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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Never Buy A Time Share

timeshare_bullshitOh time share, time share!

How do I hate thee? Let me count the ways.

I hate the way you are sold. I hate they way timeshares give the appearance of an ‘investment,’ when they are in fact the opposite of an investment. I hate the way financially distressed people buy you.

I’ve previously urged readers to never buy a variable annuity. Last fall I broke my self-imposed rule to never even mention the word bitcoin. Some day soon I’ll write about never buying gold. Taken together, time shares, variable annuities, bitcoin and gold are the Four Horsemen of your Personal Financial Apocalypse.

All four share the common characteristic of being packaged and sold as sound investments, when really they’re expensive, money-soaking, tricks.

For your benefit, I signed up for a timeshare pitch last week. I sacrificed an otherwise pleasant afternoon to multiple aggressive and manipulative sales techniques packed into 90 minutes. You’re welcome. I deserve a medal for bravery.

Roberto, my personally assigned salesman at Wyndham Resorts, asked me for fifteen minutes what kind of vacations I usually take, what place I like to go, and what people I go with. As I warmed up to describing past skiing and camping trips with my daughters, he asked me to share what kind of “feelings” I experienced with my daughters while on vacation. Oh, Roberto, thank you for asking.

always_be_closingPlunging deep into the hazy mist of emotions and family, I learned that timeshares are a legacy to pass on to my daughters. They promise “ownership” in perpetuity, yet every month charge “maintenance fees” which never go away. My editor at the newspaper is an heiress who “inherited” a Hilton Disney World timeshare from Dad. Hey, thanks Dad! It costs her $1,500 a year to maintain. With a handsome legacy like this, she may never be able to retire.

Once made dizzy by this emotional journey, Roberto began to bludgeon me with the fuzzy logic of timeshares. Since I already spend a certain amount of vacation money per year on my family – as he scribbled some numbers on a page – wouldn’t I like to “own” rights to vacation spots rather than “rent” as I have been doing up to now through traditional hotels? What if I could do that at less cost? More number scribbling followed, plus I would gain “Deed and Title” to vacation ownership. Roberto wrote “D & T” on the page and underlined it twice, so I’d really grasp the solidity of this type of ownership.

“Deed and Title?” That is such garbage. Ask anyone who has ever had tried to book timeshare vacations with points and you will quickly enter a world of “exchange fees,” added fees for “guest certificates,” fees for membership in the points exchange company, and heavy restrictions on usage. Can’t book your vacation with one and half years’ lead time? Sorry, all the places you want to go, at the listed “points” price, are blocked.

Have you ever noticed that carnivals and video game centers always work on a tokens or tickets system, rather than money? Timeshare venders use points for the same reason.

But back to my afternoon with Roberto:

wyndham_resorts_fraudHe repeatedly used the classic “anchoring” sales technique of saying the full price of their vacation point package would be $100,000, only to eventually offer a very similar package for around $27,000. Wow, I should have been thinking, what a huge discount. All just for me?

Actually, he made two offers, a bigger price and a smaller price. Given those two, he asked, which one seemed more attractive to me? This is the sales technique of making me feel like I’m cleverly in charge and actively choosing a smart, low-cost, option.

Were the offers made affordable? Well of course they were, because I can make a low down payment and borrow the rest. Wyndham offered to “finance” part of my purchase of the “Deed and Title” to their vacation points, at 13.99% interest. So that was really nice of them, assuming I don’t mind paying sub-prime mortgage interest rates.

When he heard I was in finance, my salesman focused on the clever “inflation hedge” aspect of these timeshares. Since the cost of hotels would be increasing by 10-14% in coming years (an #AlternateFact, but whatever) I should know that my points would always be worth the same amount forever, so I’d be better off buying today rather than waiting for another day.

Speaking of today, in a classic red-flag sales technique, Roberto would not allow me to take any of their marketing materials or specific offers home to “think about it.” The offer, of course, was “this day only,” with assurances that on any subsequent day I came back the offer would likely be worse.

four_horsemen_personal_financial_apocalypse
The Four Horsemen of your personal financial apocalypse: Time Share, Variable Annuity, Bitcoin, Gold

After I had declined to purchase the package, I was sent to an exit interview with a new person. Following a few cursory “how was your experience today” questions, she hit me up once again with an offer to purchase a smaller package, at an even lower price. Today only, of course.

In an earlier professional life, I networked with bankruptcy trustees, the people who sell off valuable assets of the estate of a person who goes bankrupt. You’re not going to believe this but trustees always, always, always had timeshares to offer.

The simple problem for bankruptcy trustees is that timeshares are worth nothing. No, that’s not quite right. Timeshares are worth less than nothing. They have negative value, because they cost money every year to maintain.

This is why Ebay is full of offers for timeshare vacation weeks, and hundreds of thousands of “points,” for $20, or $1. Or even $0.01. Check it out.

Caveat Emptor, or buyer beware, on any particular offering on eBay, obviously, but a scan of timeshare message board confirms that paying full price for a timeshare is a complete mug’s game.

timeshare_bankruptcyAll bankruptcy trustees become inadvertent experts in timeshares, and not just because they can never seem to sell these so-called “assets.” There’s clearly a positive correlation between people who go bankrupt and people who are tricked into believing timeshares are a good investment. Bankruptcy trustees tell a quiet joke amongst themselves that, by law in the United States, nobody is allowed to go bankrupt unless they have first purchased a timeshare.

The slogan of the entire industry should be: “Timeshares: All the costs of renting, none of the benefits of owning.” Catchy, no?

See, that’s why I don’t work in marketing.

 

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

 

Please see related posts:

Never Buy a Boat

Variable Annuities: Shit Sandwich

Bitcoins and Bullocks

Vacation camping with my daughter

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