Tag: gold

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Precious Metals Investing Warning

gold


The Texas State Securities Board notched a victory for the good guys this spring, and there was a April 30 deadline to file a claim if you’d been a customer of Metals.com.

I sincerely hope you were not a customer of that company – which also went by the names Barrick Capital, Tower Equity, and Chase Metals – and which since I last wrote about them has had a terrible, no good, very bad, year. 

Texas began to blow the whistle on them in May 2019. Since then, 29 other state regulators and the federal commodities regulator filed an administrative action, causing Dallas federal court to shut them down last September. The court appointed Dallas-based receiver Kelly Crawford to liquidate assets to attempt to recover something for victims. Crawford has set the April 30th deadline.

According to the administrative action, the scheme involved at least 1,600 victims and $185 million, of which 1,300 were elderly and $140 million was from their retirement accounts.

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Customers of Metals.com and related companies believed they were safeguarding their retirement by purchasing precious metals as investments. Representatives of the companies specifically tapped into fears among elderly retirees of imminent losses – due to government conspiracies, devalued currencies, and seized retirement accounts.

According to court filings, the companies sold precious metals at 100 to 200 percent markups, ensuring investors a huge loss upfront.

Regulators allege that when challenged on the value of their portfolios by clients, company representatives either lied about the precious metals’ resale value or claimed the difference in prices reflected some unusual scarcity of the particular metals in question. Unfortunately, investors had locked in losses from the very beginning.

Regulators allege, and previous investigations show, that the company chose their victims carefully.

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“If someone says they don’t like Hannity just hang up”

An online advertising pitch from the companies claimed “liberals are seeking to siphon money from successful Americans,” and misleadingly represented the companies’ affiliations with Fox News and the Republican Party. Phone pitches followed the collection of online leads.

Salespeople for the company, according to an earlier investigation by Quartz.com, would claim “I don’t know what your religious beliefs are, but I’m Christian. Did you know there are 700 references to gold and silver in the Bible?” According to an Alabama State Securities Commission filing, one investor found the Metals.com website through a website claiming that Fox television host Sean Hannity believed the stock market would decline. According to the Quartz investigation, a former salesperson for the company was told “if someone says they’re liberal or they don’t like Hannity, you just hang up.” 

In this manner they carefully selected their victims, who became predisposed – via identity-affiliation – to believe in the precious-metals-as-investments pitch.

Travis J. Iles, Securities Commissioner for the TX State Securities Board, says Texas brought the first administrative action against the companies, in May 2019. “We really were the bellwether in identifying this issue and bringing it to the attention of other state and federal regulators.” From there, the Commodity Futures Trading Commission, the federal regulator for metals trading, coordinated with state regulators to track and prosecute the companies nationwide.

Iles is proud of Texas’ leadership in the matter, but he also emphasized that enforcement was a team sport involving the feds and 29 other states. Says Iles, “I’ve been doing this type of enforcement work for 20 years, and I can’t remember a more collaborative effort in an enforcement action. Texas is very proud to have had the opportunity to have raised the alert and to assist our teammates in this regulatory area.”

Although enforcement against the two individuals previously running the companies is not resolved yet, Iles noted that “the matter is ongoing as it relates to the individuals.” 

“The receiver reports liquidating high-end automobiles, office equipment and recovering bank funds late last year from the primary owners of Metals.com. The receiver warns that customers will unlikely recover their full investment. Unofficially, they may only receive pennies on the dollar. 

This may all sound like a boring and cruel scam. And it is. But if you’d like to liven up the narrative, you can see what one of the two named leaders of the Metals.com companies has been up to lately. Look up #LucasAsher on Instagram, and his postings under the further hashtag #OmertaComplexFamily. There you will see hints of where the money might have gone, although I’m admittedly speculating there. Maybe he has plenty of money from other sources, and isn’t spending any Metals.com money on the skydiving, Porsches, helicopter rides and the James Bond-lifestyle that he Instagrams about. 1

https://www.instagram.com/p/CDemPUFgkUF/?utm_source=ig_web_copy_link

What’s interesting to me about the Metals.com story is how closely it resembles non-criminal methods for selling the same products to similar audiences. The normal markups may “only” be 5 or 20 percent on precious metals, but the fear-mongering is similar. The way to sell these bad products is to tap into irrational fears, appeal to conspiracies, and lie about intentions. The idea that precious metals are an appropriate investment for individuals’ retirement accounts – or any investment account at all – is itself, essentially, a fraud.

gold

The conspiracy theories and polarized identity-appeals are necessary because it is certainly not possible to pitch gold and silver on the merits of their long-term returns. Which are terrible.

To keep it simple, let’s look at annual returns of the most commonly cited precious metal, gold, versus a basket of stocks, the S&P500, and adjust for consumer price inflation in both cases. This allows for comparing “real” returns on investment. 

Using these terms, the 10 year returns on gold and stocks are 15 percent and 257 percent respectively, from March 2011 to March 2021. That’s obviously terrible for gold. It gets worse.

The 30 year returns on gold and stocks are 174 percent and 1773 percent respectively.

The 50 year returns on gold and stocks are 654 percent and 15737 percent respectively. Essentially, in a little longer than my lifetime, you could have either turned your $1 into $6.54 or into $157.37. You choose! This does not take into account storage costs for gold, which would further erode its usefulness as an investment asset.

It is always possible with any volatile asset like precious metals to find temporary time periods of outperformance. The longest time frame is always best for evaluating an asset. The longest run return on gold is pathetic. Other precious metals will be similar, again allowing for short-term fluctuations. 

In the Metals.com case they are alleged to have stolen the money upfront through massive markups in price. In the rest of the precious metals sales industry for gold and silver, they are siphoning your money over longer periods of time, as precious metals produce no wealth. Meanwhile you give up the opportunity to have invested in something real, that would grow your wealth over time.

When you buy precious metals from legal “legitimate” sellers there’s no receivership at the end that can partially reimburse you for your losses. There’s no civil enforcement action. You have only yourself to blame.

I realize I will convince precisely zero of you gold bugs of this view, but the long-run returns on precious metals are so obviously bad that the whole enterprise can only have been built on cynical salesmanship, conspiracy theories, and crackpottery. 

A version of this post ran in March 2021 in the San Antonio Express News.

Please see related posts:

On Metals.com, the short con and the long con

Coins fine for collecting, terrible for investing

Texas builds it own Fort Knox to store gold because…Texas

Never Buy Gold

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  1. You should seriously click on the instagram link and spend some time on this fraudster’s supposed lifestyle. ↩
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Your Bitcoin Warning

You’ve been writing me a lot lately, wondering about bitcoin. What is this technology? What is it used for? Should you get involved? 

bitcoin_what_is_it_used_for
What is the right price for bitcoin? What are its uses?

But also, what is the right price for bitcoin? Is it a buy or a sell here? As of this writing, a bitcoin costs roughly $50,000, up from $10,000 a year ago. Could it go to $200,000? That’s only 200% up from now. It’s gone up 500% in the past year. So sure, why not? $200,000 sounds great.

That’s,,,not a prediction. 

What do I think is the fundamental right price for bitcoin? I’d say, roughly, zero? I truly think zero is the fundamental correct price. But it could take a while to get there.

Now, blockchain – the innovative technology of which bitcoin is the best known example – may have real uses. I’m open to that idea. Blockchain allows for anonymous, distributed transactions which can be verified between parties that neither know nor trust each other. Theoretically, blockchain obviates the need for government regulation or third-party verification. 

Applied to money, bitcoin – using blockchain technology – theoretically allows us to remove transactions from the purview or limitations of existing financial infrastructure.

Dollars, the theory goes, involve pesky government issuers, unreliable central banks, and the meddling institutions of the existing global finance system. To its proponents bitcoin – using blockchain technology – is like money unshackled by politics, regulators, and borders. 

To be clear. I totally disagree with the need for unshackling. I think dollars are awesome. I even buy stuff and services with them! I’ve honestly never felt limited by dollars, except obviously by the amount of them that I control at any given time. By contrast, I believe bitcoins are – at their essence – useless. A useless fiction, and therefore a fraud. I prefer my fictions to be useful.

What is the real-world use of bitcoin? Bitcoin is not a useful store of value in the way that dollars are. Anything that can soar 500 percent in the past year – as Bitcoin has – can also drop 80 percent the following year. Or the following month. That makes it entirely inappropriate for “storing value.” 

Could bitcoin be delightful as a pure gamble, like buying a lottery ticket? Sure. But no sensible person advocates lottery tickets as a store of value.

The South Sea Company was created by charter in 1711 with a mandate to engage in an implausible business, in a far off place, that none of its British investors had ever seen. It was just exotic and mysterious enough to capture the whiff and elan of possibly unlimited wealth. It enjoyed the imprimatur of the government of England, and for a time legitimately traded in English government bonds. Shares began at 100 British pounds, but reached 1,000 pounds a decade later. Fortunes were destroyed shortly thereafter, when the laws of financial gravity returned. We return to this cautionary financial story over and over because – while no two bubbles are alike – history does rhyme.

South_Sea_Bubble
South Sea Stock (log scale)

Bitcoin has all the makings of collective financial madness. Magical thinking! A difficult-to-grasp mysterious technology! Breathless media coverage of its ever-increasing price! Celebrities who might be buying it! 

Bitcoin’s only plausible real-world use cases – as a medium of exchange rather than a speculation – are tax evasion, foreign-exchange-control evasion, drug dealing, prostitution, child-pornography, assassinations, arms-dealing, illegal gambling, and ransomware for computer hackers. As I have yet to engage in any of these activities, I have yet to find an actual use for bitcoin in my own life. But your mileage may differ, no judgment.

Incidentally, bitcoin is probably not even anonymous. One of the features of the blockchain is that all transactions are infinitely traceable and reproducible. That’s the plausible key to blockchain technology’s usefulness in the future – that all transactions and counterparts create a permanent record, visible to all counterparts. 

But that feature of permanence undermines anonymity. A blockchain-sophisticated FBI should be able to see exactly who sold you bitcoin, and who in turn you sold bitcoin to. Your drug deal or tax evasion with bitcoin was not as anonymous as you thought it was after all! Haven’t you ever watched movies? This is neither business nor legal advice, but do you know what is anonymous, instead? A suitcase full of unmarked, non-sequential dollar bills.

Should you take my word for it on bitcoin? I can only warn you about my similar strong feelings in the past and how that worked out.

In the one and only market call I have ever made in this space in 7.5 years, I said Tesla was a terrible stock in 2015. 

It promptly quadrupled in value. So I reiterated my hatred for that stock’s price in early 2020.

My bold call clearly triggered the value of that stock to septuple over this past year. You’re welcome.

I just mention this to say, you should probably speculate in the opposite direction of whatever I advocate, including, especially, about things like bitcoin. Bitcoin is far, far, stupider than Tesla shares will ever be. Naturally, Tesla announced last month that it had speculated with its corporate cash by acquiring $1.5 billion in bitcoin. Because LOLs. And YOLO. And FOMO. 

Tesla CEO Elon Musk’s explanation for this speculation: “Bitcoin is almost as bs as fiat money. The key word is ‘almost’.”

[Ah, yes, such wisdom! What mysterious sagacity from 2021’s newest richest man in the world! Take all my money, please, you carnival-barking promoter of fictions!]

Bitcoin – Also not a very efficient use of power!

Never underestimate the power of greed and magical thinking to keep things irrational longer than you can stay solvent. Welcome to the monkey house.

Cryptocurrency enthusiasts like to point out that traditional “fiat” money like dollars, unmoored from a metallic base like silver or gold, is based on a collective fiction. In that sense, would-be sophisticates (and Musk) argue, the collective fiction of bitcoin is no worse than dollars. 

Rai_Stones_of_Micronesia
Rai Stones. Better than gold?

Gold is also a collective fiction, albeit one a few thousand years old. Shells have made for a collective fiction in the past. The rai stones of Micronesia were a collective fiction. What even is money?

US dollars are also a collective fiction, except for the true fact that my government demands, and accepts, dollars for taxes. As far as I can tell, this is the basis for fundamental value in a currency. What my government accepts in taxes.

A convenient currency is more useful than barter. My local, state and federal governments do not currently accept extremely well-reasoned and delightfully funny finance writing as a means of discharging my tax obligations. I need to first convert finance columns to dollars, which my government then does accept.

When President Elon Musk declares in 2028 that we can and must make tax payments in bitcoin, then – and only then – will I agree that bitcoin has any fundamental value. It may well go to $200,000 (and beyond!) for all I know in the meantime. Unless and until Musk runs for President, I expect a zero value future for this particular collective fiction.

A version of this post ran in the San Antonio Express News.

Please see related posts:

Tesla is awful (January 2020 edition)

Tesla is not going to make it (2015 edition)

Hater’s Guide To Tesla (August 2020)

Never Buy Gold

Never Buy Timeshares

Never Buy A Variable Annuity

Bitcoin, Blockchain, and Bullocks

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Ask an Ex-Banker: How To Fight Upcoming Inflation?

homebuyer

A reader wrote me recently:

“Given the staggering debt of the United States and Congress’ seemingly laissez-faire attitude and impotence towards addressing it, I am starting to be concerned about the value of U.S. currency. Historically, wars and corrupt governments have led to hyperinflation in other countries where the costs of goods and services skyrocket. The likelihood of this happening in the U.S. may seem remote but it is not impossible. Are there ways for individuals to protect themselves from this?” — Dom D. From San Antonio

I really like this question. Dom recognizes our unprecedented current debt situation and the unfortunate parallels with other countries where hyperinflation followed. I have no idea what’s going to happen.

If it’s comforting, hyperinflation would require a failure by the Federal Reserve to do its job. The Fed withstood the last few years better than most institutions. But, yeah, increased inflation seems increasingly likely for the reasons Dom named. So what to do?

federal_reserve_seal
The Fed has to fail for hyperinflation to happen

Something to remember about inflation is that if the underlying economy is unchanged but the amount of available currency doubles, it is reasonable to assume that the price of things approximately doubles. This is bad when we have to pay for things. It is not necessarily bad if the price doubles of things that we already own. Things that you could own, which should double in price if the supply of money doubles, include real estate and stocks. As a result, these make for very good inflation hedges.

So the first great way to hedge against inflation is to own a business, or preferably many businesses. Some insist on the hard way to do this.1 I would like to focus everyone’s attention on the lazy way – my preferred way – which is to own hundreds or even thousands of businesses through a single low-cost diversified stock mutual fund. In an inflationary environment, successful businesses raise prices in response to their higher costs. Successful businesses adjust dynamically to earn profits despite inflation. 

Similarly it is reasonable to expect – all else being equal – that a stock worth $100 today will be worth $200 tomorrow, if the amount of currency doubles overnight. One explanation for the record rise of the stock market in the last few months – the one I find most plausible – is that the Fed has dramatically increased the supply of currency in the economy. The record stock market rise is probably a specific form of inflation hitting one very visible corner of the overall economy.

The second great hedge against inflation is to own real estate in advance of inflation. For starters, try to own your home. And then live in it for a long time. The price of your home should appreciate roughly at the rate of inflation. That’s the definition of a good hedge. Let’s say, for example, you own a home today worth $250,000. And then we suffer a patch of 10% annual inflation for ten years. Your house at the end of 10 years will be worth a little over 648 thousand dollars. Compound interest math uses the same formula as inflation math.

homebuyer
Homeownership is good

Now, here’s an even more interesting twist on inflation hedging via home ownership. The triple lindy inflation hedge, if you will. Are you ready for it? 

Do you have a long-term fixed-rate (let’s say, 30-year) mortgage on your house?

Ta da! You did it. You are amazing. Have you ever thought about being a hedge fund manager? 

Here’s why this is an amazing inflation-hedging tool. Using the previous example, as your home value leaps upward over 10 years of 10% annual inflation from $250K to $648K, your 30-year fixed rate mortgage decreases dramatically, both in nominal and real terms. Using a standard 30 year amortization schedule, your mortgage would pay down from $200K to $162K during the first ten years. At the end of ten years, a $162K amount of debt on a house worth $648K is actually pretty easy to handle. You moved from owning $50K in home equity to $486K in home equity, nearly a ten-times increase. 

Also, just as money isn’t worth as much following inflation, debts are also not worth as much in an inflationary future, so $162K in debt is not as big a deal in that future as it would be today. In other words, being a borrower during an inflationary period is actually a powerful inflation hedge. (Provided, of course, your debt has a fixed rather than variable interest rate.)

By owning your home with a mortgage, you’re a fancy inflation hedger, and you didn’t even know it.

Next, what should you specifically not do if you anticipate future bouts of inflation?

Do not buy fixed income products for any investment purposes. Traditional fixed income investment products include bonds, bond funds, annuities, and CDs. Inflation absolutely wrecks the value of these fixed income investments. Even money market funds, savings accounts, and cash could be considered fixed income, just with an extremely short (same day) maturity date. If your net worth or income is in any of these fixed income products, inflation will unfortunately destroy your wealth.

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Not an inflation hedge I endorse!

Next, do not buy gold as an inflation hedge. Gold is a pretty but useless metal sold by preying on the fears of unsophisticated financial minds. I understand you don’t believe me, because of all those plausible sales pitches on your video screens, but it’s true.

Also, do not buy bitcoin as an inflation hedge. Bitcoin is a fake currency, neither useful for buying beer nor paying taxes. It has no legal use case and produces no wealth, except for people hyping you to buy it, based on the greater fool theory of speculation.

In sum, own your own home, own some businesses either directly or through the stock market, and if you must borrow, then borrow at a fixed interest rate. Avoid the standard inflation-hedge scams.

Bitcoin
Avoid Bitcoin

What I really like about the previous two sentences is that in anticipation of heavy inflation – and I can not emphasize this strongly enough – you should pursue the exact same investment actions I would advise to anyone who is not anticipating a future bout of heavy inflation. 

Did you catch that? It’s important. Do exactly the same prudent things you should always do.

Finally, is Dom’s scenario likely to come to pass? I don’t know. Neither does anyone. Pundits who predict the economic future with certainty are fools or confidence men to be deeply distrusted. 

I have personally (but silently) expected significant inflation since aggressive interest rate drops in September 2001. I’ve been wrong every time. 

Although, maybe not. Come to think of it, my home value and my stock index funds have suffered quite a bit of inflation over the past twenty years. Haven’t yours?

A version of this ran in the San Antonio Express News.

Please see related posts:

Homeownership is great, including as an inflation hedge

Bitcoin and Bullocks

Never Buy Gold

ETFs and Mutual Funds

Trump_federal_reserve
This guy…would have happily caused hyper inflation if he thought it served his short-term political or narcissistic interests

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  1. Being an entrepreneur is the hard way. I’ve tried it. It’s…hard. ↩
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Metals – The Short Con And the Long Con

Silver_Coins

Did you know that “Liberals are seeking to siphon money from successful Americans” and “They want to feed their grandchildren before yours!”

Depending on the strength of your reaction to that statement, I might have something to sell you for your retirement account.

That claim in quotes above is from a Facebook advertisement by precious metals company Metals.com or its affiliates. Metals.com does business under other names Chase Metals LLC, and Chase Metals Inc, Access Unlimited, and is owned by parent company TMTE.

Unfortunately for folks who responded to that pitch, the company has a history of fleecing its customers, according to actions taken by regulators in seven states. 

In Texas, the State Securities Board kicked off a torrent of state regulatory action last May, with a Cease and Desist Order.

The State of Texas complaint notes the example of an 80-year old woman convinced to transfer her entire $850 thousand retirement account into another account – affiliated with Metals.com – that could hold precious metals, disregarding its appropriateness for her situation. In addition, in April 2019, the Securities Board complaint continues, the firm’s lawyer sent a threatening “Pre-Lawsuit Notice” to a 75-year old retired schoolteacher who publicly complained about investing nearly $66 thousand with Metals.com.

As part of the sales process, the Securities Board found, salespeople convince elderly prospects that their existing investments in securities are highly risky and imminently in danger. Only precious metals, the pitch went, can provide safety in retirement.

But this company does not target just any elderly prospects. An investigation by Quartz.com described their particular strategy of Facebook targeting.

The Quartz investigation details how Metals.com’s sought to exploit political biases. Specifically, Facebook advertisements targeted a demographic that identified as “very conservative,” over 59, and “interested in” Fox News’s Sean Hannity.

Further, the Facebook ads that led to Metals.com strongly implied linkages – linkages that do not exist – with Fox News. Facebook ads used Fox News logos, and unaffiliated websites like www.foxbusiness.com.co that would appear linked to the media company. Metals.com ran ads that sounded like they originated from political and governmental bodies, although they did not, with sponsors named “Republican House Committee,” “US Retirement Bureau,” and “Conservative Republican Association.” 

These online ads encouraged Facebook users to sign up for more information about how silver and gold investment strategies could protect them from the Deep State and from a grasping federal government. 

With an ad supposedly sponsored by an account called “Proud To Be A Deplorable,” the message asked “Is your retirement protected from the Deep State? A newly-liberal majority Congress cares more about chaos than your security!” 

Commissioned salespeople would contact potential victims, initiating a conversation about politics or religion. A former salesperson for the company, interviewed by Quartz, said his instructions were “if someone says they’re liberal or they don’t like Hannity, you just hang up.”

Another opening sales line to use on prospects was “I don’t know what your religious beliefs are, but I’m Christian. Did you know there are 700 references to gold and silver in the Bible?”

The solution to everything, apparently, was gold and silver investments.

In July 2019, Metals.com agreed to an Order with the Texas State Securities Board to offer refunds, up to $10 million, to 84 customers in Texas of the full amounts they invested in precious metals with the company.

The company’s troubles are not over, however. Following Texas’ lead, at least six other states have initiated enforcement actions against Metals.com and its affiliates. The latest was a complaint in December 2019 from the Securities Division of the Secretary of the Commonwealth in Massachusetts.

That Massachusetts state filing details one couple that transferred $2.3 million from their retirement account from a Fidelity IRA to a precious metals account at the direction of a Metals.com salesperson. Due to the heavy markups employed by the company, the account suffered an immediate $1.5 million drop in value. Transactions by this couple and others described in the Massachusetts enforcement action suffered markups between 53% and 63%. 

As further described in the complaint, Metals.com provided statements showing values in the precious metals had increased, despite observable prices that made those claims fraudulent.

One plausible financial lesson we could take from the Metals.com enforcement actions would be to beware pushy salespeople using scare tactics and political biases to push expensive, inappropriate investments on vulnerable people. And that’s fine advice. But that advice seems to limit the story to the unsavory tactics of a rogue boiler-room operation.

A would urge a more general lesson, one that goes far beyond the frightening Metals.com story: Never, ever, buy precious metals as an investment. 

Gold, and other precious metals including silver, are always primarily a psychological trick used to prey on the financially naïve. Massive segments of the financial infotainment industrial complex dedicate themselves to selling us on the idea that gold and silver have a legitimate role in an individual investor’s portfolio. 

This simply isn’t true.

So yes, beware of boiler-room operations like Metals.com, still apparently in business today, despite multi-state enforcement action against them. But also consider, if you didn’t know this already, that the entire retail-investment arm of the precious metals industry is itself a long con.

Phone calls to Metals.com went unreturned, as did an inquiry through their website.

A version of this post ran in the San Antonio Express News and Houston Chronicle.

Please see related post:

Never buy Gold

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Texas Wants Its Own Fort Knox Because…

Now that the holiday season is behind us, you’re probably wondering where to store all of your gold ingots, lumps of physical gold, and bars of gold bullion. The struggle is real, amirite?

lone_star_tangible_assetsNever fear, the State of Texas has your back, in 2018.

Specifically, the Texas Bullion Depository wants to solve all your gold storage problems.

The Depository – created via legislation passed in 2015 and blessed by statute with the imprimatur of the Texas State Comptroller – is managed by a private company  named Lone Star Tangible Assets. LSTA’s business affiliates also are in the business of selling gold, diamonds, and precious metals as well as offering storage services for investors and collectors, according to communications lead Josh Hinsdale.

The Depository is slated to open in January 2018, at which point they will publish rates for depositors. For now, Hinsdale told me, depository customers should expect the cost of a combination of storage and insurance will be less than ½ of 1% of the value stored, per year. Meaning, storing and insuring a $100,000 worth pile of gold bars should cost you less than $500 per year at the Depository.

Now, I don’t personally own any gold, for reasons I’ll explain further down, but it’s true that storing gold could be a problem for some Texans.

I called my homeowner’s insurance provider, and learned they explicitly exclude precious metals like gold in lump, bar, or sheet form from their homeowner’s policies. So, I could try to store gold in my closet or basement at home, but it would be with the knowledge that any losses, including theft, are at my own risk.

Another answer could be a safe-deposit box at my bank. I checked with my bank, and for $100 per year I could rent one of their larger boxes at their headquarters office in town. This would remove the gold problem from my house, and would afford me bank-level security. It would not, however, provide insurance against losses. The bank provides the space only, and unlike money deposits at the bank, my gold would get no guarantees against theft or destruction. I would need to purchase separate insurance for the value of my gold ingots.

Texas_bullion_depository
The Fort Knox of Texas

The gold storage and insurance service, available in January 2018, is just phase one of the Texas Bullion Depository plans. Phase two involves the creation of a purpose-built facility for physical gold storage in Leander, Texas outside of Austin, slated for completion in December 2018. One of the points of phase two is to appeal to institutional investors, who may want a “Texas option” for storing their gold.

Now, the Texas Bullion Depository appears to be a thoughtful and serious service, and for people who need to store their personal gold, this seems better than the alternatives.

But here’s the more important thing I feel obligated to point out: nobody should be buying gold for their personal accounts. It’s not a wise use of your money.

Gold – unlike actual investments like stocks and bonds and real estate – produces no wealth or cash-flows. Unlike real money, it is too volatile to serve as a stable store of value. Unlike real money, it’s too bulky and inconvenient to serve as a convenient medium of exchange. Gold forms one of Mike’s Four Horsemen of Your Personal Financial Apocalypse, along with time-shares, variable annuities, and bitcoins.

I guess I could say the only thing gold has going for it is that it’s “better than bitcoin.” But frankly they are in the same genre of financial tricks played on the simultaneously gullible and paranoid. What I mean is that if gold is the Bozo The Clown of investments, bitcoin is Pennywise.

From previous reader feedback I already know I’m whistling into the wind with you gold enthusiasts, and likewise you can trust that your (undoubtedly, polite) disagreements will not tempt me to agree with you.

Given the precious metal fever-dreams to which gold-enthusiasts succumb, I think the state-sponsored part of the Texas Bullion Depository is odd.

The depository is, naturally, the only one of its kind in the United States. No other state has seen the need to create this through legislation.

The state Comptroller’s office released a video in December extolling the creation of the depository in Texas, noting:

“The Texas Bullion Depository will provide safe, fully-insured storage for precious metal, providing an alternative to depositories largely located in and around New York City.”

Something about the physical location of gold in New York apparently makes Texas lawmakers nervous?

“The law will repatriate $1 billion of gold bullion from New York to Texas,” Governor Greg Abbott’s office announced upon signing the bill to authorize the depository in 2015. I think using the word “secession” would be impolite here but I’m also not denying that’s the word that comes to my mind when I hear this kind of crazy talk.

The Texas Bullion Depository offers a legitimate solution to some people’s gold storage needs. Undoubtedly, however, this facility will also stoke more fringy gold-bug fantasies.

gold_bug
It’s this kind of fringe-y garbage I worry about

Now, do you mind if I share my own fantasies? I was disappointed to hear from Hinsdale there are no plans as of now for a “visiting room” to see the physical piles of gold once the facility in Leander gets built. I would totally take my girls on a field trip to visit big lumps of other people’s gold. Then we could spend the whole drive talking about how to stage an Oceans’ 11-style heist of the “Fort Knox of Texas.”

And really, what’s the point of a Texas Bullion Depository if it doesn’t inspire this kind of magical thinking? If Richard Linklater or Robert Rodriguez isn’t currently writing a “Goldfinger of Texas” screenplay starring the Wilson brothers then I demand a full refund for all of 2018.

 

And please see the related stories:

The Four Horsemen of Your Personal Financial Apocalypse:

Never Buy Gold

Never Buy Bitcoin

Never Buy Variable Annuities

Never Buy A Time-Share

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Never Buy Gold

goldA significant portion of the Financial Infotainment Industrial Complex dedicates itself to selling you gold, as an investment.

Resist.

I have already written about the three other horsemen of your personal financial apocalypse: variable annuities, times shares, and bitcoins.

The commonality of these four horseman is that they are sold to credible people as “investments” when they are really the opposite of investments. All four act as a drain on your net worth.

Gold fails the fundamental test of what constitutes an actual investment.

What do I mean by the “fundamental test” of what makes an investment? I mean that unlike true investments, gold produces no cash flow. The birds-and-the-bees of compound interest is like this. Money begets money. True investments make you money because over time they reproduce little baby monies, which over time, reinvested, grow up to be big monies. That’s what positive cash flow means.

what_if_I_told_youThe way to value real investments is to measure future positive cash flow.

If you don’t want to get more technical than the birds and the bees, skip this next paragraph.

To get a bit technical for a moment, the fundamental value of every investment is the sum of all of its future cash flows, discounted to the present day. This is how to value private businesses, as well as publicly owned stocks, based on future re-invested profits and future dividends. This is how to value bonds, based on future interest and principal payments. We similarly calculate the value of commercial real estate, based on the expectation for future rents.

Gold, by contrast, produces nothing. No cash flow. No baby monies. It just sits there, a non-fecund lump. In fact, gold in physical form – like all other commodities – has negative cash flow, because of storage costs. You should reasonably expect a negative return over time on your long-term gold holdings, all else being equal.

But now you might be thinking that you’ve heard people, or at least seen people on television, talking about making money investing in gold. Gold certainly fluctuates in value, which can create the illusion of an investing opportunity. But it’s a speculator’s illusion, a gambler’s trick. It’s based on expecting other people to become fearful about the state of the world, which for a short time can make the price of gold go up. The little silver ball of a roulette wheel, similarly, consistently lands on either black or red, and you can observe people making Never_buy_goldmoney over a short period of time by correctly guessing the future color.

The key is not to look at how gold (or stocks, or bonds, or real estate) performed over the last few weeks or last few years. Rather, the key is to look at gold’s long-term results, in order to overcome any distraction we may suffer from short-term fluctuations.

Professor Jeremy Siegel – author of the finance classic Stocks for the Long Run offers the definitive take down of gold as a long-term effective asset class, especially when compared to real investments like stocks or bonds or real estate.

According to Siegel’s time series, one dollar invested in stocks in 1802 would be worth $706,199 by the end of 2012. One dollar in long-term bonds would be worth $282. Meanwhile, one dollar in gold would be worth just $4.50.

But what if you think of gold not so much to grow your money, like an investment, but rather simply to hedge against inflation? That’s also important to consider, for two reasons. First, because Siegel also notes that one dollar hid under a mattress in 1802 would be worth just 5 cents by 2012, its value eroded by inflation. Second, many gold-purchasers view their shiny metal not as a way to earn a positive return, but to guard against inflation.

But again, this lacks the historical view.

To hedge against inflation, you need the value of the thing you’re buying to increase in value at least as much as inflation erodes your money. But if a dollar only buys one twentieth of what it bought 200 years ago, then earning gold’s real return of 4.5 times isn’t enough.

If you really want to keep pace with inflation, buy real estate and stocks. Unlike gold, these actually do increase in value as fast as inflation. A company that sells a successful product can increase prices to keep pace with inflation, and can even earn a profit in the face of inflation. Own the company through its stock, and you too can outpace inflation handily with your investments.

Owning your own house, interestingly, is an effective inflation hedge. The price of homes, in aggregate, generally increases in line with inflation.

Some people buy TIPS – inflation-adjusted bonds from the US Treasury. I wouldn’t, but that’s at least a rational decision, with a positive cash flow, under inflationary conditions.

What if you had a $100 million investment portfolio? Should you buy some gold then? Ok, maybe. I don’t endorse it, but sure, you can afford to buy a wide variety of experimental assets without cash flow for diversification – including art – and maybe a diversified basket of commodities. Go ahead and buy collectible beanie babies while you’re at it. You can afford the loss. It won’t do you any good, but who am I to argue? You’re the one with the $100 million.

But what about the fact that during times of extreme financial crisis – like we last experienced in 2008 – gold prices soar. Didn’t gold prove its hedging value then? Yes, I can’t deny that gold prices temporarily responded to financial panic, mostly because other people and institutions buy into the fiction that gold is a “safe haven” appropriate for the financial, or zombie, apocalypse. You had a couple of weeks for feeling smug, but I know you’ve lost money on your gold investment since then. The medium and long-terms prospects for gold are always terrible, because gold is primarily a psychological trick played upon the scared and financially naïve. Don’t participate. Its fundamental value is as fictional as the Walking Dead. Nobody wants your lumps of shiny metal when the undead approach. You would be better off with backup power generators, baseball bats, and canned goods as an investment.

The only apocalypses are the ones happening in your head, and to your net worth.

A version of this post appeared in the San Antonio Express News and Houston Chronicle.

Please see related posts:

Never Buy A Time Share

Never Buy Variable Annuities

Never Buy Bitcoin

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