The Safer Haven

We've talked about how bad the stagflation was during the late '70's and early '80's, but don't take it from me. Here's what Federal Reserve history has to say: [bold added]

The economy was already in weak shape coming into the downturn, as a recession in 1980 had left unemployment at about 7.5 percent. Both the 1980 and 1981-82 recessions were triggered by tight monetary policy in an effort to fight mounting inflation. During the 1960s and 1970s, economists and policymakers believed that they could lower unemployment through higher inflation, a tradeoff known as the Phillips Curve. In the 1970s, the Fed pursued what economists would call "stop-go" monetary policy, which alternated between fighting high unemployment and high inflation. During the "go" periods, the Fed lowered interest rates to loosen the money supply and target lower unemployment. During the "stop" periods, when inflation mounted, the Fed would raise interest rates to reduce inflationary pressure. However, the Phillips Curve tradeoff proved unstable in the long-run, as inflation and unemployment increased together in the mid-1970s. While unemployment trended down slightly by the end of the decade, inflation continued to rise, reaching 11 percent in June 1979 (Federal Reserve Bank of St. Louis).

(WSJ graph)

In 1971 Richard Nixon canceled the convertibility of dollars to gold under the Bretton Woods system, which had been in place since 1944. The delinking of the dollar from gold and the combination of inflation and unemployment unprecedented since the Great Depression made it a period of maximum economic uncertainty. The gold price spiked from the $35/oz. under Bretton Woods to a high of $850 by the end of the decade.

The gold market is spiking again. In fact it Hasn’t Rallied This Much Since 1979. [bold added]

A modern-day gold rush is stretching from Costco store aisles to underground vaults in London to the flickering screens of Wall Street. Old jewelry now glimmers with potential dollar signs.

Gold’s value has ballooned by 40% this year, putting it on track for a greater annual price jump than during the depths of the Covid-19 pandemic or 2007-09 recession, according to Dow Jones Market Data. Futures for the precious metal haven’t surged so much in a year since 1979, when a global energy crisis fueled an inflationary shock that thrashed the world’s economy.

Costco 1 oz. buffalo gold piece

These days, it isn’t a financial meltdown that is drawing people to one of the original market refuges. The recent run-up to record prices—reaching $3,682.20 a troy ounce on Monday—instead stems in part from the White House, with investors big and small rushing to shield themselves from an uncertain outlook for the U.S. economy and its role in the world.

A lot has changed in the past 50 years. What hasn't changed over the centuries is that people flee to gold in troubled times.

There's Gold in Them Thar Buckets

(AP 2008 photo)

A Christmas surprise in a Salvation Army bucket:

An anonymous donor dropped a rare gold coin into a red kettle operated by the Napa Salvation Army on Saturday.

Volunteers discovered the 1-ounce South African Krugerrand gold coin while counting donations after a day of bell ringing at Napa’s Bel Aire Plaza, Larry Carmichael, a corps officer of the Salvation Army of Napa, told the Chronicle on Sunday.

“This is not a coin you carry in your pocket to toss anywhere,” Carmichael said. “Whoever had it was intentional about where they were donating it.”

...The organization’s annual red kettle donation campaign, which started at the Oakland Ferry Landing in 1891, collects millions of dollars nationally to fund its holiday meals program. In Napa, donations also fund a culinary arts training program, music classes for children and housing grants for more than 100 local families.

What I like about this story is that the donor wanted anonymity (and didn't even want to document the donation for the IRS!). Yes, he or she could have private, practical reasons, but I like to think that this was the motivation:

“Be careful not to practice your righteousness in front of others to be seen by them. If you do, you will have no reward from your Father in heaven.

“So when you give to the needy, do not announce it with trumpets, as the hypocrites do in the synagogues and on the streets, to be honored by others. Truly I tell you, they have received their reward in full. But when you give to the needy, do not let your left hand know what your right hand is doing, so that your giving may be in secret. Then your Father, who sees what is done in secret, will reward you.----Matthew 6:1-4

The spot price of gold is about $2,630 per ounce, and the value of a 1-oz. Krugerrand tracks spot gold closely.

Merry Christmas!

Clenching the Teeth and the Wallet

August, 2021: looks the same as January, 2020

Nine months after the last cleaning I dutifully showed up for the dental appointment.

To these untrained eyes the X-rays looked the same as they did 18 months ago. Stan the Dentist confirmed that there was no decay or gum disease, so everything was copacetic except for the fact that...

A piece of the large filling that we had been watching for over 20 years had finally broken off.

Stan's business person quoted $1,539 for a porcelain crown, about double the cost of the gold crowns that were installed 30 years ago. $800 was a lot of literal and figurative gold in 1990, but at the time I could justify that investment with more than half my expected life lying before me.

Now....well, I asked for an estimate for a gold crown and upon receiving it will probably chew on that decision for a while.

It's Been Fun Playing, But I Will Pick Up My Marbles

Benjamin Graham (1894-1976), the
father of fundamental analysis

Investing in stocks, your humble blogger first turns to fundamental analysis, which tries to determine the "intrinsic value" of securities both from a projection of earnings and dividends as well as the fair value of assets and liabilities on the balance sheet. Yes, it's hard work and as boring as it sounds, but some of the most successful investors in history have used FA to determine when to buy or sell a stock.

More often than not, however, emotions rule markets, such as the Reddit frenzy that has driven Gamestop, AMC, and other heavily shorted names to prices that cannot be rationalized under even the most optimistic scenarios.

Thousands of members of WallStreetBets, a forum at the online community reddit.com, have been leading the swarm of amateur individual traders buying stocks that hedge funds and other institutional investors were betting against.

Moving in sync and en masse, such traders can drive a stock way up or down even if each trader commits only a few dollars. Professionals, on the other hand, are legally restricted from colluding and incur much higher brokerage costs.

These new mobs of amateur traders resemble swarms of animals that often coalesce in the wild. You may have seen videos of an immense school of fish flashing in unison through the sea or a murmuration of starlings forming a vast swirling vortex in the sky.

These swarms shift direction in swift, coordinated bursts to find prey and evade predators.

Even multi-billion-dollar hedge funds can be overwhelmed by the "swarm," so if an individual wants to participate on either side of the trade on one of these targeted stocks, it had better be with money that he can afford to lose.

Silver (Reuter's image)

The heavily shorted Reddit stocks have been well publicized, and to this bemused investor it is impossible to know whether they will go up or down from their present levels, However, one tidbit caught my eye last week: the price of silver was being discussed on the message boards, and precious-metal stocks had only risen modestly so far.

Those of us who lived through the rampant inflation of the 1970's are dwindling in number. We old-timers remember the "guns vs. butter" debate from the 1960's, when fiscal conservatives argued that the United States could not both prosecute the Vietnam War and implement Great Society social spending programs. The rampant inflation of the 1970's seemed to prove the fiscal conservatives correct.

The Federal Reserve under Paul Volcker wrung inflation out of the economy by forcing Treasury rates to the mid-teens and triggering a severe recession, and the lessons of that period have influenced generations of economic policy makers. Today's gargantuan deficits in the $trillions and near-zero interest rates have not resulted in inflation...yet; but now may finally be the time when history repeats.

The above is a long way of saying that I have started to shift my retirement portfolio into hard assets like real estate, precious metals, and related stocks as a hedge against inflation. So, back to Reddit targets: the fact that thousands of individual investors were beginning to look at silver accelerated this investor's decision to buy some poor-man's gold.

On Friday I purchased some Hecla Mining (HL) at $5.80, a stock that I had owned in the past, as a way of playing the silver market. As of this writing, HL is trading at $7.19, a 24% increase over cost.

There's been some chatter that the big-money funds have disguised themselves online as individual investors and are planting information to drive up the price of silver and silver stocks. It's been fun for a day, and I'll ride it a little longer before getting out.

Diamonds + Bitcoin = Diamond Coins

Five months ago we viewed the Federal Reserve's unprecedented commitment to support the entire economy as the beginning of a multi-year cycle of inflation.

Now the Fed is buying corporate debt--even some risky pieces that pension funds won't touch--and the debt of state and local governments. It has crossed a line and can't go back. ("Why are you letting [State name] go bankrupt?") Eventually the tidal wave of government debt and paper money will cause an inflation that will dwarf that of the 1970's.

We already see the signs in rising prices of bitcoin and gold (see above graphs)

(Image from tokenpost)

Now there's a move to resurrect diamonds as a store of value: [bold added]

Here’s how the new market would work: Diamond Standard plans to sell 5,000 coins each worth $5,000. The company will then use an automated process to bid on millions of diamonds and adjust its bids until it can buy a sample of about 50,000 to 60,000. That bidding process will include many big diamond vendors, creating the first global diamond exchange.

The geological information about the diamonds purchased by the company will be put in a public database. From there, a computer program will select a comparable distribution of 11 or 12 to go into each coin.

The vendors must comply with know-your-customer and anti-money-laundering requirements in a process supervised by the Gemological Institute of America to ensure no conflict diamonds used to finance wars are involved. Diamond Standard is also regulated by the Bermuda Monetary Authority and audited by Deloitte LLP.

The GIA will then grade each diamond and assemble the coins before delivering them to customers in mid-October. Each coin also carries a computer chip that makes it a digital asset using blockchain—the technology that supports the digital currency bitcoin—letting holders buy and sell on digital exchanges. Those trades will dictate the price of coins after the initial offering. The top of the plastic coins is transparent to display the diamonds.

I admire the entrepreneurs for trying to use 21st-century technology to solve the diamond market's twin problems of questionable provenance and synthetic manufacturing. As a money-like asset instead of jewelry, diamonds like gold will experience much greater demand ($1.2 trillion?!? per the WSJ article).

As for your humble blogger, if I were looking for inflation protection I would invest in real estate. If it all goes south at least I could live in it.

The Gentleman Can Start His Chomping

New software allows the patient to view the status of each
tooth. The latest X-rays are in the bottom left corner.

It's been a year since my last visit to Stan the Dentist. I was due for a cleaning, which went quickly because I've been flossing regularly and using an electric toothbrush.

I also needed him to re-glue one of my gold crowns. Since late December I had been chewing very carefully; biting on a loose crown could distort its shape, perhaps ruining the fit. But what I most feared was swallowing the bit (!) of precious metal and having to retrieve it, if you know what I mean and I think you do.

I told Stan that the subject crown was the left bottom molar, the furthest one back. Oh, you mean number 18. He "sandblasted" (his words) the tooth and crown and applied cement. The crown had been installed in 1987, so by applying simple linear extrapolation we'll have to do this again in 2045. Rampant chomping has resumed.

Old Money

(Chronicle photo)

A California couple has unearthed history's largest find of buried gold coins, approximately $10 million worth:

The bonanza emerged last year as the man and woman were walking their dog on their property in the Gold Country and noticed the top of a decaying canister poking out of the ground.

They dug it out with a stick, took it to their house and opened it up. Inside was what looked like a batch of discs covered in dirt from holes rotted through the can.

They weren't just discs.

A little brushing revealed nearly perfectly preserved $20 gold coins with liberty head designs on the front, dated from the 1890s. They ran back to the same spot, and when they were done digging, they'd found a total of eight cans containing 1,427 coins - with a face value of $27,980.

A total of 1,373 were $20 coins, 50 were $10 coins and four were $5 coins. They were dated from 1847 to 1894, and after sprucing up they shone like, well, gold - which fortunately never corrodes. About a third of the coins were in pristine condition, having never been circulated for spending. Most were minted in San Francisco.

Despite its name, the Gold Country in Central California has not shared in the tech boom of the coastal regions.

The couple, who are in their 40s and are self-employed, told [coin dealer Don] Kagin and [numismatist David] McCarthy they want to donate some of the proceeds to the homeless and hungry in their area. They also plan to keep a few coins as keepsakes.

"Like a lot of people lately, we've had some financial trials," the man told Kagin in the recorded interview. "I feel extreme gratitude that we can keep our beloved property."

Once our envy subsides, we always get a warm feeling when good fortune comes to good people who could really use it.

[Update - 3/4: Uh-oh, they may not get to keep their find. The coins may have been stolen from the San Francisco mint in 1900.]