CHISWICK, WEST LONDON – Greetings from my childhood home…

It’s time for our Friday mailbag edition, where I answer the latest questions you’ve sent in.

Gold is on readers’ minds this week, including: Will the government confiscate gold again, like it did in 1933? Are central banks suppressing the gold price? And what’s the best currency to hold against a depreciating U.S. dollar, besides gold?

While others weigh in on the new Hero Trade I’ve been exploring in these Postcards, to bet against the debt bubble.

All this and more below, so let’s dive in…

Reader question: What stops the U.S. government from seizing all gold held by U.S. citizens, like President Roosevelt did?

Apathy. Why would they want to confiscate gold today?

In Roosevelt’s time, gold circulated as currency. Roosevelt had very good reasons to confiscate it.

Today, gold is seen as a pet rock, a relic, a pariah of the banking system. It poses no threat to the ambitions of the state, in my opinion.

So I ask, why would they confiscate it when doing so would only alienate American voters?

Reader question: I agree that owning junk bonds seems suicidal. It reminds me of the investors who bought 100-year Argentine bonds in 2017 at 7.9%. They have already lost about 40% of their value. If you believe junk bonds are truly ready for a big plunge, you might consider buying and selling HYG calls for a credit spread. Just an idea.

The iShares High-Yield Corporate Bond ETF (HYG) is a gargantuan exchange-traded fund (ETF). It holds $20 billion in assets. And it’s the 12th largest bond ETF in the universe of 462 bond ETFs.

It does look like a great short. I’ve even considered betting against it, but I stopped myself. Why? Because I think I can express this trade with a better risk-reward profile if I look at individual companies. (HYG only declined 21% in March 2020, which I find a little underwhelming.)

Also, I need to be able to express this trade in my retirement account, so advanced option strategies are off the menu.

I’m still thinking about the best way to express this trade with individual companies. Once I have something concrete, I plan to add it to the model portfolio at my Tom’s Portfolio advisory.

Reader question: Read your Postcards every day and love them. Feel secure in investing in gold and hoping to capitalize on it one day. In one of your posts, you recommended Robert Prechter’s book, “Conquer the Crash.” In it, he is suggesting that the coming crash will be deflationary, while you seem sure it will be inflationary.

In looking at what the Fed is doing, I agree with you. But at the same time, I wonder how Prechter can suggest the opposite. In a deflation, wouldn’t cash be king, and in inflation, gold would be? Help!

I’m not certain the crash will be inflationary. Whether the debt bubble deflates through inflation or deflation depends on future decision-making by policymakers.

At this stage, more money-printing and intervention is inevitable, because there’s nothing to prevent it. But if prices start rising uncomfortably fast, policymakers will face a much tougher decision. Who knows how they’ll react?

This is why I love my bet on the Dow-to-Gold ratio. To work, it doesn’t require any predictions. It’s a simple observation that in inflation or deflation, the Dow will decline in real, inflation-adjusted, terms.

To me, this is the ultimate response to the great credit bubble… an investment strategy that wins whether we get inflation or deflation. 

Reader question: In respect of buying physical gold and silver, it is a lot more expensive and complicated here in Israel. Gold and silver purchases are subject to a value-added tax (VAT), and because of the fairly small market, commissions are a minimum of 10% (if not more) on top of the price of gold.

I managed to do one purchase by buying some gold coins that someone else was wishing to sell in order to at least avoid the VAT aspect… but the dealer was not prepared to reduce their commission from 10%. I don’t know if you have readers from other countries who may have similar issues like me. Not everyone lives in the U.S. or England, where the market is large and there are various options.

I don’t have any good suggestions for you on how to buy cheap physical gold in Israel. Maybe you can buy gold through BullionVault instead?

You won’t have the gold in your possession, but at least you’ll own physical gold. And you won’t have to pay a big premium over the spot price of gold to purchase it…

Reader question: What percentage of one’s investable equity (outside of his property) should a person put into physical gold if he is in his late 70s? What type of gold (bullion, coins, other) if that person has enough income to live? Where are the reliable places to buy such gold? What is the best way to store it (deposit box, safe, private company)?

Before I answer this, keep in mind I can’t give personalized advice. All I can tell you is what I’m doing.

I’m putting nearly 100% of my investable savings into gold, silver, and steel. (I keep a little cash for emergencies.) I don’t feel safe leaving our savings anywhere else.

I try to buy the cheapest gold I can find, ounce-for-ounce. I prefer coins over bars, just because I think they’ll be easier to sell in the future.

To store gold, any of the ideas you suggest would work fine. I would maybe use all three to avoid having all my eggs in one basket, as they say?

Reader comment: I took my original MicroStrategy position “off the table” when it doubled. Later, I took approximately $12,000 in additional MicroStrategy profits, “off the table.” My remaining MicroStrategy shares are currently UP nearly 400%.

My gold/silver positions have done nothing. I’ve come to believe that the gold/silver markets are the most manipulated of all. I guess it doesn’t pay to “fight the Fed.”

Congratulations on a successful trade in MicroStrategy.

You say your gold/silver positions have done nothing, but that’s sort of the idea, isn’t it? Gold and silver are real money. They should do nothing, except preserve purchasing power.

Don’t forget: We’re in the final stages of the greatest financial experiment in history. As I wrote in the June 30 Postcard, MicroStrategy is just one warning sign of the cracks forming in the credit markets.

Just because being conservative with your wealth doesn’t make as much money as taking risks with your wealth doesn’t mean being conservative is the wrong decision. In my opinion, it’s the right decision.

I’m happy to sit on the sidelines in gold and enjoy the show without any need to enter the fray. If you agree with me that this great experiment is going to end badly then you should be, too…

Reader question: I’m highly suspicious and concerned that central banks are suppressing the price of gold to create the illusion that inflation is not a problem and that everything is under control. It seems to me, despite the markets hitting new highs, that gold should be considerably higher.

Don’t people realize how insane the world is right now? Perhaps I’ve answered my own question. I’d appreciate your thoughts.

I don’t think gold should be “considerably higher”… yet. Gold is a safe haven… a chaos hedge. It rises most when investors are panicking and the train seems to be coming off the rails.

Right now, there’s no chaos. No one wants a safe haven. They want GameStop and bitcoin and the Nasdaq and vacation homes.

As for central banks suppressing the gold price… I don’t think the government actively invests in suppressing the gold price.

It’s just a hunch. But even if I’m wrong, and the government was actively suppressing it, I wouldn’t care. In the end, the real price always reveals itself.

I just think gold’s time to shine hasn’t arrived yet. That happens when the credit bubble bursts and the Fed isn’t allowed to keep intervening in the market. And that still could be some ways off into the future…

Reader question: Why do you use the Dow instead of the S&P, by example? The Dow is not the best to represent the market value (S&P would be better), and when the index changes their compositions, we are comparing plums and cherries over time.

Hence, I like the idea of making a ratio between the market value and gold but have some reservations about using the Dow to do so. I would appreciate your thoughts about this.

It’s true, the S&P is a better proxy for the whole stock market than the Dow. But the Dow is good enough for our purposes. I’ve charted the S&P-to-Gold ratio next to the Dow-to-Gold ratio going back a century, and they’re nearly identical.

The other way I like charting this is with Berkshire Hathaway’s A-shares against gold. It gives you a very pure view of a high-quality equity compounding strategy versus gold. I wrote about that in more detail in the May 26 Postcard.

Reader comment: Looking at the chart of recessions, it strikes me that the frequency has really dropped off since the Bureau of Labor Statistics started monkeying around with how they calculate inflation, artificially lowering the measure, I’d argue. Given that inflation is the deflator applied to nominal GDP to calculate real GDP, the growth or contraction of which defines recessions, this seems expository.

In other words, if they still calculated CPI the same way they did in 1980, we’d have since seen many more declared recessions.

I wonder if we could use gold as the constant and chart GDP-to-Gold to see the frequency of recessions over the last 100 years, instead of using the shifting Consumer Price Index (CPI) calculation?

(For those who missed it, I shared a chart of U.S. recessions going back 120 years in the June 28 Postcard.)

Reader question: I live in Jackson, Wyoming. Can I help you get your car out of the Idaho Falls airport parking lot and move it to a cheaper place to park? Maybe I can find you a free place.

It’s very kind of you to offer your help. Thank you.

Actually, colleague Dan Denning (coauthor of The Bonner-Denning Letter) has offered to buy the car from us and take over the responsibility of it. So we sold it to him!

Dan will go and pick it up sometime soon. In the meantime, we’re only paying $40 a month to store it at the airport…

Reader question: Aside from holding gold, what currency would you hold to hedge against a devalued U.S. dollar? Perhaps the Norwegian krone? Swiss franc?

I am an 80-year-old woman who just sold my house and wants to safeguard the funds. I know nothing about investing in the market.

Excellent question. I’d probably hold a basket of East Asian currencies, including China, Taiwan, Japan, and South Korea.

I prefer gold to all of these currencies, but since you asked me for my favorite paper currency, I’d go with these East Asian ones. I think the world’s center of economic gravity is moving east. And as the U.S. depreciates its currency, capital will flow into these currencies.

In the past, I might have said the Swiss franc, but I don’t like how the Swiss Bank buys equity in risky U.S. corporations and pays negative yields.

And that’s all we have time for this week! As always, please keep sending me your questions and comments at [email protected].

I read every note you send us, and I’ll respond to as many as I can in future Friday mailbag editions. (I’ll never reveal your name or potentially identifying details if I republish your note.)

– Tom Dyson

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