A True Store Of Wealth

If you haven’t seen the first season of “Yellowstone” prequel, “1883”, take the time to watch it.

It has a lot of good lessons.

One key one is the value of things… or lack thereof as the case may be. As the Dutton family is crossing the U.S. with a wagon train, you see settlers lose one possession after another from pots and pans to an ill-advised upright piano that just weighed down the wagon in the mud.

The Duttons brought only the necessities for the trip. One of Elsa Dutton’s necessities is a bracelet of small gold nuggets her father gave her. She’s able to use the gold nuggets to buy things at the trading posts they come across. People bartering their fancy possessions for food don’t get the value of those possessions, but Elsa gets the value from her gold.

Financial pundits say to hold at least 10% of your investment portfolio in precious metals—gold, silver, platinum, and palladium. They’re thinking about wealth management. They aren’t thinking like the Duttons.

Effectively, you need two parts of your wealth held in precious metals. One amount as a general hedge against inflation and the volatility of other asset classes and another amount as a hedge against a financial system meltdown or other global crisis where fiat currency isn’t available or isn’t acceptable.

Unlike paper money, gold and silver have millennia of history being accepted in trade. It’s what the world will revert to in times of crisis.

The truth is paper money isn’t even accepted as easily as it used to be… at least in Europe where cash transactions are legally limited in size. You can’t even cash a check in a bank in France. You have to deposit it into your bank account and take cash out of the ATM.

Many people don’t even carry enough cash to buy a cup of coffee preferring to use credit and debit cards, Apple Pay, Google Pay or some other online app. I used to get stuck paying for things in small kiosks in Europe when traveling with my grown kids. They don’t carry cash. Fortunately, many of these vendors have portable credit card processing machines that connect to data on their phones.

What happens when the vendor’s hot spot fails? You can’t buy anything unless you have cash.

Now think bigger. What’s going to happen when (not if) bank computers and ATMs shut down due to electrical outages, cyber-attacks, or because governments turn them off? The masses will likely be caught short unable to pay for goods and services.

Cash is still accepted in most places despite European countries trying hard to eliminate it altogether, but even people who have cash in their pocket for random purchases don’t hold a backup stash of cash at home.

Before you start building up your precious metals holdings, I recommend starting with holding some cash… not in a bank account, but in your wallet. Keep at least enough cash on hand to get you through a couple of weeks of groceries.

Once you have some cash on hand, the next emergency bucket you should fill is one with gold and silver in an accessible location.

While the financial pundits want you to hold at least 10% of your wealth in precious metals, that gold and silver is typically held in a vault in somewhere. That could be under the airport in Zurich where billions worth of gold is stored in an area effectively as secure as Fort Knox. Or it could be elsewhere like Singapore, Hong Kong, or even the U.S.

One company I know of has a $250,000 minimum requirement for holding gold with them. If you’re wealthy enough to hold that much gold, you might not have thought of the practicalities of accessing your gold in a time of global crisis.

What good is that gold held in a vault if you can’t get to it?

If you can get to it, what good is that gold to purchase daily necessities if it’s in the form of a one-kilo bar? You’re not going to buy $73,000 worth of groceries at one time and shaving off pieces is impractical.

Bulk gold definitely belongs in everyone’s portfolio as a store of wealth, but it’s not going to be much use in a global crisis where paper money isn’t accepted and you need to feed your family.

One ounce gold coins are portable, but still have the problem of use for smaller transactions. Maybe you’ll buy $2,300 worth of groceries if you have to in one trip to the store, but unlikely.

You need transactional sized bits of gold and silver in a worst-case scenario.

One option many Americans have embraced is pre-1965 coins. These ‘junk’ silver coins have about three-quarters of an ounce of silver for every dollar of face value (90% silver content in the coins themselves). You can buy these in bulk online from coin dealers.

These coins can work well, but silver is bulky for its value. Transporting large dollar amounts of it gets cumbersome and expensive.

Gold options include coins smaller than a one-ounce Maple Leaf or American Eagle—a-half, a-quarters, and even one-tenth of an ounce. Still, the value of even small gold coins can be more than you’d spend in a single trip to the grocery store, but more transactional than a one-ounce coin or a one kilo bar.

The premium paid over the metal value for silver coins and smaller gold coins is at least 25%.

A mint in Switzerland came up with an end of days product to make it easier to conduct business when fiat currencies are no longer acceptable.

Valcambi CombiBars come in versions where you can cleanly break off smaller one-gram pieces of silver, gold, or platinum. The 20-gram gold version has a 20% premium over spot prices and gets you down to under $100 for transactional purposes (one gram of gold is currently worth about $65 before the premium).

Valcambi and other mints produce half-gram, one-gram, 2.5 grams, 5 grams, one-tenth of an ounce, and one-quarter ounce ‘mini’ bars that come in individual assay packaging.

The packaging is meant to assure whoever you might exchange your gold with that it’s actual gold.

These individual bars have between a 20% to 50% premium. The smaller the bar the higher the premium. It costs money to mint and package.

Besides acting as a confirmation of metal content, the packaging helps you keep from losing the small bars that can be the size of a phone chip.

Despite having been around for a long time, these small bars including the Valcambi CombiBars aren’t well known beyond gold bugs and coin collectors. That leaves the question as to how exchangeable they would be in a time of crisis.

The same holds true for the latest form of transactional gold: Goldbacks. They aren’t well known yet having been around for only five years. However, the creators of this gold product are working hard to make Goldbacks easily used for purchases or exchanged for fiat currency. To date, they’ve issues series of bills in five states with a growing list of local stores in each state that accept Goldbacks.

Goldbacks are effectively gold paper currency. Each bill contains an amount of gold. One Goldback has 1/1000th of an ounce. A 50 Goldback bill has 50/1000ths or 1/20th of an ounce. Stack twenty of the 50 Goldback bills and you have one troy ounce of gold.

These are the smallest denominations of gold out there which means they come at a higher premium…about 100% right now.

However, once purchased, you can exchange them in the stores that take them at the same premium. In other words, if you bought one Goldback at the official exchange rate on their website for $4, you can buy goods in a store accepting Goldbacks for $4 assuming the exchange rate hasn’t changed.

They’ve also arranged with one of their distributors to accept Goldbacks to guarantee liquidity. However, at 1,000 Goldbacks for a one-ounce gold coin, you’d be losing the premium value of the Goldbacks. Better to spend them or sell them outright.

The big benefit of Goldbacks is their denominations (1, 5, 10, 25, and 50) ranging from 1/1000th  of an ounce of gold to 1/20th of an ounce. It makes them portable and transactional compared to even one-gram bars of gold. The downside is the high premium.

At the end of the day, you have to decide what type of gold or silver product fits your portfolio, your lifestyle, and your risk tolerance.

Holding gold as a store of wealth is a good idea as is holding gold for a global crisis. The problem is those two objectives require different products.

Fortunately, good options are available for both objectives.

Stay diversified,

Lief Simon,

Editor. Offshore Living Letter