.

I feel the world would be a much better place if we all were better students of history and learned from the mistakes our elders made. Unfortunately, as generations change, we tend to forget the horrors of the past, allowing the forces that be to repeat the same mistakes.

In my youth, I was lucky enough to hear countless stories from elders about life during World War I and World War II. As much as I like to read about history, nothing compares to accounts from people who experienced it firsthand. This is one of the reasons I started this series of articles featuring our customers’ stories and what they learned from their experiences.

Today, Peter W. from South Africa is sharing his early childhood lessons about money with us.

My name is Peter W., resident in South Africa for the last 65 years. I was born in Hamburg, Germany in December of 1941, in the last years of the second world war and was schooled in Hamburg to leave for the UK at the age of 16 to start my working life. We were taught good English at school, living in the British occupied zone of the city. There were French and American zones as well.

During my upbringing, with my grandparents in Hamburg I had my best education in the toilet. It was a sizeable room, as toilets go, with no windows, only an air shaft, being located inside of the apartment my grandparent lived in.

There was a Dado rail a little above an adults hip height, the walls above the Dado rail painted and the area below the Dado rail wallpapered with old Bank notes. As a youngster my natural curiosity made me question the background to these wallpapered bank notes, which covered the Weimar Republic Inflationary period, the first world war (wipe out of currency) as well as the 2nd world war, again wipe out of currency. Some of the notes were overprinted temporary changing the note’s values to, say 20 Milliard etc etc. These were the last weeks of the inflationary days and final destruction of the value of the then paper money!

My grandfather explained, and I have not forgotten this, that paper money, i.e. the nation’s currency is just that, a piece of paper. He further talked about how paper money, irrespective the circumstances, loses money until the final collapse and then it indeed can only be used for wallpaper. He further explained that the only avenue for retaining wealth over time was to buy and own gold. He then showed me a gold Thaler, of which he had accumulated some, and gave me the advice that should I find myself with surplus cash one day to invest it, not in shares on a stock exchange, another piece of papers, but to buy gold coins or bullion bars.

This I have been doing for the last 40 years odd and have been passing on my experience/story to my children and to whoever wants to listen.

Over this period I have seen a significant appreciation in the value of the accumulated gold, one recalls that gold was fixed at $ 45 an ounce to then bounce to $ 1900 an ounce to stand at around $ 1250 an ounce at present. The South African currency, the Rand, as for that matter the Dollar, Pound and the Euro have all lost significant purchasing power over these 40 years, not to mention all the smaller currencies around the world, such as may have survived these 40 years.

My Grandfathers advice was really worth its weight in gold, to use a pun.

Free ebook: Investing in Precious Metals 101: How to Buy and Store Physical Gold and Silver

Learn how to make asset correlation work for you, how to buy metal (plus how much you need), and which type of gold makes for the safest investment. You’ll also get tips for finding a dealer you can trust and discover what professional storage offers that the banking system can’t.

It’s the definitive guide for investors new to the precious metals market. Get it now.

 

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To learn more, call us Mon – Fri, 7AM – 4PM Arizona time.
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CLIENT TESTIMONIAL

The Hard Assets Alliance Blog

Childhood Lessons About Paper Money Peter Will Never Forget

Growing up in Europe, I have always been fascinated by its history and how it manifests everywhere you look. Every building, be it an ordinary house or a glorious monument, wears the marks of historic events, which remind us about past successes and failures.

I feel the world would be a much better place if we all were better students of history and learned from the mistakes our elders made. Unfortunately, as generations change, we tend to forget the horrors of the past, allowing the forces that be to repeat the same mistakes.

In my youth, I was lucky enough to hear countless stories from elders about life during World War I and World War II. As much as I like to read about history, nothing compares to accounts from people who experienced it firsthand. This is one of the reasons I started this series of articles featuring our customers’ stories and what they learned from their experiences.

Today, Peter W. from South Africa is sharing his early childhood lessons about money with us.

My name is Peter W., resident in South Africa for the last 65 years. I was born in Hamburg, Germany in December of 1941, in the last years of the second world war and was schooled in Hamburg to leave for the UK at the age of 16 to start my working life. We were taught good English at school, living in the British occupied zone of the city. There were French and American zones as well.

During my upbringing, with my grandparents in Hamburg I had my best education in the toilet. It was a sizeable room, as toilets go, with no windows, only an air shaft, being located inside of the apartment my grandparent lived in.

There was a Dado rail a little above an adults hip height, the walls above the Dado rail painted and the area below the Dado rail wallpapered with old Bank notes. As a youngster my natural curiosity made me question the background to these wallpapered bank notes, which covered the Weimar Republic Inflationary period, the first world war (wipe out of currency) as well as the 2nd world war, again wipe out of currency. Some of the notes were overprinted temporary changing the note’s values to, say 20 Milliard etc etc. These were the last weeks of the inflationary days and final destruction of the value of the then paper money!

My grandfather explained, and I have not forgotten this, that paper money, i.e. the nation’s currency is just that, a piece of paper. He further talked about how paper money, irrespective the circumstances, loses money until the final collapse and then it indeed can only be used for wallpaper. He further explained that the only avenue for retaining wealth over time was to buy and own gold. He then showed me a gold Thaler, of which he had accumulated some, and gave me the advice that should I find myself with surplus cash one day to invest it, not in shares on a stock exchange, another piece of papers, but to buy gold coins or bullion bars.

This I have been doing for the last 40 years odd and have been passing on my experience/story to my children and to whoever wants to listen.

Over this period I have seen a significant appreciation in the value of the accumulated gold, one recalls that gold was fixed at $ 45 an ounce to then bounce to $ 1900 an ounce to stand at around $ 1250 an ounce at present. The South African currency, the Rand, as for that matter the Dollar, Pound and the Euro have all lost significant purchasing power over these 40 years, not to mention all the smaller currencies around the world, such as may have survived these 40 years.

My Grandfathers advice was really worth its weight in gold, to use a pun.

 

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Subscribe to our Blog...

...and be the first to read what we post the moment we post it!

Receive email notification whenever precious metals news, analysis and commentary is posted to our blog.


Your email address is safe with us. We will never rent or sell it to anyone. Period. Read our Terms of Use.

We Now Accept Bitcoin as Payment!

To learn more, call us Mon – Fri, 7AM – 4PM Arizona time.
877-727-7387 (toll-free within the US)
602-626-3022 (for international callers)
Or click here to download our Bitcoin Request Form

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Why It’s Time to Increase Your Allocation to Silver

People love bargains. They will travel miles to find an item they want on sale.

But this behavior is rarely present in investing. Driven by fear of missing out, all too often investors follow the herd and buy assets in a bubble. 

Do you remember the investment craze when the Nasdaq was trading at 5,000 in early 2000? Or Bitcoin above $19,000 last December? The mania quickly turned into devastating losses.

Conversely, when Goldman Sachs was trading at $52 in November of 2008 or GE under $7 in March of 2009, few investors had the guts to buy amid collapsing markets. 

Only true value investors like Warren Buffett were buying.

My point is that forward-looking investors should always look for value in unloved assets that are trading near lows. That’s especially important in a world of low yields.

Today, gold trades under $1,300/oz. It’s been out of favor for more than seven years after it reached all-time highs in 2011 and some pundits were predicting $10,000 an ounce or more.

Look, gold is now trading at a 35% discount from its previous high.  It is truly a bargain in a world laden with record levels of debt and artificially inflated financial assets. 

In the long run, therefore, gold has nowhere to go but up!  However, there is an even more attractive investment you can get into today.

It’s silver.

The Best Bargain in Precious Metals

Silver is trading under $16/oz as of this writing, which is down two-thirds from its 2011 high of $49. 

Today, silver’s value relative to gold is more attractive than ever since the Great Recession. Now the gold-silver ratio is more than 76 to 1, compared to an average of 62 to 1 over the last two decades, or 47 to 1 throughout the twentieth century.

Yet few investors invest in gold today, let alone pay attention to silver.

But it’s just sentiment fed by unattractively low prices.

Silver continues to be one of the most important industrial metals—with only few cost-effective substitutes. The metal has higher electrical and thermal conductivity than any other element.

This makes silver an important component in most electrical applications. 

In fact, silver is the critical part of many high performance batteries, solar panels, and printed circuits whose demand is skyrocketing as renewable energy picks ups momentum.

Not only that, silver-based compounds can kill bacteria, algae, and fungi. They are used to purify, sanitize, preserve, and filter all sorts of liquids.

Silver also remains an important element in the manufacturing of mirrors, photography, and printing.

All in all, silver demand in manufacturing is expected to reach 680 million ounces in 2018, 27% up since 2013.  This growth is mainly driven by growing demand in the solar and automotive industries.

But while silver demand is growing, its supply has been limited.

Global silver mining production peaked in 2015 and has since declined by 50 million ounces to 850 million ounces.  Scrap silver supply peaked in 2011 at 260 million ounces and dropped down to 140 million ounces annually in the last three years.

The main reason is that a lot of silver exploration projects have been cancelled or put on hold due to low silver prices. And bringing new supply into production takes years. 

Besides, silver is usually produced as a by-product of gold, copper, or zinc mining.  This explains why silver supply is inelastic to change in price and why silver can be so volatile when demand outstrips supply.

That’s bad news for manufacturers but good news for investors as the silver price is likely to soar under constrained supply.

Silver Will Beat Gold in the Next Recession

Silver is still a bargain but that will change soon.

History shows that as precious metals come into favor again, silver is likely to beat gold.

Between 1970 and 1980, gold appreciated by 24 times while silver prices grew 30 times. 

In November 2008, gold bottomed at $730/oz and silver at $9.3/oz; by April 2011 gold reached $1,890/oz and silver $49/oz, up 2.6 and 5.3 times respectively. 

The reason silver tends to rise faster than gold is that the silver market is much smaller than gold’s. Besides, as we’ve learned already, silver supply is inelastic. That means a small increase in investment demand results in shortages.

As such, it’s reasonable to expect that during the next rally in precious metals, silver will the best metal to hold.

 

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If You Don’t Have a Gold IRA, Your Retirement Is at Risk

When the stock market crashed in 2008, the average worker lost about 25% of their savings. That’s the average. There were less prudent folks who lost 50% and more due to lack of diversification.

Now imagine that happened to you just before you entered your hard-earned retirement. 50% of your savings are gone and you have no time to recoup it. That’s the nightmare many soon-to-be retirees experienced when the markets crashed.

My point is, if your retirement savings are tied only to unstable financial markets, your nest egg is at risk. And no matter whether you are in your 20s or 60s, losing a big chunk of your savings is no fun.

As such, you have to hedge. And one of the best ways to do that is to own physical gold in your IRA account.

But before I explain what a gold IRA is, let me briefly tell you why gold is a must in your retirement fund in the first place.

How Bullion Can Benefit Your Retirement

When economic growth slows, nearly all investments lose value.

To protect your portfolio from a huge loss during a recession like the one we saw in 2008, you want to own some assets that tend to move in the opposite direction from most others.

And gold’s inverse relationship with stocks makes it one of the best financial safe havens known to man.

If every investor portfolio should contain physical gold, this is doubly true for retirement accounts. There are few scenarios worse than losing 50% of your life savings due to a stock market crash.

But even if a recession doesn’t destroy the value of your paper assets, the purchasing power of your nest egg can still be eaten away by inflation.

When your savings should last through retirement and expenses like health insurance and medical care are increasing, knowing how far your money will go in 30 years can become a life or death issue.

Think about this: Something that cost $10,000 in 1976 cost $22,028 in 2016.

What will it cost in 2046?

Meanwhile, gold has retained its value (in real terms) for thousands of years. As indebted governments print more money, I’m sure its value will only grow.

Did you know that gold has provided an average annual return of over 7% in the last 50 years—and that actually exceeded the growth of the S&P 500?

It is essential to consider inflation or currency debasement in your retirement planning… and dedicating a portion of your savings to physical gold is a great start.

Now, let me explain to you what a gold IRA is and the options you have…

How to Get Started with a Gold IRA

A gold IRA is simply an IRA that allows you to invest in precious metals.

There are two kinds of IRAs:

  • In a Traditional IRA, you can make tax-deductible contributions if your income is below a certain limit. Your money can grow tax-free until you reach retirement age. By then, you’ll likely be in a lower tax bracket.
  • Roth IRA is almost the opposite. You don’t get a deduction when you put money into the account, but you won’t owe any tax at all when you reach retirement age and begin withdrawals.

Regardless of the IRA type, the buying process involves four parties: you, the IRA custodian, the gold dealer, and the storage facility.

Here’s how it works:

  1. You find a custodian and transfer your funds to it via IRA-to-IRA transfer, annual contribution, or by rolling over cash from another retirement account such as 401(k) or 403(b).
  1. You choose a precious metals dealer and place your order. The dealer contacts your custodian to verify funds; the custodian contacts you to confirm your order; then your dealer places the order on your behalf and notifies the custodian.
  1. You choose the storage facility you will use to hold your gold. Your dealer ships your order to the facility, and the facility verifies receipt of your metal.
  1. Once your gold is safely in storage, your custodian releases funds to your dealer and credits your metal to your IRA account.

This process requires a lot of paperwork, coordination among participants, and takes up to 4–6 weeks. Anytime you want to make a transaction, you have to do it all over again.

As you can see, it’s far from convenient and can be daunting to even the most seasoned investors.

The Ideal Gold IRA

If you wish to avoid the paperwork, time, and hassle of coordinating each part of the process, it’s worth it to find a fully integrated precious metals IRA program combining:

  • an online custodial account
  • access to a robust dealer network to buy and sell bullion 24 hours a day
  • a secure purchasing and management platform
  • domestic and international storage options
  • ability to take a physical distribution of metal anytime without added fees (physical distributions may be taxable and subject to early withdrawal penalties, please consult your tax advisor before requesting a distribution)
  • dedicated customer support

With everything under one roof, you can easily add physical precious metals to your IRA and manage the entire process online, anytime.

If you are looking for a gold IRA program, I invite you to consider the Hard Assets Alliance.

We run one of the most convenient and secure bullion platforms on the market. The platform connects you with a pool of wholesale bullion dealers that bid on your order, which ensures highly competitive pricing.

It’s also a sophisticated suite of services that includes precious metals IRA accounts, savings programs, dollar-cost-averaging solutions, and more.

If you buy for storage, the Hard Assets Alliance provides you with fully allocated storage at the vaults of first-class storage companies like Brinks or Loomis. These vault companies store metals owned by the world’s biggest institutional investors—a clear vote of confidence that tells you your gold will be safe there as well.

This kind of convenience and pricing in the precious metals industry were only available to large institutions not so long ago. The Hard Assets Alliance makes it available to you—and at a fraction of the cost.

Learn more about our platform and IRA program.

Regardless of your dealer choice, I strongly recommend adding gold to your IRA. History shows that this metal is the best hedge against any crisis—be it a stock market crash, a devastating hurricane, a political backlash, or a war.

And in volatile times like these, protecting your wealth is more important than ever.

 

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This Kid and Granddad Dialogue Best Explains Why We Invest in Gold

The other day, Hard Assets Alliance customer Ron Saunders reached out to me. It turned out, Ron was not only a gold investor but also a novel writer.

He was gracious enough to send me a copy of The Aurykon Chronicles, a tale about teenage boy Mack Thomas learning his crucial life lessons through conversations with his life mentor and grandfather, Pappy.

In one chapter, Pappy bought his grandson a Gold Eagle as a birthday present and explained to him why society has valued the metal for thousands of years— and will continue to do so for the foreseeable future.

Their dialogue is a fascinating read that I recommend to each of you.

Essentially, the conversation between Mach and Pappy boils down the fundamentals of investing in gold, explained in 5-year-old terms.

Sometimes cases for gold may be dull and boring. But Ron, using his uncanny storytelling, explains (or reminds) you of the reasons to invest in gold through a compelling narrative—telling but also entertaining.

I hope you enjoy reading this excerpt as much as I did.

Excerpt from: The Aurykon Chronicles: Books 1 to 5—A tale of a young man’s search for truth in America

(reproduced with the permission from the author, Ron Saunders)

Chapter 13: The Sound of Money 

Mack rode his bike into his grandparent’s driveway, which extended from the street alongside their two-story traditional home and into a spacious backyard. The large Victorian-style house harkened back to Ukiah’s past. Round columns enclosed the porch and veranda. Multiple gables projected from the steep-pitched roof, and ornate brackets supported wide eaves. The manicured lawn and gardens brimmed with shrubs and flowers, displaying pride of ownership.

A large detached garage with matching decor stood behind the house at the end of the driveway. An open double door revealed a workshop full of woodworking tools—table saw, lathe, sanders, and a shaper. Covering the walls was a cluttered collection of hand tools, cords, jigs, and boards stored on shelving. Standing on the floor in the center of the work area was a large, unfinished armoire, awaiting doors, drawers, and crown molding.

Reg Woodward, a slender senior man with thinning white hair and a trimmed beard, sat on a tall stool at a well-worn workbench. He tied a feathered fly mounted in a small vice behind a magnifying lamp suspended on a metal swing-arm stand.

“Yo, Pappy! How’re you doing?” Mack asked. He leaned his bike against the doorjamb, dropped his backpack, and removed his helmet.

Reg glanced over his wire rim glasses. “I’m fine as frog’s hair. Come and check out this emergent caddisfly. I just finished it.”

Mack inspected his grandfather’s handiwork. “Awesome. It would look good in my fly box.”

Reg removed the fly from the vice jaws. “That’s where it’s intended to be.” He presented it to his grandson.

“Ah, thanks, Pappy. I’ll try it out today.”

“It should work. We’re entering the caddisfly hatch.”

“This is my birthday present.”

“Heck no, son, I got you something special this year. I’ll give it to you now so we can talk about it in private, rather than at your party. Too many people and noise won’t let me explain it properly.”

Reg reached into his pocket and withdrew something grasped in his fist. “Happy birthday.”

Mack held out his hand. “Is this a trick?”

“No, son, I’m serious.” He placed an object in Mack’s palm, a large, yellow coin encased in a round, clear acrylic holder.

“Pappy! This is an American Eagle, a gold coin. It’s worth a fortune!”

The old woodworker nodded. “It doesn’t matter what it’s worth today. What’s important is what its value will be in a few years. That’ll start your hair on fire.”

Mack held the coin under the magnifying lamp. “It says one-ounce fine gold—fifty dollars—but, I know it’s worth more.”

“Its value is the market price of an ounce of gold, plus a premium for coinage and distribution. Now, promise me you’ll keep it safe. Son, I’m telling you, this coin will be worth many times its current value when the collapse happens. Hang on to it. Hide it good. Don’t let people know you have it—just your mom and dad.”

“I promise!” He hugged his grandfather. “Thanks so much!”

Pappy returned the embrace. “Well, you’re a Californian, the Golden State. You should own some gold. Now, let me show you something. Give me the coin.” He held out his hand.

Mack gave it back. Reg opened the holder and removed the Eagle. He fished through a junk drawer in the workbench and found a similar-sized steel slug. “Come over to the table saw.”

The big saw had a flat, polished, cast steel top. Reg dropped the slug from a few inches above the surface. It made a dull thud. “Hear that?”

“Yeah, so what?”

He then dropped the gold Eagle from the same distance. It rang a melodic, soft tone.

Mack’s eyes lit up. “Unreal!”

“That’s the sound of sound money.” Pappy repeated the demonstration.

“The gold has a beautiful ring,” Mack said. “The steel doesn’t ring, it just clunks.”

“Right. A pure silver coin will also ring. It is a characteristic of gold and silver most other metals don’t have. You see, for thousands of years, ever since man could refine metals, gold and silver were considered valuable. They are rare and have unique physical qualities. Gold can sit at the bottom of an ocean and won’t rust or corrode. These two precious metals became money—true money—recognized throughout the world for trade and as a store of wealth.

“Most of man’s history revolves around the acquisition and retention of them. We explored new lands in search of them. We fought battles to acquire them and ravaged native cultures to plunder them. Empires rose, driven by the lust for gold and silver. But they all fell, losing their riches through expensive wars and unwise politics.”

The grandson shrugged. “That’s not what they teach us in history class.”

“Of course not,” Reg said, shaking his head. “In today’s world, the ‘Powers-That-Be’ don’t want you to understand this. Back in the days of the Roman Empire, their military conquered much of Europe and North Africa. They had to police the subjugated lands—often brutally—to keep the Empire intact. This required money, which they minted from gold and silver. Over time, the cost of running an empire became burdensome, and the gold and silver reserves grew scarce. What did they do?”

“I dunno.”

“Well,” Reg said, “they mixed cheaper metals, like copper, zinc, and tin, with the precious metals. This debased the true value of the coin, but the government claimed it was worth the same. They lied. At first, just a little non-precious metal was added. Eventually, the gold and silver content of the coins became so small people realized the money no longer retained value. It was a chunk of worthless metal. The Roman Legions who were guarding the Empire in distant lands were paid with coins of no real value. Do you know how they knew they were being stiffed?”

“No, but I think you’re gonna tell me.”

“Exactly what we just did. They would listen for the sweet ring of precious metals. At first, the coins rang the reassuring sound. Over time, they thunked. The soldiers had no interest in risking their lives for a corrupt government, which desperately hung onto power while cheating them. They became disorganized and rebellious. The Roman Empire failed as it lost the ability to finance its Legions. The Visigoths, Vandals, and Huns overran the Empire and sacked Rome. Throughout history, empires collapsed because they grew so large they were incapable of financing their armies and bureaucracies.”

“But gold and silver aren’t money anymore,” Mack said. “They’re just something you collect, like jewelry.”

“Really? Then why do governments and the big banks in the world, including central banks like the US Federal Reserve, hold much of the world’s gold? Maybe they know something you don’t. Gold and silver were once money in America, but the government phased it out. Years back, they even confiscated everybody’s gold. Yeah, President Roosevelt made it illegal to own. For one hundred and fifty years, we Americans used gold coin as currency, but then FDR destroyed what the Constitution established for sound money, and replaced it with a system of paper money. You can’t print gold into existence, but you can print paper dollars in the extreme. And they did!”

“Why? If people see so much value in gold and silver, why not use it as money?”

“Now that’s a good question.” Reg pulled a money clip from his pocket and slipped off a bill. “What’s this?”

“Come on, Pappy—it’s a twenty-dollar bill.”

“Actually, it’s a Federal Reserve Note—a credit slip, printed by a private bank. It promises the bearer this bill is exchangeable for twenty dollar’s worth of value. There was a time you could go to a bank and redeem your dollars for gold or silver coins. But no more. This is just a piece of paper representing a debt. American dollars—many trillions of them all over the world—are IOU’s. They have value because the Fed and the government say so, not because they’re backed by a hard asset, like gold or silver as they once were.”

“I’m not following you,” Mack said. “What do you mean, ‘backed by a hard asset?’ This is American money. It’s good anywhere!”

“What I mean is, many years ago, it said right on the bill—a legal tender note—it was payable to the bearer on demand in gold or silver coin. It was as good as gold! Now, it no longer is. It doesn’t amount to a bucket of warm spit!”

“No, no, no, Pappy!” He glared at his grandfather. “I understand that gold is valuable, but don’t tell me an American dollar isn’t. If that’s what you think, then give me your wad of money. I’d be happy to exchange it for a new saddle on my BMX racer. Of course it has value!”

Reg waved a hand. “Now, don’t go getting your dander up. An American dollar only has value because you believe it does. And, you believe it because you’re told it does by your government and the banking system. But what if the government and the banking system are insolvent—you know—bankrupt? How can they keep the promise they make about the currency they print out of thin air?”

“I dunno.”

“That’s what’s happening today and has been for decades. And that’s why the dollar is no longer backed by gold. The government doesn’t have enough gold to cover all the trillions of dollars the Fed printed.”

This confused Mack. “I understand gold is valuable, but why do people think it’s money? I still don’t know why paper bills aren’t just as good.”

“Okay, son, consider this: I said man accepted gold as money for thousands of years. But, those civilizations lived on different continents at different times. Each was unaware of the existence of the others. There was no contact or trade between them. Yet, gold emerged as money everywhere in the world. It possessed a natural—almost spiritual—appeal throughout time, unlike any other form of money. Paper substitutes, however, have come and gone. History teaches us they always fail, and always will.”

The logic of his grandfather’s argument made sense. “So gold keeps its value, while paper money loses value?”

“That’s correct,” Reg replied with a nod. “Over the past century, fiat currencies have lost much of their purchasing power, while gold has retained, even increased, its purchasing power.”

This baffled Mack. “What’s ‘feet’ currency?”

“Fiat. Fiat is paper and digital currency issued by governments, usually through a central bank. It’s a note that says it’s worth something. But it’s not linked to anything of value—it’s just a promise. A false promise because inevitably too much fiat currency is issued, diluting the value of previously circulated currency.”

Mack shook his head. “I don’t know about this. All I know is when Hank gives me a paycheck, I can cash it and spend it. Dollars have value to me.”

“Sure, but it’s a big, hornswoggling lie. The day will come when the lie is exposed. When that happens, people won’t want American dollars anymore. They’ll get rid of them. Fast! Their value will crater. It’ll be gone like a lean hog in a ripe cornfield. People, all over the world, will want to replace their paper US dollars with something of recognized value. They’ll remember how precious metals are a trusted store of wealth. Gold will become insanely valuable, as measured by paper money, including our dollar. That’s when you’ll be glad to have your gold coin.”

“Okay, Pappy, I know you’re always reading about this stuff. But, I’m just a kid. What do I know? Anyways, I understand this coin is precious, and I’m thrilled to have it. I promise to keep it safe and hang on to it. It’s my new good luck charm. It will always remind me of you.”

“No, no.” Reg shook his head. “This Eagle isn’t a charm. When the day comes, you’ll want to sell it to gain the high value it’ll hold.”

“Nope. This is a keeper, my way of remembering you.”

Pappy hugged him. “Okay, I love you, son. Keep it forever if you wish. But, I think you might change your mind when the price goes sky-high.”

* * * * *

If you ever wanted to present a gift of wealth and prosperity to your special child or grandchild (or any other minor you care for), you may want to consider opening a UTMA account with the Hard Assets Alliance.

Precious metals are both a symbolic and practical gift with timeless appeal. Your loved ones will appreciate and value it for many years to come. And there’s a real chance that they will greatly prosper from it as they come of age!

LEARN MORE ABOUT UTMA ACCOUNT

 

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Why Gold Is the Ultimate Crisis Insurance for Your Portfolio

Every economy eventually skids into a recession as part of the natural cycle of ups and downs. And each recession has one common feature: big losses in equities.

In the dot-com crash, for example, most Internet stocks went down 70–90% from their all-time highs, which was a death sentence for investors who heavily speculated on tech stocks.

But even if you are diversified among different sectors, that doesn’t necessarily mean you are safe.

In 2008, the whole S&P 500 index suffered a fall of 38.5%. Now, if you could afford to wait until the market recovered, you were fine. But for those who needed money to cover immediate living expenses, or worse, retirement plans, it was devastating.

As such, hedging your portfolio against a downturn in equities is key to long-term success in investing and your prosperity.

So, how exactly do you shield your portfolio from a recession? The answer lies in the correlation of your assets…

The Best Hedge Against a Stock Market Crash

To avoid or mitigate losses during a crisis in equities, you want to hold assets in your portfolio that are not correlated to the stock market. In simple terms, that means they tend to move in the opposite direction from equities.

For example, treasuries and investment-grade corporate bonds are usually largely uncorrelated to the stock market. Unfortunately, an allocation to bonds hardly makes up for equity losses at current interest rates.

Worse, as bonds are approaching all-time highs after a multi-decade rally, buying this asset class at today’s prices exposes you to a lot of downside risk.

Bottom line: The standard 60/40 allocation won’t work this time around.

But there’s one time-tested asset class that beats everything when it comes to hedging losses during a stock market crash.

It’s gold.

First, as you would expect, gold is not correlated to the stock market. That means if equities zig, gold usually zags.

Second and most important, gold’s correlation to stocks drops during a recession.

Look at the chart below to see how gold’s correlation to other asset classes changes when the economy moves from expansion to contraction…

(A “1” correlation means that the asset classes always move in the same direction; “0” means they move together about 50% of the time; and “-1” means they move in opposite directions.)

Gold is already uncorrelated to the S&P 500 during periods of economic growth. But as the stocks fall, the correlation grows even more negative.

That means gold will more often than not move in the opposite direction from stocks during a recession.

History Doesn’t Lie

There have been seven recessions since 1965. Below, note gold’s performance in each of them:

In five of the seven recessions, gold went up. And during three of those times, the metal soared double digits. Even in the midst of the 2008–2009 financial crisis, gold moved higher.

There was only one recession, in 1990, during which gold suffered a decline of 9.1%.

Now, you may be wondering why investors flock to gold when the market tumbles…

The reason is that gold has been a store of value and a unit of exchange for more than 5,000 years. Unlike paper asserts, such as stocks or currencies, gold has retained its value ever since then...

As financial turmoil stokes fear among investors, they buy gold coins or gold bars as insurance against risks such as government defaults, hyperinflation, bankruptcies—all that would make paper assets worthless.

Gold is called a “fear trade” for good reason. Historically, gold has been the best refuge against social, political, and financial calamity.

The Next Recession Is Imminent

The main takeaway here is this: to preserve your investment portfolio and financial well-being, you must own a meaningful amount of gold bullion before the next recession.

Look, we know that:

  1. gold is not correlated to the stock market
  2. stocks usually fall in a recession
  3. another recession will happen sooner or later

And there is no “in case”…

History clearly shows that the odds of another recession are 100%.

No prediction about future events or getting the timing right is required.

This makes gold an absolute portfolio necessity. I know many gold critics who own gold because of this exact argument.

But don’t get me wrong. I’m not suggesting that you sell out your entire equity portfolio and use all the money to buy gold. That would be foolish.

Gold is not a tool of speculation but insurance, and you must use it as such. The rule of thumb—which I personally follow—is to hold about 5-15% of your investments in gold.

Full disclosure: My personal allocation to precious metals is now at the higher end of that spectrum. Over the last few years, I’ve increasingly reduced my allocation to equities and bought more precious metals, which have been out of favor—and cheap—lately.

A little allocation to gold helps you shield the rest of your portfolio from the strong likelihood of financial losses, be it a fall in equity value or a currency devaluation.

And that’s the whole purpose of investing in gold.

Those who own gold stand a greater chance of winning in the next recession than those who do not.

It’s as simple as that. You don’t have to be a doom-and-gloomer to understand it.


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The 3 Biggest Trends That Will Drive Gold in the Next 30 Years

The World Gold Council recently released an insightful report titled, Gold 2048: The Next 30 Years for Gold. This report looks at overarching demographic, technological, economic, political, and social trends around the world and their implications for the gold market.

The report has brought together top gold industry experts as well as world-renowned authors and economists who discuss the underlying macro forces that will drive gold in the next 30 years.

This is an eye-opening yet lengthy read that I highly recommend to all investors (find it here). To give you a glimpse of what’s inside the report, this short overview presents the highlights and takeaways from an investment perspective.

Trend #1: The Rise of the Middle Class in Emerging Markets

According to the report, in the next 30 years, demographics will play an increasingly important role in shaping the global economy.

The big story of the next quarter-century will be the rising middle class in emerging markets, particularly in China and India. Recent reports estimated that, over the next 17 years, 170 million Asians will enter the middle class every year.

India, the largest consumer of gold, is set to become the fastest-growing economy in the coming decades. If it manages to pull off its ambitious political and economic reforms, its middle class might soar from 19% to 73% of total population.

“Not only will the Indian middle class become a driving force within the Indian economy, but its aggregate purchasing power will result in the creation of one of the largest markets in the world,” says the report.

China’s middle class, too, is rapidly expanding. But unlike India, the Chinese are facing major demographic headwinds. Key among them is an aging population, which might curb economic growth despite the gains from the expanding middle class.

Takeaway for gold investors:
India and China are the biggest consumers of gold worldwide. As their middle class and aggregate purchasing power grow, gold demand is expected to soar.

Trend #2: A Shift in Gold Demand and Supply Dynamics

Jewelry and investment-grade bullion are not the only drivers of gold demand. Gold has wide industrial applications as well. Practically every piece of electronics has a little gold used as highly conductive and corrosion-resistant material. Unknown to many, gold is even effectively used in medicine.

Here’s a quick rundown of technological trends from the report that will spur industrial gold demand:

  • The adoption of the Internet of Things (IOT) will lead to an explosion of electronics (and gold) used in all consumer durable goods.
  • A shift to hybrid and electric vehicles demand far more high-end electronic components that use gold.
  • Gold compounds show promise in clinical testing and even drugs as a new class of antibiotic.
  • A booming solar panel industry will demand more gold as a core catalyst component.

There are many more gold applications, but industrial applications make up only a small part of aggregate gold demand. Investment demand has a much more profound impact on the gold price.

The experts who contributed to the report predict that the growing popularity of gold-backed ETFs as well as advancements in fintech will be some of the biggest drivers of gold demand in the coming years. The convenience and cost-effectiveness that technology brings will make gold attractive to more investors, including Millennials.

Meanwhile, gold supply is under major constraints due to rising operating costs, scant gold discoveries, and low gold prices.

The report sums up the current situation in gold supply:

We expect new mine supply to decline over the next 30 years, hit by rising costs. Metals Focus estimates that, even today, new gold mines need a price of about US$1,500/oz, and with costs having increased at a compound annual rate of 10% over the past 15 years, additional ESG costs are likely to mean that even higher gold prices will be required in the future.

Takeaway for gold investors:
Due to operating constraints, gold miners will struggle to keep up with the growing gold demand. This, in turn, will put upward pressure on gold prices in the long run.

Trend #3: A Volatile Future

The investment landscape itself will radically change in the next 30 years. A combination of demographic, technological, and macroeconomic trends is creating structural changes in the global economy that will have profound implications for investors.

  • Working-age populations are shrinking in the developed world. Labor scarcity will put a strain on economic growth and equity returns. A rise in wages due to constrained labor supply is likely to mark the end of the low inflation era.
  • The rise of automation and AI—displacing increasingly more workers—will elevate political and social tensions and bring more volatility to the markets. We might also expect Western politics to become more redistributive, which will put a greater financial burden on investors via rising taxes.
  • The impact of demographics will have a profound effect on the dynamics of global powers. The Western world will be increasingly burdened by aging populations, scarce labor, and stagnant economic growth. Conversely, India and China are set to reach their golden demographic spot in the coming decades. Since demographics have a direct effect on economic growth, we are likely to witness an unprecedented shift of economic power from West to East. As a result, geopolitical tensions will rise.
  • The widespread adoption of big data and artificial intelligence in investing will increase automated trading in liquid markets. Automation and fast data dissemination will make investment preferences more correlated, so true diversification will be hard to achieve.

Takeaway for gold investors:
The next 30 years are going to be highly unstable, both politically and financially. As history shows, gold performs best in volatile times—and is the best, time-tested hedge against any crisis.

A No-Brainer Investment

These three macro trends suggest that gold is a no-brainer long-term investment. With an uncertain future ahead of us, minimizing your portfolio’s volatility is as important as maximizing returns. And this is where gold bullion comes in handy.

Gold has been around as a medium of exchange for 5,000 years and, unlike most paper currencies, gold’s value has never gone to zero. Even better, the metal is not correlated to the stock market—gold rose in the last five out of seven recessions, offsetting investor losses in equities.

As such, allocating 5–10% of your investable assets to gold is a prudent move that will give you peace of mind amid the political and financial tensions that are already looming on the horizon.

Note that gold has been out of favor lately, which has pushed its price down to this year’s lowest point. So today is a good time to make a move into gold or increase your allocation.

 

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How Bob Has Successfully Invested in Precious Metals for 20+ Years

Continuing our series of stories about precious metals from our dear customers, we have an inspiring account from Bob W. He shares his experience of accumulating precious metals over more than two decades:

My story in no way rivals the wonderful story in your original email, but here it is. [you can find my original story here]

Once I had a back surgery which did not go as planned. I was left at home on the mend and had much time on my hands. I had always enjoyed reading financial stuff and started reading articles about precious metals versus government issued fiat currency.

I learned the difference between the two. I understood the issues of debasement and inflation and what they could do to devalue government issued currency.

At the time (1996), I was out of work and also had a growing family with three children in either private universities or high schools. In spite our financial worries, I made the leap and purchased a combination of silver, gold, and platinum.

I was back at work after a little over a year and continued to purchase small batches of primarily silver whenever I could. The dealer I used for my original purchase eventually suggested I swap out my platinum coins (which had appreciated significantly) for silver eagles, which I did.

Over the years, I’ve continued to increase my metals holdings, except in 2011 and 2012 at which time I liquidated several hundred eagles.

I also opened up a precious metals IRA when I rolled over a 401(k) from a previous employer in 2006.

I’ve periodically taken redemptions in kind from this IRA, especially when I felt the market was depressed. I have kept my metal or gifted it to my children at different points in time.

The largest portion of my holdings is still held securely in a storage facility out of state.

Over the years I’ve tried to encourage family members to view real money as I do.

I have so many comments about Bob’s story.

For starters, it’s a perfect example of sustainable, long-term investing. Bob has been a patient and steady investor who has systematically invested for decades. He played a long game and didn’t give in to speculation and mania, which has paid off for him big time.

For the record, in 1996, an ounce of silver and gold traded at around $5 and $375 respectively. As I write this, gold sits at around $1,295 while silver sells at $16.51.

Removing Emotions and Speculation from Investment Decisions

Another aspect of Bob’s story that stuck with me was his resilience and emotion-free investment decisions.

Bob was wise enough to recognize bubbles in the precious metals market and re-balance his portfolio accordingly. In retrospect, it looks straightforward. But in the midst of mania, it takes discipline and courage to sell.

He sold part of his stash of precious metals in 2011. Back then, precious metals were in a big uptrend with gold nearing $1,900/oz and silver $50/oz. The rally was the direct result of Bernanke’s aggressive quantitative easing in response to the 2008 financial crisis.

As QE tapered, Bob temporarily reduced his exposure to precious metals to capture some gains at highs.

High metals prices induced excess optimism and speculation among investors. Caught up in the mania, they forgot that all asset classes go through bull and bear cycles. A crash followed.

The reverse is happening now.

With today’s relatively low prices, precious metals are falling out of favor. Everyone is obsessed with tech stocks instead, which closely resembles the period leading up to the dot-com crash.

As history shows, following the herd is the fastest way to lose your shirt.

A Better Alternative to a Traditional Precious Metals IRA

I’d like to wrap up this article with one piece of advice for Bob and any of you who have a precious metals IRA. Instead of taking redemptions from an IRA, I suggest transferring your IRA assets to a Roth IRA.

In doing so, you’d still realize gains on the assets being rolled over and pay taxes. Also, you’ll enjoy the following benefits in the future:

  1. Future gains would never be taxable again as long as the assets stay in the Roth IRA.
  1. Roth IRA distributions are non-taxable for the beneficiary.
  1. Roth IRAs do not require forced distributions once the owner reaches age 70 ½. Your gains will continue to compound tax-free as long as the assets are in the fund.
  1. Your heirs will hold all the benefits of a Roth IRA if you don’t take redemptions before death.

A Roth IRA is one of the most important parts of your estate plan. Of course, you must consult your tax accountant or estate attorney to see how a Roth IRA conversion would work based on your personal circumstances.

For most investors, however, Roth IRAs are one of the most powerful tax shelters. They are 100% legal and yet very few advisors recognize their value.

Bob, thank you for being a member of the Hard Assets Alliance and for sharing your stories with us!

 

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Smart Money Is Moving into Gold as Volatility Returns

Two months ago, we hosted a conference featuring 25 world-famous asset managers, investment experts, and economists who discussed their economic outlook and predictions.

I’m talking big names like “bond king” Jeff Gundlach, David Rosenberg, Louis Gave, and others.

As you can imagine, these speakers usually don’t talk much about gold. They’re more concerned with stocks, funds, bonds, and the like.

But this year was different.

I’ve never seen so many high-profile investors mention gold as a safety net—and that includes some who were previously hard-core gold bears.

Unfortunately, the reason is not a happy one. All these “in the know” people are very worried about the direction the markets are taking.

This article is a short report that details what five of these well-known asset managers see coming down the pike over the next few years—and why gold is the best hedge against the looming crisis.

MARK YUSKO: Your Purchasing Power Is Being Destroyed

At the conference, Mark Yusko, CIO and CEO of Morgan Creek Capital Management, gave an emotional speech comparing the Fed to a dictator that robs the nation.

He pointed out that despite $20 trillion being injected into the US economy through quantitative easing since 2008, the results haven’t matched the effort...

Everybody's all excited about QE. Everybody's all excited about the Fed, but you realize that in the last 10 years, we had the worst growth in the history of America. Let that sink in for a second... 1.4% real growth for the last 10 years. And we have indebted our future to the tune of $20 trillion for nothing.

This increased money supply, he said, resulted in currency devaluation. “This is what dictators do. They systematically acquire the assets, and then they devalue the currency and boost the price of assets.”

He showed a chart that plots the S&P 500 price in nominal terms (blue line) and in gold (pink line).


Source: Mark Yusko

“Gold is money,” he commented. “It's real money. For 5,000 years, an ounce of gold has bought a fine man's suit. So you can see in 2007, we had the housing bubble in nominal terms, but... the value [of the S&P 500] in gold fell. Today, we don't have a bubble. We have a bubble in nominal prices, so this is what dictators do.”

Put simply, he said, record-high valuations in equity markets are the result of a devalued currency and monetary measures that the Fed pursues: “The purchasing power of the currency is being destroyed right before your eyes, and you're just not paying attention.”

JEFF GUNDLACH: Gold Will Break Out in a Big Way

Jeff Gundlach, CEO of Doubleline Capital, provided a more technical forecast for gold. Given the situation in the markets, he thinks it’s only a matter of time before the gold price breaks out:

We're at a juncture in gold, not surprisingly, because it is negatively correlated with the dollar... Now we see a massive base building in gold. Massive. It's a four-year, five-year base in gold. If we break above this resistance line, one can expect gold to go up by, like, a thousand dollars.

Gundlach was reluctant to predict the probability and timing of this massive gold rally, but he thinks that investing in gold at this price is a no-brainer: “It’s a great time to be buying gold... because one way or the other, this baby’s got to break in a big way.”

LOUIS GAVE: Gold Will Shine in the Coming Inflationary Boom

Louis Gave is the co-founder and CEO of Gavekal Research. The main theme in his keynote speech this year was a once-in-a-generation shift from a deflationary boom to the inflationary boom that we see today.

Below is a four-quadrant framework that Gave uses to determine where we are in the cycle:


Source: Gavekal Research

According to Gave, these shifts occur every 30 to 40 years, usually as a result of policy errors.

As a method to determine where we are in the cycle, Gave suggested using the gold/bond ratio: “My starting point is always that... over a four-year period, bonds should always outperform gold... When they don't, when bonds underperform gold, that's the market giving you a very important signal.”

He pointed out that gold has been outperforming bonds for the past four years now. “This, to me... means we are moving to an inflationary boom and bust period.”

If that’s the case, Gave told the attendees, the investing environment will radically change.

He suggested that investors reconstruct their portfolios and get out of bonds as a diversification tool because they are not a good diversifier in periods of inflationary booms.

To prove his point, Gave showed a chart of the performance of gold, cash, and US Treasuries as hedges during inflationary booms (see below).

In the last inflationary boom, from 1966 to 1980, Treasuries were a horrible choice for investors’ portfolios. Meanwhile, gold and cash shined.

Another positive trend for gold that Louis Gave sees is the growth of emerging markets (EM). That’s because higher purchasing power in EMs tends to translate into higher gold demand: “...for me [gold] is a good proxy for emerging market growth. When people get rich in an emerging market, they buy gold. And the reality is today people are getting rich in emerging markets at an accelerating pace.”

He said that growth in emerging markets combined with rising inflation and a weak dollar create a perfect setup for a gold rally in the coming years: “I think the time indeed has come for having gold in your portfolios.”

GRANT WILLIAMS: A Shift in US Monetary Policy Spells Trouble for Equities

Grant Williams, author of Things That Make You Go Hmmm..., warned investors about the dangerous implications of a shift in US monetary policy—another good reason to invest in gold bullion now.

According to Williams, for the last 40 years, US monetary policy has been built on constant injections of stimulus. Since Paul Volcker’s tenure in the early 1980s, every Fed chair has pushed interest rates lower.


Source: Grant Williams

Now QE is officially over and is to be reversed. Williams thinks that this marks a monetary shift, which spells trouble for equities.

He gave a brief rundown on the effects that the Fed’s three rounds of QE had: “Stocks soared. The S&P doubled under the Fed's various QE programs. Gold fared really well because of fears of inflationary effects of money printing. The dollar eventually eked out a small gain. And the yield on the [10-Year] Treasury fell 1.6%.”

The key message for investors is, Williams said, that after nine years of one long, pleasant ride in equities, we've reached the point where the main driver of equity prices is about to reverse.

In the best case scenario, he thinks quantitative tightening will reverse the effect of the Fed’s stimulus measures on the stock market. However, he doesn’t rule out a much bigger sell-off.

Asked what investors should do, Williams joked, “Long the Zambian kwacha versus the US dollar. Ah, who the hell am I kidding—it's gold! Of course, it's gold!”

The reason is that all the trends are pointing to rising inflation, he said. “Gold performs best in a rising inflationary environment, not a high inflation environment. So, we're kind of moving into that sweet spot.”

Williams likens today’s situation to the period leading up to the 1970s recession where a shift from equities and cash to gold could happen unexpectedly fast.

What happened with that late-cycle stimulus that Johnson put in, and what happened to equity markets, bond yields, wage prices, CPI, and gold, going into the late ‘60s into the early ‘70s, we saw these things take off. And these things are cyclical. So to me, if this inflation story gets some traction, then I think you're going to see money move to gold reasonably quickly.

Further, Williams suggested, in periods of quantitative tightening, equities eventually crash. Since gold is inversely correlated to the stock market, this is another reason gold should rise in the coming years.

In fact, history shows that gold has rallied in the last five out of seven recessions.

DAVID ROSENBERG: There’s No Better Hedge Against a Weak Dollar Than Gold

Yet another speaker who praised gold was David Rosenberg of Gluskin Sheff.

The biggest reason for Rosenberg’s bullishness on gold is the United States’ protectionism, which he thinks will inevitably push the dollar down:

We'll get a countertrend rally in the US dollar, maybe three to four percent, and then it's going to go right back down again. Because you have a protectionist government, and part of that protectionism, what is a better tariff than just depreciate your currency?

Rosenberg suggested buying gold as hedge against a weak dollar: “Gold is perfectly inversely correlated with the US dollar. If you want to hedge against the US dollar as opposed to inflation... you have to have some gold in your portfolio.”

 

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3 Customer Stories That Prove Gold Is a Time-Tested Store of Value

A while ago, I wrote a couple of stories about how gold had come into my life at an early age. 

The first story was about my Swiss grandfather during WWII. The other one was an account of refugees from Cambodia that became friends of my family when I was in my teens in France.

My belief was that many of our customers have similar life stories about gold that are worth sharing with our Hard Assets Alliance community. As such, I invited you to share your stories.

Originally, I wanted to compile these accounts into a book and make it available to our readers. While I have received a number of interesting anecdotal stories to share, there were only a couple that were extensive enough to be included in a book.

So I decided to do a series of articles instead, each covering a couple of stories (slightly edited for ease of reading) with my commentary.

Today’s blog is a compilation of three stories from our customers. The first two are proof that precious metals are an excellent store of value. The last one reminds us to be cautious of market cycles and to time our purchases accordingly.

Today Silver Buys More Gas Than in 1958

Bob D. recalls:

When I was a young man in college in the mid-sixties, a gallon of gasoline to power my 1958 Ford cost a silver quarter. Yes, only 25 cents! 

In 2017, I was talking to a gas station owner who understood the value of precious metals. For fun, the man allowed me to purchase my gas for one silver quarter per gallon. Contemporary, yes, but relevant to the wealth-preserving power of the precious metal.

As of April 30, 2018, silver traded at $16.32/oz. The gas station owner who accepted silver quarters from Bob could sell them at melt value for approximately $2.95, which is more than the price of a gallon of regular unleaded gasoline in most states.

How the Dollar Lost Its Purchasing Power

Rolth L. writes about what a dollar could buy back in 1964:

Last year, I visited a friend in Medicine Hat. Carol (not her name) showed me a couple of 1954 hundred-dollar notes as we talked about the picture on them showing a view of Okanagan Lake, where we live.

I was flabbergasted to see that she saved these bills her mother gave her, thinking that they might have antique value. I explained to her that up to 1964, one could convert the paper note to gold or silver at the bank—it said on the note: Pay the bearer on demand. At the time, $100 would have bought just about three ounces of gold.

Sadly, those $100 bills have lost most of the purchasing power they had in 1954. The example demonstrates how one could buy 1,000 cups of coffee for $100, and the same $100 today would only yield 50 cups.

On the other hand, three ounces of gold are worth about $4,800 today.
In 1954, one ounce of gold was worth approximately C$36 while today it is trading at C$1,695. Over the last 64 years, the Canadian dollar lost almost 98% of its value against gold. The US dollar did not fare much better.

The Lesson of Buying Gold at the Peak

Greg T. shares his valuable experience of buying gold at the wrong time:

In January 1980, while talking to my brother, I learned that he owned several gold Krugerrand coins. My mind immediately went to what I had been hearing, and not paying much attention to, every day on the news recently. The price of gold was jumping higher and higher—$20 to $50 virtually every day!

I was envious of my brother’s gains and immediately decided that I needed to be a part of the action. My brother told me if I wanted to purchase some gold, he would be happy to unload part of his cache.

Contemplating this new idea, I asked my other older and wiser brother for advice. Did he think I should be purchasing gold at this time? He laughed and told me that he was ready to unload some of his.

Undeterred, I told him I wanted to purchase four of his gold coins. It took all the money I had in my savings account. So, the deal was agreed to.

The very next day, the price of gold hit what was at the time, and for several decades later, to become an all-time high.

The lesson: when the last person (i.e., the person who had never even considered buying) buys, the party is over.

The gold party was definitely over for me! The lesson, painful as it was for me at the time, has served me well.

I will never forget!

While gold has been a great investment and store of value in the long run, it’s not exempt from cycles like any other asset class. The problem is that record-high valuations at the peak usually create a mania in the market, pushing asset prices even higher.

The story above is a good example of this phenomenon.

In 1979–1980, gold was in a late-stage bubble. It took over 25 years for those who bought gold at that time to recover their losses (in nominal terms).  

From 2003 until 2011, precious metals were in a big uptrend. But once again, the rise was too fast, too soon, and the end of QE drove silver and gold prices back down. 

The lesson for investors is: invest in asset classes that are out of favor and reduce exposure to overvalued assets. While there is no way to predict the exact date of the next market correction, it is clear that stocks, bonds, real estate, art, and speculative investments like cryptocurrencies are selling high. 

In contrast, precious metals are relatively cheap. 

It makes sense to diversify out of asset classes that sit at record-high valuations and buy cheaper assets like gold and silver.

When your taxi driver or elementary school child starts talking about investing in precious metals (like in late 1979 or late 2010), you will want to reduce your exposure to gold and silver. 

Over the years, my allocation to precious metals varied between 5% and 15% depending on their value relative to other asset classes. However, I always keep a minimum of 5% as disaster insurance.

As for today, I’m close to my maximum allocation.

 

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David Rosenberg: Mean Reversion in Equities Is Coming

At the Strategic Investment Conference 2018, David Rosenberg of Gluskin Sheff warned investors of the coming mean reversion in the stock market, which can push down equity prices by 20% or more.

Rosenberg also admitted that this is one of the strangest rallies of all time. That’s because all asset classes went up, even the ones that are inversely correlated:

Whether it was bank stocks, emerging market bonds, Ant stocks, the CRB, oil—every single market, even global bonds. Barkley's Bond Index globally generated a 7.5% return. The least-risky asset class in a risk-on year generated an equity-like return of 7.5%.

He thinks that a breaking point is a year away and so investors should start taking precautions.

Smart Money Is Pulling Back

The beginning of this year started off great for investors. The S&P 500 hit record highs at around 2,750, and stocks had their best January since 1987.

As if it was not enough, Rosenberg pointed out, Wall Street now raised their target to 3,000. The media extrapolating record returns only added to the rise in investors’ unreasonable expectations.

However, increasingly more hedge fund managers and billionaire investors who timed the previous crashes are backing out.

One of them is Sam Zell, a billionaire real estate investor, whom David Rosenberg admits is a “hero” of his. Sam Zell predicted the 2008 financial crisis—eight months early, though. But essentially, he was right. Today, his view is that valuations are at record highs and easy money has been made.

Then we have Howard Marks, a billionaire American investor who is the co-founder and co-chairman of Oaktree Capital Management. He seconds Sam Zell’s view that valuations are unreasonably high.

“And I don't always try to seek out corroborating evidence. But there are some serious people out there saying some very serious things about the longevity of the cycle,” said Rosenberg.

Data Suggests That Equities Are Poised for a Major Correction

Later, David Rosenberg shifted from quoting high-profile investors to showing actual data, which paints the same ominous picture.

For starters, David Rosenberg pointed out that only 9% of the time in history have US stocks been so expensive.

Then he showed a table with GDP growth figures in the last nine bull rallies. This table reveals a dire trend where each subsequent bull rally in the last 70 years generated less GDP growth. Essentially, that means we are paying more for less growth.

“Historically, you get a 17% growth rate in a bull market with nominal GDP at 7 and real GDP almost at 4. This time around, we did it with three six nominal [3.6% nominal GDP], and two one real [2.1% real GDP]. We basically had a typical bull market in the context of economic growth that was barely half of what it normally was.”

According to David Rosenberg’s calculations, the S&P 500 should be at least 1,000 points lower than it is today based on economic growth. In spite of this, equity valuations sit at record highs.

Another historically accurate indicator that predicts the end of bull cycles is household net worth’s share of personal disposable income.

As you can see in the chart below, the last two peaks in this ratio almost perfectly coincided with the dot-com crash and the 2008 financial crisis.

Now the ratio is at the highest level since 1975, which is another sign that reversion is near.

Even the Fed Thinks Mean Reversion Is Coming

As another strong indicator that recession is around the corner, Rosenberg quoted The Federal Reserve Bank of San Francisco. He pointed out that, having access to tons of research, they themselves admit that equity valuations are so stretched that there will be no returns in the next decade:

Current valuation ratios for households and businesses are high relative to historical benchmarks… we find that the current price-to-earnings ratio predicts approximately zero growth in real equity prices over the next ten years.

Basically, the Fed is giving investors an explicit warning that the market will mean revert.

But when we revert, we don’t stop at the mean, warns Rosenberg. He gave an example of how mean reversion in the household net worth/GDP ratio would create a snowball effect.

According to his calculations, if the household net worth/GDP ratio reverted to the mean, savings rates would go from 2% to 6%. As a result, GDP would go down 3%, which would have nasty consequences for the economy and, in turn, stocks.

Monetary Regime Change

Stretched valuations are not the only problem for the stock market. Rosenberg thinks that new Fed Chair Jerome Powell marks the end of low interest rates, which will also add pressure to equities.

Even the biggest Fed doves admit that low rates created a heightened risk of asset bubbles and unstable asset inflation. And so, Rosenberg thinks, Powell will be more hawkish than people think.

“He's [Jerome Powell] talked about risk-taking in the past, he's talked about frothy financial conditions. He was adamantly against the prolonged period of zero percent interest rates. He was profoundly opposed to the repeated rounds of QE, and now he's in charge. So, for people to think he's only going to go three times this year, I think he'll go four. He may go more, depending on the circumstances.”

Rosenberg also thinks that Powell will not cut interest rates, even if we get a 20% sell-off. That’s how determined Powell is to normalize interest rates, according to him.

In other words, we are in the middle of the Fed tightening cycle. As history shows, a tightening cycle is almost always followed by a recession.

Bottom line: All signs point to a recession, which, Rosenberg predicts, is a year away. As such, he suggests de-risking your portfolio. That means raising cash and investing in asset classes that are not correlated to the stock market.

A Time-Tested Hedge That Withstood Most Stock Crashes

Finding assets uncorrelated to the stock market is not easy. Generally, bonds do well, but they are reaching historical highs. Plus, they are threatened by rising interest rates and excessive US debt.

Dividends can cushion a fall in equity prices, but only to an extent.

That leaves us with gold, a time-tested hedge against recessions that is largely uncorrelated to stocks and many other asset classes.

This means when the markets tumble, gold tends to rise. Here’s proof:

There have been seven recessions since 1965. In five of the seven previous recessions, the gold price rose.

This makes sense when you think about the nature of investing in gold. Gold is called a fear trade, meaning that when investors worry about instability in the market, they tend to buy gold, such as liquid sovereign gold coins or gold bars.

Not only that, gold’s correlation to stocks drops during a recession.

Look at the chart below to see what happens to gold’s correlation to other asset classes when the economy tumbles:

(A “1” correlation means assets always move in the same direction; “0” means they move together 50% of the time; and “-1” means they never move together.)

Gold already has a negative correlation to the S&P during periods of growth. In an economic collapse, the correlation grows even more negative.

That makes it a perfect hedge against the bubbly stock market that we have today.

 

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How to Pick the Best Gold Dealers for Your Needs

In the current economic environment, an allocation to gold is a sensible choice.

Gold is a safe-haven asset that performs well during periods of financial uncertainty. When the stock market is falling, gold’s price tends to rise. In other words, gold acts as a form of financial insurance.

Gold also provides protection from inflation. It is both a store of value and a global currency that has retained its value for thousands of years.

Yet, buying gold bullion is not always a safe and straight-forward process. There are plenty of unscrupulous gold dealers out there that won’t have your best interests at heart. Doing a little research is essential in order to make your gold purchase with confidence.

This guide explains how to buy gold and what to look for in a gold dealer.

A Warning on Numismatic Coins

Before we begin, one important point to note is that many gold dealers, both local and online, often try to sell novice investors high-margin “numismatic” coins. They may try to convince you that numismatic gold coins could provide high returns.

However, investment-grade gold bullion almost always outperforms numismatics. Truly rare collectible coins are an exception, but you need to have a really good understanding of this niche market to profit.  

Unless you are an experienced collector specifically looking for rare gold coins, avoid dealers that promote numismatic coins as a good investment. This is especially true of modern collectibles, proof coins, and commemorative coins.

Reputable gold dealers, such as the Hard Assets Alliance, will only offer LMBA (London Market Bullion Association)-approved, investment-grade bullion. This is the best gold to buy as an investment.

Now, let’s get back to picking the best dealer for you.

Local vs. Online Gold Dealers

There are two main ways of buying gold.

The first option is to visit a local gold dealer. These can be found in cities all around the world.

Since brick-and-mortar shops usually have higher overhead costs and lower sales volumes, local dealers often sell bullion at higher prices.

Admittedly, local dealers have their advantages. When buying gold at a local dealer you can physically inspect the gold and take immediate possession of it. You may pay a slightly higher price for your bullion but you won’t have to pay for shipping or wait for delivery.

Due to the nature of local business, local dealers also care a lot about their own reputation in the communities they serve. Therefore, the quality of their service can be higher.

Finally, if you buy small quantities of bullion and pay for it in cash, your transactions with a local dealer may not have to be reported to the IRS and can remain confidential. If that is a consideration, make sure your dealer confirms that your transaction will be below the current reportable threshold.

The other option is an online gold dealer.

Online dealers typically sell higher volumes of bullion and have significantly lower fixed costs. As a result, they are often able to pass on significant discounts to customers.

However, buying gold from an online dealer can make some investors nervous. Gold is an expensive product that some people might be afraid to buy online. This is probably the key reason why local gold dealers remain in business.

On the other hand, online dealers offer a much wider range of gold bullion products. Also, some online dealers offer convenient buy-and-store programs, further reducing the hassle of owning gold as an investment.

The downside of buying gold online is that you do have to pay shipping costs and wait a couple of days for delivery. Yet, that’s a small price to pay for the discount and convenience that online dealers provide.

Here’s a quick list of bullet points for easy reference when comparing local dealers against online dealers.

Local Dealer vs. Online Dealer Summary

Local dealer advantages:

  • Exist in most cities
  • Can buy gold in person
  • Gold can be physically inspected
  • Gold can be purchased immediately
  • Transaction may not have to be reported and remain confidential
  • No shipping costs
  • No wait for delivery

Online dealer advantages:

  • Significantly lower prices
  • Higher profit potential
  • Wider range of products
  • Buy-and-store programs offered

So which option is better, you may ask? It depends on your needs.

There are different things to look for, depending on whether you are buying for delivery, buying for storage, or buying in an IRA.

What to Look for if You Buy for Delivery

When buying gold for physical delivery, there are several important things to consider.

First, look for a dealer that has a strong reputation. You want a dealer that is trustworthy and reliable. It’s easy to check a dealer’s reputation by reading customer reviews on Google, investment forums, and other precious metals-focused websites.

Second, the dealer must strictly sell gold coins and gold bars from LMBA-approved wholesalers. This is your best guarantee that the coins and bars are authentic.

Last but not least, check the dealer’s premiums on bullion, which can vary widely in this industry. Also, be conscious about the spread between buying and selling prices, which can sometimes be as high as 10% or even more.

It’s worth spending some time to find a reputable dealer that offers everyday low premiums if you want to maximize your long-term profits.

An Important Note for Investors Who Buy for Delivery

If you buy precious metals from a LMBA-approved dealer for delivery, keep in mind that you will break the so-called chain of custody, which guarantees the authenticity of the bullion.

In the custody of LMBA-certified members, the face value of bullion is accepted without examination as long as it stays there. Put simply, you can quickly sell your bullion without having a dealer inspect it in person.

However, as soon as the gold leaves the chain of custody, the bullion will have to be inspected and possibly assayed before it can be sold. This can delay the sale, reduce bullion value, and limit selling options.

The only way to return the bullion to the chain of custody is for a certified dealer or a refinery to inspect coins or assay bars again.

Investors who want to store gold at home should also be aware that the risk of theft is probably the greatest threat to their precious metals holdings. You also put yourself and your family at risk in case burglars break in.

Although storing bullion with a dealer adds to the costs, the LMBA chain of custody is the best guarantee that your precious metals holdings will be there for you when you need them.

What to Look for if You Buy for Storage

When buying gold for storage, there are a few extra things to look for.

Obviously, it’s still important to check a dealer’s reputation, premiums, and bid-ask spreads on the gold coins or gold bars for sale. However, there are a lot of other factors that come with bullion storage that you should check.

First, examine storage facilities. You want the dealer to store gold bullion with a separate credible entity to reduce counterparty risk. Ideally, it should be a LMBA-approved vaulting provider like Brinks or Loomis.

They house the gold reserves of governments and some of the biggest financial institutions in the world. Knowing that your gold is stored securely with the precious metals of the world’s largest banks will provide you with peace of mind.

Insurance is an important consideration, too. You want a dealer that offers insurance at full replacement value.

That means if anything happens to your bullion, you’ll get back the same type and amount of coins and bars you had as opposed to compensation in cash, which is based on the spot price of your metal.

In a financial crisis, gold coins and bars tend to be in short supply and so they sell at a much higher premium over the spot. In that scenario, the payout from an insurance company would be much lower than the true market value of your bullion.

Another important thing to look for is whether precious metals are fully allocated to you or not.

Fully-allocated bullion is held in your name and is available for delivery or sale at any time. You are the outright owner of it and no one can claim it.

In contrast, unallocated bullion is shared by several investors who own an interest in large gold bullion bars. This raises all kinds of liquidity issues. It’s also impossible to take delivery of your metal without exchanging it for smaller bullion, which brings another issue.

Most dealers will charge a significant premium for “fabricating” your holdings into smaller coins or bars before they can deliver it. This process will delay your shipment and reduce the value of your bullion holdings.

Other things to assess when buying gold bullion for storage include a dealer’s buyback/delivery policy and whether they offer savings programs and features like dollar-cost averaging.

What to Look for if You Want to Open a Gold IRA

If you are considering opening a gold Individual Retirement Account (IRA), again, you want a Gold IRA provider with an excellent reputation. IRAs are a long-term investment so you want a provider that will still be in business in 10 or 20 years.

The dealer must offer different forms of IRAs, including Roth IRAs and SEP IRAs, and only propose IRS-approved bullion products.

You also want a provider with a transparent fee structure. Check the fees for buying, selling, and storing gold since fees can affect your investment returns. Make sure their pricing is competitive and transparent.

As with storage, insurance is a necessity and should be offered at full replacement value as opposed to spot prices.

Finally, you want an integrated service in which the dealer can help you deal with the custodian. Custodians can sometimes be slow to respond to issues. Having a dealer on your side can help resolve issues quickly.

Warning on Self-Directed IRAs

Investors should avoid buying gold in a self-directed IRA unless they are very familiar with the IRS rules concerning prohibited transactions. A small error could result in harsh penalties.

Only buy precious metals for your IRA through a reputable custodian offering products that comply with IRS rules.

Common Plots and Scams to Avoid

There are many unscrupulous gold dealers out there that will try to take advantage of new gold investors. Being aware of common plots and scams will help you avoid them.

The first thing to look out for is a large spread between the buy price and the sell price of gold bullion.

Some dealers lower their selling price in order to lure unsuspecting customers. Later, these dealers push down their buy-back prices so they make more profit when the customer sells their bullion.

Also, be careful of hidden fees. Ensure you have a full understanding of the storage and delivery costs associated with your gold bullion coins and gold bullion bars.

Another common tactic used by less reputable gold dealers is “bait and switch.” In this tactic, the dealer will bait you with a low price to get your attention and then try to sell you onto a higher-priced product of lower value.

Often, the dealer will try to offload numismatic and collectible coins. Always remember the old adage—“If it seems too good to be true, then it probably is.

Be careful of unallocated programs that are advertised as allocated programs. Look out for sellers that are offering allocated gold in grams or “grains.” The dealer is most likely selling unallocated gold.

In that case, fabrication charges, and possibly delays, will occur if you request delivery of your gold.

These services can be competitive and may suit some investors. Yet, they are not comparable to the benefits and security of fully allocated precious metals storage services.

Finally, watch out for counterfeit products. In order to avoid the risk of being ripped off, invest though reputable gold dealers that only sell LMBA-approved bullion products.

So, Who is the Best Gold Dealer for You?

If you’re serious about investing in gold, buying gold online is most likely the best way to buy gold.

Online gold dealers usually offer much lower premiums. They provide a much wider range of bullion products and solutions, such as buy-and-store or savings programs. All of this makes investing in physical gold easy, convenient, and secure.

However, it’s important to find a reputable online dealer that you can trust. So, take your time to do proper due diligence. Don’t fall for empty promises and work only with dealers that sell LMBA-approved investment-grade precious metals.

 

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Where to Buy Gold Bars and Coins

Looking to buy gold? You’ve made the right decision!

You don’t have to be a doom-and-gloomer or a conspiracy theorist to buy gold bars or gold coins. I can tell you that even many gold critics, including some government officials, own gold—if for no other reason than diversification.

It makes sense to hold some of mankind’s oldest monetary asset in your portfolio. After all, how many stocks have survived for thousands of years? None, and neither has any one currency.

Not only that, owning an asset uncorrelated to stocks and bonds can protect you from huge losses in an economic downturn.

And because it’s a hard asset—rather than a paper promise—no one’s ever going to default on your investment.

So the question isn’t really whether to buy gold, but rather where and how to buy gold.

Drawing on my 10+ years of experience as an industry insider, I will show you different options to buy gold bars and coins—along with their pros and cons—to get the best deals.

But before we start, let me tell you a couple of important things about investing in gold.

Things to Consider Before Contacting a Gold Dealer 

Not all gold is created equal, so it helps to know exactly what you’re looking to buy before working with gold dealers.

Gold coins and bars are the most affordable, low-risk, and convenient way to start or grow your allocation to precious metals.

However, a lot of inexperienced gold investors have been steered into products that don’t offer the protection that makes physical gold bullion an attractive investment in the first place.

The type of gold you own makes a difference in the value, liquidity, and security of your investment.

Here’s what to avoid:

type what it is why you should avoid it

Numismatic coins

Rare, collector coins with historical significance
  • Value is based more on rarity or historical significance than gold content
  • Collectible coins are a niche market; if you’re not an expert, you can easily get ripped off
  • Numismatics is a small market; coins are highly illiquid
  • Big markups; it is easy to overpay
  • No price transparency
Commemorative & proof coins Special edition coins
  • Have little, if any, gold
  • Largely uncontrolled market
  • Not authentic and rare contrary to what advertisers claim
Gold ETFs Paper/electronic units backed by physical gold
  • You own the shares you buy, NOT the physical gold that backs them
  • Counterparty risk; any breakdown in protocols can hurt your investment
  • Delivery requests can be settled in cash
  • Expensive—and in most cases, not possible—to take delivery
Pool accounts Money is pooled with other investors to buy large gold bars
  • Bars are owned by the company, not to any individual that shares ownership
  • Delivery requires an expensive fabrication fee, plus a delivery fee
  • Fabrication and delivery can be subject to availability of the product required
  • Counterparty risk


Real, physical investment-grade bullion is the only gold investment that offers physical ownership and no risk of default.

Now, let’s get back to picking a dealer for your bullion purchases.

Buying Gold from a Local Dealer

Buying from the neighborhood bullion dealer has distinct advantages. You can buy now, instead of waiting for delivery. You’ll also avoid shipping fees. And you can talk face-to-face with the guy you’re buying from.

The drawback is that premiums at a brick-and-mortar dealer may be higher than those of an online dealer, even after you factor in shipping and insurance.

A storefront business must cover higher expenses than a website company. They also tend to offer lower buy-back prices, though most will give prior customers their best deal.

Even with the drawbacks, always check your options with a local dealer. A relationship with them can be helpful should you need to make a quick sale. Ask for a discount if you’re buying multiple bars.

Where to find a local dealer

One of the easiest options is to Google “gold dealer” and your city or country. Another search tool is this handy US Mint dealer locator.

If you’re in Europe or Asia, you can buy gold bars (and coins) at certain banks.

How to choose the best local dealer:

  • Look for a dealer that is more educational than salesy. Avoid anyone that promotes rare coins or anything you’re not shopping for.
  • Warning: Most dealers will try to sell you on numismatics and collectibles. The reason is that these products have much higher premiums than investment-grade bullion and so the dealer earns more from them. 
  • Know exactly what product you want and stick to it. Check standard mark-ups over the spot before you walk in the store.
  • Consider the size of the shop. Small dealers may have limited product selection or be unable to fill a large order. Insufficient cash on hand could also prevent them from buying back a large number of gold bars.
  • Do your due diligence and get recommendations. While there are many honest dealers out there, there are also a lot of shady ones.

Pros and cons of buying gold bars from a local dealer:

Pros Cons
Take immediate possession Premiums likely higher and smaller buyback premiums
No shipping or insurance fees

Insufficient liquidity to make large buybacks

Gold bullion is outside of the London Bullion Market Association’s chain of custody, which makes it harder to guarantee it is genuine.
Face-to-face transaction with dealer Limited product choices possible

Online Gold Dealers

Buying gold bars and coins from online dealers also comes with some inherent risk.

You must trust the dealer to deliver what you paid for. However, a reputable dealer can be cheaper than your local storefront, even when shipping and insurance fees are included.

When selecting an online dealer, you want to see product prices displayed on the site, along with shipping and insurance fees (you may have to search for these charges).

A dealer that doesn’t show prices isn’t necessarily bad, but it gives greater weight to transparent dealers. A delivery timeframe should also be confirmed before you place an order.

If you are not planning to store gold yourself, choose a dealer that offers buy-and-store programs. If you find one, the key selection criteria for a bullion buy-and-store program is the custodian.

The custodian—the entity that will hold your gold—should not be the dealer that sells you the product. You want a chain of custody that separates storage from sales, as this adds a layer of security.

If you want to buy, store, and sell your gold back to the same dealer, pay attention to the bid-ask spread of their gold product prices, which can vary a lot.

Also, make sure that your stored gold is fully-allocated to you and not pooled with others’ gold bullion. Otherwise, you may not easily take possession of your gold assets when the need arises.

How to choose the best online dealer:

Compare product prices from a few dealers. Getting a low premium is important, but price isn’t the only consideration. The following factors should also weigh in your decision on where to buy gold bars and coins:

  • How quick are delivery times?
  • Do they offer a buy-and-store program? If so, is gold insured at full replacement value and fully allocated to you? Are the assets held in custody by a world-class LBMA approved vault?
  • What are my total costs, including commissions, shipping, insurance, and credit card/bank wire charges?
  • What are their premiums?
  • What is their bid-ask spread for gold bars and sovereign coins?

Pros and cons of buying gold bars from an online dealer:

Pros Cons
Ease of online ordering Must trust dealer to deliver your product
Higher liquidity  
Real-time pricing  
All-in costs likely cheaper Must wait for delivery
Buy-and-store programs Product only ships after payment clears

What About Those Dealers on TV?

We generally would avoid them. They pay exorbitant advertising and celebrity endorsement fees, which must be recouped by selling lots of product at high premiums.

If you call one, you’ll probably get the ole’ “Did you know this rare coin will make you more money than bullion?” sales pitch. No thanks.

Are Gold Dealers on eBay Trustworthy?

Some people swear by eBay. Beyond its convenience, shipping is often free and you don’t pay state sales tax (there’s no federal tax on buying gold, but some states charge sales tax).

You can find gold bullion bars and coins that cost less on eBay than at a bullion shop, though many dealers also post products on eBay. 

One useful eBay feature is the Advanced Search tool. Enter the name of the product you want (e.g., one-ounce gold bar) and check the “sold listings” box. This search will show you what one-ounce gold bars have sold for in the past.

This gives you an idea of whether the current asking prices of gold bars and coins for sale are competitive.

Many eBay buyers are investors who know exactly what they want—with sufficient experience to recognize a good deal. I don’t recommend eBay for first-time buyers.

How to choose the best eBay dealer and avoid fraud:

  • As with anything you buy on eBay, deal only with sellers who have a 100% approval rating, or close to it. (Note that most gold on eBay is not auctioned, but is either “Buy It Now” or “Make Offer.”)
  • Check the buyer feedback on a seller you’re considering doing business with. There can be unscrupulous sellers, but they don’t last long on eBay. And eBay has a buyer protection plan that guarantees your purchase. Nevertheless, always proceed with caution, especially if you’re an eBay newbie.

Pros and cons of buying on eBay:

Pros Cons
Usually no sales tax Must wait for delivery
Free shipping is likely Best for experienced buyers
May find better price than local bullion shop Must trust seller to deliver what you paid for

What about Gold Shows?

Most gold shows are focused on coins, and collectible coins at that. You might find the occasional gold bar, but selection is generally very limited. As such, they are not a good place to buy investment-grade bullion. And they are definitely not for the novice.

Pros and cons of buying gold bars at gold shows:

Pros Cons
Can bargain on price Usually poor selection of bars
May find other items you like Must travel to show

Fractional Ownership/Pool Accounts

A pool account is where your investment into gold bullion is “pooled” with other investors to buy large gold bars. Together with other investors, you own a “fraction” of that bar.

These programs tend to be convenient and cheap. Storage is also inexpensive and sometimes free.

The catch: You don’t own the gold. Ownership of the gold bars is allocated to the company, not to any individual that shares ownership. Some programs offer delivery, but it’s expensive. You must first pay a fabrication fee, which can exceed the premium you would’ve paid for the bar in the first place, and then a delivery fee.

You are also exposed to counterparty risk. Should the company become insolvent or bankrupt, you become an unsecured creditor. You may never receive your gold or the return of your money.

Pool accounts were popular in the early 2000s. Today, a greater number of options to buy gold are available and their popularity has waned.

How to choose the best pool account:

  • The first priority is to select a company that is financially strong.
  • Confirm with the company that your gold bars are not held on its balance sheet. A bankruptcy would, at a minimum, tie up your bullion during a lengthy legal process, and at worst be used to meet the claims of other creditors.
  • Next, confirm that the company holds allocated metal for its pool accounts. They should possess the exact amount of bullion that customers have bought.
  • Holding a paper substitute for gold is unacceptable, as the company might be unable to meet customer liquidation demands.

Pros and cons of pool accounts:

Pros Cons
Trading costs are very low No ownership
Storage is inexpensive Fabrication and delivery is expensive
Don’t have to take delivery Counterparty risk

If I Buy Gold Bars and Coins, How Do I Know They’re Real?

Now that you know how to pick the best dealer for your needs, let’s look at some precautions to avoid any fraud.

Most gold bars are manufactured by reputable refiners. But counterfeit bars have been discovered, especially for larger bars. The overall incidence of these gold-plated, tungsten-filled bars is relatively low, but there’s two easy ways to make sure your bar is the real McCoy:

  • Buy a reputable brand. The world’s most highly regarded refiners include Johnson Matthey, Argor-Heraeus, PAMP Suisse, and Valcambi. This list is not exhaustive. The point is to avoid products from little-known or upstart refiners. The refiner’s name should be stamped on the bar, along with the purity (99.99%) and a unique serial number. Buying a recognized brand also makes resell easier.
  • Buy from a reputable dealer. You want a well-established dealer that facilitates large volumes of business at low prices. Check the dealer’s Better Business Bureau rating.
  • Don’t buy bullion below the spot price. No dealer would sell their product at a loss. If their bullion price is below the spot price, it might be a fake product or there are some hidden fees or intentions.

The Best Advice on Where to Buy Gold

Where to buy gold bars is a personal choice. Based on my decade of insider experience in the industry, here’s what I would do if I were new to the gold sector:

  • Compare prices at your local shops with online dealers. I would not use eBay or gold shows in the beginning, and pool accounts as well as ETFs don’t offer full ownership.
  • Buy a small portion of physical gold to store at or close to home. For this purchase, compare bullion prices at local and online dealers. Buy from a reputable dealer that offers the best price.
  • Buy the rest of your bullion with a reputable online dealer that has the buy-and-store program. Direct access to some of your gold bars is essential. However, the bulk of your gold bars should be stored outside your home to reduce your security risks.
  • Don’t forget to compare storage fees, bid-ask spreads, buy-back policies, and check whether your bullion is fully allocated to you or not.
  • Warning: Some dealers might say that they offer fully-allocated bullion storage even if they don’t. They “allocate” bullion in terms of “grains” or other vague measurements. Pay attention to the wording in their terms. Ideally, you want the entire gold, discrete coins, or bars allocated to you.

Gold bars are a physical asset that act as inexpensive insurance against all types of crisis.

Congratulations; you’re about to own mankind’s most enduring asset that has withstood history’s worst troubles.

For convenient reference, here’s a table that summarizes the options covered in this report and their pros and cons.

Option Pros Cons
Local dealers Take immediate possession Premiums likely higher and smaller buyback premiums, lower liquidity & transparency
No shipping or insurance fees Insufficient liquidity to make large buybacks
Face-to-face transaction with dealer Limited product choices possible
Online dealers Ease of online ordering Must trust dealer to deliver your product
Higher liquidity Must wait for delivery
All-in costs likely cheaper  
Expanded hours to buy product Product only ships after payment clears
eBay Usually no sales tax Must wait for delivery
Free shipping is likely Best for experienced buyers
May find better price than local bullion shop Must trust seller to deliver what you paid for
Gold shows Can bargain on price Usually poor selection of bars
May find other items you like Must travel to show
Fractional Ownership/Pool Accounts Trading costs are very low No ownership
Storage is inexpensive Fabrication and delivery is expensive
Don’t have to take delivery Counterparty risk
 

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How Gold Helped Cambodian Refugees Escape the War

It was 1974, and I was a young teenager, when I had a defining experience that I remember to this day.

I grew up in a little medieval town in France, and my parents were very involved in our community of about fifteen thousand people. When a small group of Cambodian refugees arrived in France, my parents immediately agreed to “adopt” a family named Huu.  

Adopting refugees meant helping them with their basic needs: find accommodation they could afford, a first job, clothes, and all the other necessities to survive.

We also welcomed the Huus into our home on a regular basis. It happened so many times that the kids from both families became like stepbrothers and sisters.

To me, the story of this refugee family who became our good friends has always been an example of human courage and determination.

The Backstory

The Huus were an educated, upper-middle-class family from Phnom Penh, Cambodia’s capital.

Than Huu, the father, was a well-respected entrepreneur with a large construction business. Originally from Vietnam, he served as an air force pilot before moving to Cambodia during the war of Indochina against the French. 

In Cambodia, he met his wife and started a family and a successful business. 

The family lived in a good neighborhood—until late 1973, when the Khmer Rouge took control of almost two-thirds of Cambodia, and Pol Pot attempted to take over the capital.

While the attempt was unsuccessful, the Khmer Rouge controlled most of the escape routes outside of the capital, and Phnom Penh was de facto under siege.

This was the time when Mr. Huu realized that he had to get his family out of the country.

Thanks to his construction business, he had strong contacts in Phnom Penh’s political circles. With their help, he managed to get his four kids and wife to Thailand in an escape disguised as a short trip.

His family was allowed to leave on the condition that he would stay in the country until they returned.

His wife Buangmali and his children had to leave with small travel bags that were supposedly meant for a short vacation. Mr. Huu therefore made sure his family carried with them gold jewelry and as many gold coins as they could hide in their luggage.

As soon as they arrived in Bangkok, Buangmali reached out to friends who helped them arrange a trip to Paris, France. At great cost, they obtained tourist visas for France and managed to use some of their gold to purchase tickets to Paris.

Upon arrival, they contacted their Cambodian connections in Paris who helped them seek refugee status. By the time we met our adopted family for the first time, it was May 1974. 

It had been six months since they left Cambodia, during which they had little contact with the father.

Welcoming Refugees

I remember the first day Mrs. Huu and her four children, two girls and two boys, came to our house.

Mrs. Huu spoke a little French; her children didn’t know a word. But despite the language barrier, my brothers and I quickly made friends with the Huu kids. While they had been fortunate to avoid the Khmer Rouge, leaving everything behind—both emotionally and financially—had taken its toll on them.

My mother collected many articles of clothing and essentials to help them settle in our little town of Senlis. My father managed to find a low-budget apartment for the family to move into quickly. He also found a job for Mrs. Huu as a maid in a local hotel. The children were soon enrolled in local schools for the next school year.

While the family was successfully settling in, their thoughts were with Mr. Huu, whose fate was hanging by a thread. By then, the situation in Cambodia had gotten worse, and there seemed to be no escape for him.

Then came the fall of Phnom Penh in 1975 and the ensuing Death March. Like most other residents, Mr. Huu was forced out of the city on a march across rural Cambodia. 

He survived due to luck and determination, but he witnessed many people die of exhaustion, hunger, and thirst. As his convoy slowly progressed northwest toward the border with Thailand, he saw numerous executions. 

Mr. Huu was forced to work long days in rice fields and to live in primitive conditions. As he later admitted, he survived only because he managed to be useful to a few Khmer commanders. He was occasionally mistreated and beaten, but was spared from execution because he could organize work in farms.

The Escape and Reunion

After six long months of marching and working in collective farms along the way, Mr. Huu ended up in a plantation only a few miles away from the Thai border. 

Determined to rejoin his family, he managed to escape one night and crossed the border undetected by the enemy. Once in Thailand, he still had to walk for days to get away from the militarized war zone and seek refuge.

He eventually entered a Red Cross refugee camp. Then, in early 1976, he was exiled to France to reunite with his family.

I still remember the day when my family accompanied Mrs. Huu and her children to meet Mr. Huu at the Charles de Gaulle airport in Paris.

My parents hosted a small reunion party for the family. Mr. Huu showed clear signs of the suffering he had endured throughout this time. His family could not believe how much weight he had lost.

With the help of my father, he quickly found a job in town. Two years later, he got an opportunity to work as an accountant at the Palace of Versailles, and the family moved closer to his work. His wife was also hired as cashier at the palace’s souvenir shop.

Expect the Best, Prepare for the Worst

From that point on, our families met once or twice a year. In the early 1980s, I moved to the United States and lost contact with the Huu family, but my parents see them occasionally to this day.

Ever since the reunion, the Huu family has led a happy and successful life in France. By the late 1980s, Mr. Huu had become a successful export sales executive for a French multinational and was in charge of all their Asian businesses. His children attended prestigious French universities, and based on what my mother tells me, they all have successful careers.

While the Huu family exhibited an exceptional amount of resilience and determination, it is undeniable that the family’s gold holdings played a small but vital role in their escape and new life in France. 

I have always been inspired by their optimism and work ethic. I’ve never heard them complain about their bad luck or the horrors they experienced. 

I hope that you never go through anything like that. But as the saying goes: Hope for the best, prepare for the worst.

In a financial context, the takeaway here is that anything can happen. Black swans, political fallouts, wars—you can’t rule out anything. And in situations like these, no asset class can protect your wealth better than gold.

Governments can’t devalue or control it. No official can claim it. You can carry it with you, and it’s universally accepted all around the world.

Allocating 5–10% of your liquid assets to this metal is a prudent and sensible move that will give you peace of mind—no matter what the future holds.

 

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8 Reasons Your Portfolio Needs Crisis Insurance Right Now

We’ve witnessed what I consider to be a turning point for the stock market.

Just when many predicted another growth year for the markets, on Monday, February 5, the Dow plunged by 1,600 points—its greatest point drop in history.


Source: Money.CNN

The sudden decline shook investors’ bullishness to the core. Many belatedly remembered that markets do not always go up and that even the “New Economy” isn’t indestructible.

I have no doubt that the stock market bulls will find excellent excuses for this correction. Fundamentals are still strong for the economy and the markets. Maybe February 5 was just a fluke, and we can move confidently into the future!

I happen to think otherwise. I believe that what we experienced was only the foreshock before the “Big One” hits... and history is on my side.

History Repeats Itself

The vast majority of corrections and crashes follow initial warning signals.

Very often, market tops are followed by a few setbacks, followed by new highs, until the ultimate correction occurs.

The 2000 dot-com collapse is a perfect example.


Source: Wikimedia

The initial correction started on March 11, 2000, but the index didn’t bottom until October 2002 after losing 78% of its pre-crash value.

Similarly, the Financial Crisis of 2008 and the collapse of Lehman Brothers were preceded by the 90% share price drop and subsequent bankruptcy of New Century Financial in March and April of 2007.


Source: StockCharts.com

The market actually peaked on October 9, 2007—a full six months after the initial shock. Then another five months later, Bear Stearns crumbled, followed by IndyMac in July 2008.

Bubbles rarely blow all at once.

The Question You Should Ask Yourself

The question investors should ask themselves is: Which part of the cycle are we in today? Are we closer to a top or to a bottom?

If we are closer to a top and we start seeing early signs of a correction, it’s important to adopt a defensive investment strategy before a more serious crash occurs.

The market may still reach new highs, but the risks are mounting. Personally, I’d rather sacrifice a bit of performance to protect the downside.

The reasons why we want downturn insurance in place now are:

  1. Stocks still have rich valuations today, especially the FAANGs. P/Es are high compared to historical averages.
  1. Over the last several years, corporations have used leverage for financial engineering rather than boosting productivity. US corporate debt levels are at an all-time high (above $6 trillion or about 31% of GDP). This excess leverage is fine when interest rates are low, but it can be deadly in a recession. In addition, stock repurchases don’t have the same impact on profits than capital investments.
  1. Interest rates are expected to increase as a result of the Fed’s tightening policies. Treasury issuances will likely increase over the next few years. Unfortunately, this may coincide with lower demand for US debt from both international and domestic buyers.
  1. Higher interest rates will put pressure on demand for consumer goods and real estate. These are two critical drivers of economic activity in the US.
  1. Many asset categories are currently in bubble territory and prone to downward adjustments: growth stocks, bonds, real estate in many markets, arts, collectibles, and luxury goods, and cryptocurrencies.
  1. Geopolitical risks are not insignificant (North Korea, Iran).
  1. Political gridlock in the US could lead to paralysis after the mid-term elections.
  1. Heightened risks of protectionism and trade wars.

There are some positive indicators that could prolong the current expansion—such as high employment rates and robust economic activity in all the developed economies.

The Trump administration’s tax reform could also boost the economy, although most of the benefits are likely to be delayed.

As far as I am concerned, starting in 2017, I have started adjusting my portfolio to get ready for a sizeable correction. I haven’t sold all my stocks and bonds, of course, but I have rebalanced the asset allocation considerably.

For example, I’ve sold overvalued positions and added a lot of cash to redeploy once the correction hits. And I have purchased a significant amount of gold during the last 12 months—both as insurance and because it is a non-correlated asset class that also happens to be quite inexpensive right now (learn what type of gold is best for you here)

In addition, I have made a few long-term leveraged bets on a market correction.

I recommend you do the same.

SmartMetals® Account: Buy, Sell, and Store Precious Metals As Easy As Trading Stock

SmartMetals, the revolutionary online trading platform designed by the Hard Assets Alliance, lets you buy, sell and store fully-allocated gold, silver, platinum, and palladium instantly online.

Individual investors trying to buy and sell precious metal often experience risk, uncertainty. Not to mention a whole lot of hassle that large institutional investors and banks with inside access and huge buying power are able to avoid.

The Hard Assets Alliance changed all of that. Our SmartMetals account allows everyday individual investors, from the comfort of home or office, to:

- Purchase any of our highest-quality bullion products, ranging from single coins to multi-ounce bars
- Choose to take direct delivery of your metal or...
- store it securely in any of our 6 US or international vaulting locations
- Sell a portion or all of your metals anytime you choose

Open Your SmartMetals® Account Now!

 

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Why You Should Store Precious Metals in Multiple International Locations

By Olivier Garret, Founder and CEO of Hard Assets Alliance

“Where should I store gold?” and “Should I store in multiple international gold storage facilities?” are some of the most common questions I receive from Hard Assets Alliance customers.

In short, the main reason why investors would consider storing precious metals in more than one international location is risk mitigation.

In addition to being a store of value, precious metals are insurance against a number of potentially disastrous scenarios: financial crashes, civil wars, political unrests, and other crises.

Unfortunately, any form of wealth can become a prime target of theft or government seizure in times of great distress. And diversification between storage locations can help mitigate it.

Here are the four serious risks to your metals holdings that international diversification will help avoid or reduce:

  • Confiscation or outlawing of personal gold ownership.
  • Capital controls—the government limits or denies a citizen’s right to carry or send any form of money abroad.
  • Administrative actions—seizure of property by a government agency without notice or due process; becoming enmeshed in a frivolous civil lawsuit.
  • Currency debasement/inflation will lower one’s standard of living and destroy wealth not adequately protected.

The most likely risk is that someone (including a family member) finds out that you store gold at home and steals it—or worse. For this reason, taking possession of large amounts of precious metals puts your wealth, as well as the lives of your family, at risk.

A better option is to store some of your precious metals in a safe storage location somewhere nearby. This way, you reduce the risk of theft and can quickly take delivery of your holdings.

I do not recommend storing your precious metals with a financial institution, though.

The reason is that the contents of a bank vault is not adequately insured.  In addition, financial institutions would be amongst the first casualties in a financial crisis. Further, your holdings would become an easy target in case of government seizures.

If you have enough precious metals to be concerned about government seizure/confiscation or capital controls, you should consider jurisdictional diversification. Storing precious metals abroad makes it much harder for a desperate government to seize them.

Besides, you could access part of your holdings in case you have to flee from your homeland for any unexpected reason like war.

For real-world examples, look no further than Europe in the 1930s and 1940s. Many Europeans were fortunate enough to have assets in Switzerland or the United States during the 1930s and 1940s. The offshore assets were their escape tickets from fascist regimes and wars.

If you decide to go global, make sure you store metals with the most reputable independent vaults. Look for precious metals storage companies that safeguard assets for large institutional investors and governments, such as Brink’s.

Further, be sure that your precious metals are fully insured and available for immediate delivery at all times.

Another important decision is picking the destination countries to store some of your safety nest. 

I suggest looking for the most stable countries with a long history of depositor protection.  Don’t forget the destination country will have its own set of regulations controlling the import of precious metals, too.

But in the end, you have to choose a location that makes sense to you.

I would personally more likely choose Switzerland or Australia than Singapore. That’s because I would be more likely to relocate near one of these two countries than to Asia. 

But this is a personal preference, and your criteria may be different.

For non-US investors, the United States may be a great place to store metals.  Switzerland is also attractive because it has the longest track record of political stability and neutrality. Singapore’s financial history is much shorter, but the country appears to be very stable.

England, Australia, New Zealand, and Canada are also great alternatives. 

The key is to diversify across jurisdictions as much as it makes sense based on the size of your precious metals holdings. I personally hold precious metals in four different jurisdictions, including the United States.

The only drawback of storing assets abroad is that foreign-held assets require greater awareness and planning:

  • Access to your metals may not be as quick and easy. Foreign-held bullion is for those with sufficient gold and silver already stored at or near home. Storing all your precious metals overseas defeats one of its purposes—to have it handy for an emergency.
  • The receipt of proceeds after a sale could take time. The delay between selling your foreign-held gold and receiving the funds can be days. Offshore precious metals should not be considered ready cash.
  • While the US may pose the greatest threat to a US investor, a foreign government could move to control certain assets as well. The risk varies by country and is generally greater within the banking system than with a private vaulting facility. Be sure to perform your due diligence before selecting a country. Choose a location with a history of strong depositor protection, governed by the rule of law, and solid property rights—and select bullion storage facilities with the highest reputation.
  • Understanding and complying with reporting requirements is essential.

The bottom line: Gold stored abroad is all about minimizing risks and maximizing options. As your metals holdings grow and governments become increasingly desperate, diversification becomes increasingly important.

One last thing I want to note is that I do not advise you carry gold or silver bullion across a border yourself. While it is legal, the risks are too high.

I know of numerous cases when ignorant customs agents confiscated precious metals. US Federal Government rules and regulations are muddy and complex in this regard, so you may not be able to find justice.

Free ebook: Investing in Precious Metals 101: How to Buy and Store Physical Gold and Silver

Learn how to make asset correlation work for you, how to buy metal (plus how much you need), and which type of gold makes for the safest investment. You’ll also get tips for finding a dealer you can trust and discover what professional storage offers that the banking system can’t.

It’s the definitive guide for investors new to the precious metals market. Get it now.

 

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How to Spot Fake Gold and Avoid Fraud

By Olivier Garret, Founder and CEO of Hard Assets Alliance

Counterfeit products exist in almost all industries, and precious metals are no exception. However, there are many safeguards to protect yourself from buying fake gold.

The best way to ensure the authenticity of gold products is buying gold bars and coins strictly from LBMA (the London Bullion Market) approved dealers, mints, and refineries. This way, their authenticity is guaranteed.

LBMA is an international organization that sets standards for precious metals trading all around the world. They have over 150 members from 30 countries, among which are the biggest banks and financial institutions.

As long as your bullion stays in the custody of LBMA-approved vendors and vaults, there is no question about the authenticity of your metals. Dealers can bid for your coins or bars sight unseen because they know that the chain of custody is unbroken.

This is the reason all gold bullion at the Hard Assets Alliance comes from LBMA-approved mints and refineries. This is also the reason why we encourage our customers to buy precious metals for storage in one of our LBMA-approved international gold vaults.

It is much safer than storing at home or in a bank vault, and your bullion is available for delivery at all times. Even better, if you need to sell it, you can do it within a few clicks on your computer.

If you decide to take coins into your own custody (let’s say at home), dealers will have to inspect them before purchasing them. Reputable dealers use a number of tests to ensure the bullion they purchase is not counterfeit.

That should not be a real issue other than you will only get prices from dealers that have had a chance to inspect the coins.

In general, the risk of buying fake gold bars or coins is minimal as long as you stick to well-known sovereign coins like Eagles or Maple Leafs and buy from reputable LBMA-approved dealers.

The same is true if you buy sealed bars from LBMA-listed refineries. If you follow this advice, you should not really worry about counterfeit gold products.

How to spot fake gold when buying from local dealers

If you’d like to buy from a local dealer, despite the risks associated with taking possession of gold, make sure that you check the dealer’s reputation or get recommendations. In addition, I suggest that you learn the basics of how to identify fake gold.

It’s highly unlikely that a trustworthy dealer would offer you a counterfeit product, but knowing how to inspect gold bars or coins won’t hurt.

So here are a few tips.

Weight

Bring a digital scale to a local shop where you would like to buy gold. If you buy the most popular 24-karat, one-ounce sovereign coins, they should feel dense and heavy—and weigh exactly one troy ounce.

There are coins like the American Gold Eagle and the Gold Krugerrand that are made of 22-karat gold (.9167 fine) and weigh more than one troy ounce (they contain one ounce of pure gold with some alloys to increase strength.

Remember that precious metals are weighed in troy ounces. (A troy ounce is 31.1 grams).

If the coin is lighter or heavier than its actual weight, it’s a red flag.

Diameter and Thickness

This piece of advice is more suited to government-minted bullion coins (the only kind of coins you should consider), as they have standard dimensions.

Before buying coins, look up their dimensions on an official mint site. If the coin is too large or too thick, it’s almost certain the coin is a fake gold product.

Usually, fake gold coins are somewhat larger or thicker, so they are heavier and less detectable as fakes.

So always bring a set of calipers to a local shop for measuring.

Price

Trustworthy gold bullion dealers will sell gold bullion at 1.5% to 10% (or more) over the gold spot price (small fractional coins can have even larger mark-ups). This accounts for the spot price, refining and minting premium, and transportation costs, plus dealer overhead and profit.

If the dealer sells you gold at or below spot, they either have hidden fees to make up for losses or are selling fake gold.

A quick list of red flags:

  • Too light
  • Too large
  • Grainy or mottled appearance
  • Imperfect imprint or lettering
  • A seam along the rim
  • Magnetic (real gold will not stick to a magnet)
  • Sold under spot price

And once again, the best way to protect yourself from counterfeit coins is working with a reputable LBMA-approved bullion dealer.

I hope this helps you make the right decision and invest in precious metals safely.

Free ebook: Investing in Precious Metals 101: How to Buy and Store Physical Gold and Silver

Learn how to make asset correlation work for you, how to buy metal (plus how much you need), and which type of gold makes for the safest investment. You’ll also get tips for finding a dealer you can trust and discover what professional storage offers that the banking system can’t.

It’s the definitive guide for investors new to the precious metals market. Get it now.

 

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If You Want to Be Short Bitcoin, Be Long Gold

Jared Dillian is a former Wall Street trader and the editor of Mauldin Economics’ investment advisories Street Freak and The Daily Dirtnap, a newsletter for sophisticated investors that is published about 225 days per year.

Like us here at the Hard Assets Alliance, Jared believes cryptocurrencies could one day be successful, but is skeptical about the raging bitcoin bull stampeding through today’s investment landscape.

Here’s a snippet from The Daily Dirtnap issue of Jan. 4, 2018, that we thought you may find entertaining and enlightening. Enjoy!

I am a bit of a gold bug, always have been.

What I think is interesting is that the gold bugs have mostly moved on from being gold bugs and are now bitcoin bugs. A prominent analyst who is big on bitcoin followed me on Twitter for a while, but gave up, probably after he figured out I was a bitcoin bear. You would be surprised at the number of people that were once gold bugs that have moved onto being bitbugs.

So I know we have explored this before, but what do you think happens to gold if bitcoin drops to $1,000?

A. Up $50
B. Up $200
C. Up $500


Source: Bloomberg

I say the answer is B.

I have said this before—if you want to be short bitcoin, be long gold.

Gold has a habit of disappointing people after it goes for a little run, but maybe this time is different?

If I were to ask you how many gold Eagles the U.S. Mint sold last year, what would you say?

About 300,000 ounces.

What do you think the ATH [all-time high] is?

1.4 million ounces.

As it turns out, the last time we had such a giant drop in gold coin sales was… right before the financial crisis.

Hey, just another tidbit for you. I feel like I am underinvested but I probably am not. I probably have enough.

I will say this. People will get bullish on gold again, and everyone will be surprised when it happens. Now, of course, in order for people to get bullish on gold, you need the exacta box of 1) bitcoin crashing and 2) stocks crashing. Could happen.

Speaking of exacta box, it’s been a loooooong time since I’ve watched the ponies. Never had more fun flushing money down the toilet than at Monmouth Park.

 

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Podcast: The Role of Gold in Your Portfolio

Dear Investor,

The beginning of the year is a good time to take a step back, reflect on both our personal and professional lives, and maybe re-evaluate some decisions we made in the past year.

All too often, influential forces like the mass media and social networks—which are driven by sensationalism and glamor—distract us from what is important. That’s especially true in the investment world.

For this reason, I’d like to share with you a recent podcast from Peak Prosperity in which my business partner Ed D’Agostino breaks down the key principles of investing in precious metals and their role in every investor’s portfolio.

It’s an honest and unbiased 30-minute conversation that answers many of the questions about precious metals and the Hard Assets Alliance I get from you, including:

  • The backstory of the Hard Assets Alliance
  • How private investors can access liquidity and pricing in precious metals that was previously available only to institutional investors
  • The role of gold as insurance against a black swan event
  • The benefit of dollar-cost averaging your bullion allocation
  • Supply/demand trends in the precious metals market
  • Why now is a unique time in history to own precious metals
  • How the US government and media spread antipathy to gold
  • Why gold being out of favor is a good sign

And much more…

And as always, if you have any further questions about investing in gold, send them to me at olivier@hardassetsalliance.com. I’ll answer them personally.

Olivier Garret

Olivier Garret, CEO
Hard Assets Alliance

 

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Gold American Eagle vs. Canadian Maple Leaf vs. Other Gold Coins

Precious metals such as gold and silver have many attractions from an investment point of view.

Both metals are viewed as a long-term store of value. They are durable, portable, and easily valued. As a result, civilizations across the world have used both gold and silver to protect their wealth for thousands of years.

Gold and silver also offer excellent portfolio diversification benefits. Their price movements are uncorrelated to the movements of other asset prices, such as shares and property. Adding precious metals to an investment portfolio can increase the diversification of the portfolio and reduce the overall portfolio risk.

Furthermore, precious metals offer protection against financial system risk. Gold in particular is viewed as a “safe haven” asset. This means that during times of financial uncertainty or stock market panic, investors often buy large amounts of gold, pushing its price up.

However, gold and silver each have unique investment features. If you are considering adding precious metals to your portfolio, it’s important to understand the difference between the two metals.

Gold vs. Silver as an Investment

While both gold and silver can make excellent long-term investments, gold is usually the better investment for the average investor. There are several reasons why.

First, gold has a much larger liquid market. This means that gold investments are very easy to buy and sell.

Second, the price of gold is less volatile than that of silver. Silver’s price movements are more magnified than gold’s due to its industrial demand. From an investment point of view, smaller price movements are better.

Third, gold’s price is mainly driven by investment and jewelry demand. In contrast, because silver is used in a variety of industrial applications, its price is linked to economic activity. This means that during economic downturns, silver’s price may fall more than gold’s.

As such, gold is a much more suitable precious metal than silver bullion for the majority of investors. But what is the best way to buy gold then?

Gold Coins­—The Best Type of Gold for Private Investors

While there are many ways that investors can get exposure to gold, the most effective way to invest in gold is to buy gold coins. There are several reasons gold coins trump other types of gold.

For starters, gold coins are very liquid. They can be bought in small quantities. This means that they are very easy to buy and sell.

Gold coins are also very recognizable. Popular gold coins such as the American Eagle and the Canadian Maple Leaf are recognizable all over the world. Again, this makes them easy to trade.

Another advantage of gold coins is that they have a strong resale value. Although coins such as the American Eagle and the Maple Leaf will come with a higher premium than gold bars, they will also sell at a higher price.

Generally, the roundtrip cost of a coin is lower than that of bullion bars. This is especially true when there are shortages of bullion like after the 2008 financial crisis. This is a key benefit of investing in coins as opposed to gold bars.

However, investors should note that there’s no one-size-fits-all coin out there. Some gold coins are popular all over the world. Others are less recognizable outside certain countries. Therefore, the best gold coin for a US investor is not always the best coin for a European or Chinese investor.

With that in mind, here’s a look at the best gold coins investors can buy.

Gold American Eagle Coins

The American Eagle gold coin is the most popular gold coin in North America and a very popular coin across the entire world. First issued in 1986, this beautiful coin represents a convenient and cost-effective way to add gold to any investment portfolio.

The American Eagle coin is available in four sizes: one ounce, one-half ounce, one-quarter ounce, and one-tenth ounce. The coin is made from 22-carat gold, meaning that it is 91.7% pure gold. Although it holds its value very well, note that it’s not the purest gold coin on this list.

The upside of 22-carat coins is that they are less prone to scratches and other physical damage. That is to say, 22-carat is not necessarily a negative attribute but rather a matter of preference.

A key advantage of the American Eagle is that it is backed by the United States government. It’s considered legal tender in the US. It has a face value of $50 US dollars, though it’s currently worth much more than that. Another big advantage is that it can also be added to an Individual Retirement Account (IRA).

The American Eagle is the most traded gold coin in North America. Spreads between the buy price and the sell price are generally very narrow. As a result, the Eagle is an excellent choice for US gold investors.

Pros:

  • Legal tender in the US
  • Backed by the US government
  • The most liquid coin in the US
  • A narrow bid-ask spread
  • Different sized coins available
  • More durable

Cons:

  • 22-carat gold, which is not the purest form of gold

Canadian Maple Leaf Coins

The Canadian Maple Leaf gold coin is another very popular coin amongst precious metal investors. It is one of most popular gold coins in the world. The Maple Leaf is recognized and regarded very highly internationally. First introduced in 1979, this coin is issued by the Government of Canada and produced by the Royal Canadian Mint. It features the iconic maple leaf on its reverse side, a symbol synonymous with Canada.

The Maple Leaf is a 24-carat gold coin, meaning that it has a very high gold content. It contains virtually no other base metals. One drawback of this is that it easily shows handling marks. It is available in one ounce, one-half ounce, one-quarter ounce, one-tenth ounce, and one-twentieth ounce denominations.

Like the American Eagle, the Maple Leaf is also considered legal tender. The one-ounce sized coin has a face value of $50 Canadian dollars. However, like the Eagle, each coin is currently worth much more than that. This is because the value of the gold bullion in the coin is much greater than the face value.

The Maple Leaf is a beautiful coin that is easily recognizable. It is widely regarded as the most international gold coin. It is both highly liquid and easy to trade in most locations throughout the world.

There is high demand for the Maple Leaf in countries such as India and Asia. This means that the Maple Leaf is not only an excellent gold coin for North American and Canadian investors, but for gold investors all across the world.

The Maple Leaf coin also offers excellent value. It is usually the most competitively valued sovereign coin in North America.

Pros:

  • Popular all across the world
  • High purity 24-carat gold
  • Legal tender in Canada
  • Competitively valued
  • Different sized coins available

Cons:

  • Easily shows handling marks

Gold Buffalo Coins

Another gold coin that is always in high demand is the Gold Buffalo.

This coin was introduced by the US Mint in 2006 and was America’s first ever one-ounce 24-carat gold coin. It was introduced to compete with other high-purity gold coins such as the Maple Leaf.

The Buffalo comes in several different sizes, ranging from one ounce to one-tenth ounce. The one-ounce coin has a legal tender value of $50 US dollars.

A very attractive coin, the Gold Buffalo features a buffalo on its reverse, modeled after “Black Diamond,” a buffalo in New York City’s Central Park Zoo in the early 1900s.

Given its beauty, high purity, and limited production, this coin is always sought after by both collectors and investors. As such, it’s an excellent choice from an investment perspective.

While the Buffalo is a popular coin across the world, it is not quite as well known as the American Eagle at an international level. Therefore, it is best suited to US investors.

Pros:

  • High purity 24-carat gold
  • A very attractive coin
  • Different sized coins available

Cons:

  • Not as well recognized as the American Eagle

Austrian Philharmonic Coins

Within Europe, the Austrian Philharmonic gold coin is a highly popular gold coin for investment. Also known as the “Vienna Philharmonic,” this coin has been in production since 1989. It is produced by the Austrian Mint in Vienna.

Like the Maple Leaf and the Buffalo, the coin is 24-carat gold, meaning that it is extremely pure. It comes in five sizes, ranging from one ounce to one-twenty-fifth ounce.

Denominated in euros, one-ounce coins produced after 2002 have a face value of 100 euros. The coin is considered legal tender in Austria.

The Philharmonic is widely accepted across both Europe and North America. It’s less popular across some parts of Asia, however. Within the US, the coin is not as popular as the Eagle or the Maple Leaf.

Overall, this coin is an excellent gold coin for both European gold investors and international gold investors.

Pros:

  • High purity 24-carat gold
  • Widely accepted across Europe and North America
  • Different sized coins available

Cons:

  • Not as popular as the American Eagle or the Maple Leaf

South African Krugerrand Coins

The South African Krugerrand coin is another sovereign worth looking at from an investment perspective.

Produced since 1967, the Krugerrand was the first gold coin introduced in the modern era, specifically for use as an investment tool.

Before the introduction of the Maple Leaf and the American Eagle, this coin was the most popular gold coin in the world amongst investors. While its popularity has declined a little in the last few decades, it is still one of the most common gold coins around the world today. It is also highly liquid, although not as liquid as the American Eagle within North America.

Like the American Eagle coin, the Krugerrand is made from 22-carat gold, so it is 91.7% pure. It comes in four sizes, ranging from one-ounce to one-tenth ounce.

This is a good coin to own from an international perspective. Because it was the first gold coin to be produced, it remains a popular choice among gold investors today.

Pros:

  • A very common gold coin across the world
  • The first gold coin used as an investment tool
  • 50-year history
  • Different sized coins available
  • More durable than 24-carat gold

Cons:

  • Not as liquid as the American Eagle within North America
  • Not the purest form of gold

A Word of Caution on Numismatic Coins

When buying gold coins as an investment, investors should stick to the most popular, liquid sovereign coins such as the American Eagle, the Canadian Maple Leaf, and the other gold coins mentioned above.

These coins are instantly recognizable, can be valued easily, and therefore are easy to buy and sell. This makes them excellent coins for investment purposes.

The English Britannia, Australian Kangaroo, and Chinese Panda can be acceptable alternatives if competitively priced at the time of purchase. Just be aware that these are much less liquid coins, especially in North America.

Other coins, such as numismatic coins, should generally be avoided unless you are looking at acquiring rare numismatic coins and you are able to assess the rarity and quality of these coins.

These are rare coins that are considered to be collectible not liquid investments. They do not offer the same investment benefits of coins such as the Eagle and the Maple Leaf. They are valued mainly for their rarity and less for their actual gold value.

Collecting these types of coins could be compared to collecting art. You need to have a very strong understanding of the market, and work with extremely reputable dealers, to profit from these coins.  

Similarly, other types of coins such as semi-numismatic, special edition, or commemorative coins are best avoided. These types of coins are often sold at higher premiums than standard gold coins.

However, when it comes to selling these coins, the premiums usually disappear. Therefore, they are not recommended as investments.

It’s important to find a reputable bullion dealer when investing in gold coins. There are unscrupulous dealers out there that will try to persuade you to buy numismatics and other collectible coins.

These coins won’t retain their value over time. It’s worth finding a reputable dealer to ensure you invest with confidence.

What Size Coin Should You Buy?

For most investors, the best-sized gold coin to buy is a one-ounce coin. This size is the most common and the most liquid. It generally offers the best bang for your buck.

Some investors like smaller, fractional gold coins because they can split the sales into smaller amounts. The advantage here is that they can make it easier to sell the exact amount of gold you want.

However, there are several disadvantages of smaller coins. Smaller coins often have high premiums. Therefore, they do not offer the best value. For example, 10 one-tenth ounce gold coins will cost an investor a lot more than a single one-ounce coin.

One reason smaller coins have larger premiums is due to the relative cost of minting compared to the value of the metal in the coin. This also applies to silver coins. While the US and Canadian mints can keep prices competitive, larger coins generally offer better value.

Gold dealers will also charge much higher bid-ask spreads on smaller coins. For example, the spread on a one ounce American Eagle may be 3%–5%. In comparison, the spread on a one-tenth ounce Eagle could be as much as 10%–15%. This makes them less suitable as investments.

Therefore, it’s generally sensible to stick to one-ounce coins when buying gold coins as an investment.

 

 

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The Moment I Discovered the True Value of Gold

I grew up in a little town in Northern France that, from 1939 to 1945, was occupied by the Nazis. I hadn’t been born yet at the time, but my mother and her family were forced to live for five long years with two German officers as “guests” in their own home.

As a result, my childhood was colored by first-hand stories of life in a town where even in my youth, physical reminders of World War II still lurked around every corner.

I heard many stories of scarcity, like that of the nuns in my mother’s school serving rodents and rutabaga for dinner—or that of my grandfather setting up a soup kitchen in his small factory to help feed the families of employees.

One story my mother used to tell me sparked in me an interest in gold and a lifelong appreciation for its true value.

It revolved around my grandfather, a Swiss immigrant who moved to France in the early 1920s. A skillful tinkerer, he was an electrical technician and entrepreneur. His arrival in France coincided with the electrification of the country when remote towns and villages became connected to the grid.

Up until that point, farmers had been working the fields and processing their crops entirely by hand or with the help of animals. Basic machines where powered by cranks, ropes, and pulleys, or treadmills.

My grandfather, seeing the opportunity, invented an electrical motor that could adapt to power different types of equipment. Farmers around the country very quickly adopted his product, and by the late 1920s, he ran a small but successful business, selling his electrical motors and a variety of mostly farm-related equipment. (One of his inventions was a device to automate the ringing of church bells!)

Being Swiss, my grandfather always associated money with gold, and he used all of his excess savings to buy small Swiss gold coins called Vreneli. Over the next decade, he accumulated hundreds of them.

In 1939, following Hitler’s invasion of Poland, France declared war on Germany. Within weeks, German tanks were rolling through Flanders into Northern France. Hundreds of thousands of French families fled south, taking the few belongings they could pile onto bicycles, horse-drawn or hand-pulled wagons, and into automobiles, which were still rare at the time. The exodus quickly became a chaotic nightmare as Luftwaffe (German Air Force) planes bombed roads and bridges along the way.

After evaluating the situation, my grandfather decided to take his wife and two daughters south to his mother-in-law’s farm in rural Normandy. As his wife prepared for their departure, he retrieved his stash of gold coins and headed into the basement.

There he cut lead pipes into five-inch sections and melted one end of the tubes to seal them. After filling the pipes with his gold coins, he sealed the other end and within a couple of hours emerged from the basement with twelve short lead tubes filled with gold and a shovel.

He went out into the yard and buried the pipes with his life’s savings in a deep hole next to a big tree. With the gold safely hidden, the family left their home and joined hundreds of thousands of refugees heading away from the advancing German troops.

Normally, the ride to Normandy would have taken a few hours, but it ended up lasting three days. Fortunately, due to his work with farmers in rural communities, my grandfather knew the countryside well and managed to avoid the main arteries by taking backroads. Even so, their journey was constantly interrupted by broken-down vehicles, bombed-out bridges and roads, and traffic jams at every intersection.

Throughout, German planes were flying low overhead, and the sound of explosions could be heard as the planes bombed strategic infrastructure like bridges, railroad stations, and main intersections. Occasionally, they would dive down and strafe the refugees. My mother recalled that destruction was everywhere—the way to safety paved with devastation, misery, and death.

After what seemed like ages, they arrived at the remote family farm. After unloading the car and making sure his wife and two daughters had settled in safely with his in-laws, my grandfather turned around and headed back to take care of his home and factory.

By the time he got back to Senlis, the Germans had already passed through the town on their way to capture Paris. The French government had surrendered and was now negotiating a truce that allowed it to keep some control over the southern half of France, called France Libre.

The passing German soldiers had looted some of the houses and factories on their way to Paris, but they were in such a hurry to get there that they mostly only stole food and easily transportable valuables. As they started to occupy Northern France and reestablish order, my grandfather and the handful of his workers who had not fled set to work cleaning up and repairing the factory. Other families returned and were happy to find that their old jobs were still there.

After some semblance of stability and normalcy returned, my grandfather decided to bring his family back home. By that point, the Germans had declared that French families had to host German soldiers in their homes, with the larger and more comfortable houses reserved for officers.

So two young German officers showed up one day with orders stating that they were to be housed in the family home and would spend the rest of the war living under the same roof and sharing meals with the family. Fortunately, despite being unwelcome occupiers, according to my parents, they were generally polite and respectful.

In August 1944, the German troops retreated and Paris was liberated by the Allied forces. As France started to heal from the wounds of war, life in the quiet town of Senlis slowly returned to normal.

Many years later, my grandfather fell ill and became bedridden, and so my mother stepped in and began running the day-to-day business. It was then, near the end of his life, that my grandfather called my mother to his bedside and instructed her to get a shovel, go to the tree, and dig up the twelve little gold-filled lead tubes.

After decades underground, the coins were still there, and my grandfather split them between my mom and her sister.

A couple of decades later, my parents decided it was time to pass the gold coins on to their children—and so in 1984, the tubes were opened, revealing their precious contents as shiny and new as when they were first buried.

Each Vreneli coin contains 5.8 grams of gold. My grandfather had bought them in the late 1920s and early ‘30s at a cost of 75 to 90 French francs.

In 1960, the French government declared that new French francs were worth 100 old ones. By 1984, they were worth the equivalent of 54,000 pre-war French francs.

By the mid-1980s, the French franc had lost 99.9% of its purchasing power, which then dropped by another 60% (in 2002 replaced by the euro).

My grandfather’s gold coins, however, have retained their value to this day.

If my grandfather had kept the money in bank notes instead of investing them in gold coins, the value of the 36,000 French francs would be approximately €3.00 today. On the other hand, the value of the 480 gold Vrenelis he bought would be approximately €105,600 today.

I hope you liked my gold story... I can’t wait to hear yours.

 

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Buying Gold? All of Your Questions Are Answered Here

As CEO of the Hard Assets Alliance, I regularly receive questions from people looking to buy gold as an investment—and for a good reason.

Buying gold as an investment is not as straightforward as it sounds. Novice investors often get lost in a variety of options to buy gold: “Should I buy minted bars or sovereign coins?” “Maybe that limited edition coin would be a good investment?”

Sensible investors evaluate bullion options by the price and premium on the gold spot price. But the premium is only one part of the equation. It doesn’t necessarily mean that you’ll get that premium back upon the sale.

Not only that, there are unscrupulous dealers out there. They will try to trick you into buying numismatics and other collectibles that have a huge premium and won’t retain their value over time.

There’s much more I could tell you, but the point I’m making is clear. It’s essential to get an understanding of precious metals before dipping your toes into this market.

In this article, I’ll be answering some of the most frequently asked questions that I receive in relation to buying gold. I hope that after reading this, you’ll invest in gold with more confidence.

“Should I invest in gold?”

There are many reasons why gold is attractive from an investment point of view.

For a start, gold is a time-tested store of value. It’s durable, portable, and has been valuable since the dawn of civilization. It’s no wonder that gold has been used as a unit of exchange for thousands of years.

Another key feature of the precious metal is that it offers important portfolio diversification benefits. Gold’s price is uncorrelated to the movements of other asset classes such as shares and property. By adding gold to your portfolio, you can potentially reduce your portfolio’s overall risk.

Furthermore, gold offers protection against financial system risk. The metal has proven to be a reliable safe-haven asset during times of market panic.

When financial market volatility increases, investors tend to gravitate toward what they perceive to be the safest assets. Gold is one such asset investors move into. This means that gold’s price often rises when there’s fear of an economic collapse.

With governments around the world continuing to print money and debt levels dangerously high, gold provides insurance against financial market uncertainty.

Gold has also been an excellent investment over the long term. It has often outperformed the stock market. For example, over the 48-year period between the start of 1969 and the start of this year, gold rose from $35.20/oz to $1,283.30/oz, an annualized gain of 7.8%. In contrast, the S&P 500 index rose from 102 points to 2275 points in that time, an annualized gain of 6.7%.

Gold easily outperformed the broad US equity market over that time period, despite the fact the US market has charged higher in recent years, while gold has remained well below its 2011 highs of $1,920/oz.

And gold could continue to perform well in the future. There are certain key drivers that could push gold’s price higher in coming years. These include a rise in inflation, an increase in geopolitical risk, and further financial market uncertainty.

Another potential key driver is demand from China and India. With the wealth of millions of citizens across these regions growing at a formidable rate, demand for gold jewelry and gold as an investment could increase.

Key Takeaways:

Gold has many attractive features as an investment. It offers:

  • A store of value.
  • Financial system protection.
  • Portfolio diversification benefits.

“How do I invest in gold?” or “How do I buy gold?”

You can invest in gold by buying physical gold like bullion bars and gold coins or through financial products such as exchange-traded funds (ETFs). 

Each method has advantages and disadvantages.

While investing in gold through ETFs sounds appealing due to its convenience, there are several key issues that investors need to be aware of in relation to this method of investment. If you invest in gold through an ETF, you don’t actually own the metal. You have no claim on the gold within the fund. This means that you cannot take delivery of the metal if the need arises.

In contrast, the key advantage of buying physical gold such as bars and coins, is that you own the gold. Furthermore, you own an asset that can be stored outside the financial system. Therefore, you’re not exposed to “counterparty risk.”

This is the risk that the other party in an agreement will default or fail to live up to its obligations. When investors buy gold ETFs, they are relying on financial institutions to deliver on their obligations.

In this regard, buying physical gold such as gold bullion bars or gold coins is a sensible option. Below, I’ll explain how to buy physical gold.

Key Takeaways:

  • Investors can get exposure to gold in two ways: physical gold (such as bars and coins) or financial products (such as ETFs).
  • With a gold ETF, you don’t actually own the gold.

“How do I invest in gold coins?”

The best way to buy gold coins is through reputable precious metals dealers.

Within North America, two of the most popular gold coins are the American Eagle and the Canadian Maple Leaf gold coins. Both of these coins have high gold purity, are easily recognizable, and are easy to trade.

While there are many other gold coins available for purchase, such as commemorative coins, these are not recommended. These coins are not as liquid and are not as easy to trade. Therefore, they are not always good investments.

Investors looking to buy gold coins should stick to the most liquid sovereign gold coins. There’s more on how to choose the sovereign coin that best suits you, below.

Key Takeaways:

  • The best way to buy gold coins is through reputable precious metals dealers.
  • American Eagle coins and Canadian Maple Leaf coins are the most popular gold coins for North American gold investors. 
  • Investors should avoid special edition or commemorative gold coins.

“Should I buy gold bullion or silver bullion?”

While both gold and silver have attractive features, gold is the better investment for the average precious metals investor. Gold has a much larger liquid market that is driven mostly by investment and jewelry demand. The price of gold is less volatile than that of silver.

Silver is more speculative and has a stronger relationship to economic activity. This is because silver has many industrial uses. Silver does have the advantage of being much cheaper than gold. Therefore, it’s more accessible to small investors. Silver can be attractive during down cycles when the price of the metal is cheap.

Key Takeaways:

  • Gold is a better investment than silver for most investors.
  • Gold’s price is less volatile than silver’s price.

“What is the best gold to buy?“ or “Should I buy gold coins or bars?” 

Gold coins are the best way of buying gold for most investors. This is because coins can be bought in smaller quantities. Plus, sovereign coins are easily recognizable, easy to trade, and generally sell at higher premiums than bars.

For institutional buyers or those looking to buy very large quantities of gold, bullion bars are a more sensible option, due to the lower premiums.

Key Takeaways:

  • Gold coins are the best way to buy gold for most investors.
  • Gold coins are highly liquid and easy to trade.
  • Gold bullion bars are more suited to large buyers.

“What are the best gold bars to buy?”

There are two types of gold bars investors can buy: minted and cast bars.

Minted bars are smaller, easier to recognize, and are usually sold in sealed packaging. They generally do not need to be tested for purity if they are kept in their original sealed package.

Cast bars, which are more irregular in size and shape, are better suited for larger institutional or industrial buyers that will keep them stored in a vault or melt them to use in other applications.

Key Takeaways:

  • Gold minted bars are most suited to small investors.
  • Gold cast bars are more suited to institutional or industrial buyers.

“What are the best gold coins to buy?”

For North American investors, American Eagle, American Buffalo, and Canadian Maple Leaf coins are the best gold coins to buy. For investors in Europe, Gold Eagles or Austrian Philharmonics are good coins.

The South African Krugerrand coin is another excellent gold coin for investors. This coin is minted from 91.7% pure gold alloy and contains one troy ounce of gold. It’s one of the most traded gold coins in the world.

Other good gold coins to buy that are reasonably liquid include the Australian Kangaroo coin and the English Britannia coin.

Investors should stay away from sovereign coins from lesser-known countries. They should also steer clear of special edition commemorative sovereign coins. These coins are usually more expensive to buy and resell for less than the better known coins.

Key Takeaways:

  • The best gold coins for North American investors are the American Eagle, the American Buffalo, and the Canadian Maple Leaf.
  • For European investors, Gold Eagles or Austrian Philharmonics are excellent gold coins to buy.

“What is the best place to buy gold online?” and “What is the best place to buy physical gold?”

The best place to buy gold online is through an online dealer that offers a buy-and-store program with non-bank London Bullion Market Association (LMBA) approved vaults.

Investors should avoid taking physical possession of their gold unless they believe there is an emergency.  It’s much safer to have your bullion stored in a secure vault. It’s also much easier to sell gold that is stored in a secure vault because you don’t break the chain of custody.

Key Takeaways:

  • The best place to buy gold is through an online dealer.
  • Look for a dealer that offers a buy-and-store program.
  • Investors should avoid taking physical delivery.

“When is the best time to buy gold?”

The best time to buy gold is often during the spring and summer. History shows that gold prices have often increased more during the fall and winter months and softened during the spring and summer.

The main reason for this is that the jewelry industry is one of the largest consumers of gold. The jewelry industry builds up inventory from September until March for the holidays, Valentine’s Day, Mother’s Day, and the wedding season. The strongest gold jewelry demand in India and China is also in the fall.

That said, it is impossible to time gold purchases perfectly, as gold seasonality changes from year to year. There are also many other variables that affect the price of gold including inflation, stock market volatility, and geopolitical risk. A good way of buying gold as an investment is to buy gold at regular intervals. This is known as “dollar-cost averaging” and can reduce the risk of buying a large quantity of gold at a high price.

Key Takeaways:

  • The best time to buy gold is generally in the spring and summer.
  • To avoid the risk of big price movements after the purchase, dollar-cost average your bullion purchases.

“Can you buy gold coins from a bank?”

A number of banks sell gold coins. However, banks are usually not the most cost-effective way of buying gold. That’s because banks generally buy gold coins from specialized dealers and then add their markup. 

Most investors are better off buying their gold directly from a reputable gold dealer and then storing it in a London Bullion Market Association (LBMA) approved vaulting facility.

Key Takeaways:

  • Many banks sell gold coins.
  • It’s cheaper to buy gold coins through a specialized dealer than a bank.

“How do I buy physical gold at the spot price?”

Unfortunately, it is not possible for investors to buy physical gold at the spot price. There will always be a spread between the buying and selling price of gold bullion.

The spot price of gold is the price of gold as a raw material. Buyers pay a premium over the spot price to cover the costs of producing the gold, as well as distribution costs and dealer markups. 

Minting and fabrication costs represent the largest part of the total premium over the spot price. This is especially true for coins and small bars. While fabrication costs of a 400oz cast bar are very small compared to the total value of the bar, minting costs are a very large part of the total cost of a 1/10oz gold Eagle coin.

The good news is that the minting premium paid on well-known sovereign coins can usually be recovered when selling the coins. Most sought-after sovereign coins will sell above the spot price. However, there will still be a spread between the buying and selling price, as distribution costs and dealer markups have to be accounted for. 

Key Takeaway:

  • It’s not possible for investors to buy gold at the spot price.
 

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