CHISWICK, WEST LONDON – Welcome to another Friday mailbag edition, where I answer the latest questions you’ve sent in.

This week, we talk about gold coins… a reader wonders if I’m just making “stuff up on the fly”… and we look at what we really mean when we say the feds are “printing money.”

Let’s get right to it…

Reader comment: First things first: my condolences on the loss of your mom. My husband receives your e-letter and showed me the garden photo of your Chiswick home. It reminds me so much of the garden at our friend’s Chiswick home that I was moved to write. Our friends would pick us up from Heathrow and we would stay with them for a few days’ visit.

Seeing that garden brought back so many wonderful memories. That area always seemed like such a lovely place to live. I wish you and your family many happy memories there.

We love it here too. There are so many things to do… sports, arts, history, and architecture.

At the same time, we yearn for adventure and the open road. There is nothing like that here in West London.

I once tried to hitchhike back to Mum’s house in Chiswick from Heathrow Airport after coming home from one of my trips.

I sat for two hours on a curb by the airport exit with my thumb out. I got no takers. In the end, I had to come home on the tube…

Reader question: You made a comment that gold coins are hard to sell. That worries me since I have a large number of Eagles purchased long ago and have never tried to sell any. Can you elaborate on that comment?

Ha ha… I didn’t mean it’s hard to find buyers. Gold coins are liquid and desirable.

When I said they were hard to sell, what I meant was, unlike a stock, you can’t simply click a button on a mouse and sell them.

You have to box them up, take them to the post office and mail them somewhere… or go down to a local coin shop and trade them.

But this is part of why I like gold coins. That extra effort helps prevent me from making an impulsive decision to sell.

Reader comment: Years and years ago, I started buying silver and gold. On the side, I would bid in live and online auctions for sterling silver. I bought a lot at dirt-cheap prices compared to spot silver today. I am active, but now it is so hard to find bargains. Occasionally, the blind hog finds an acorn.

Silver is exactly the shelter I’m looking for – cheap hard money to preserve the purchasing power of our savings while we wait for the stock market to return to cheaper valuations.

Now, silver spiked to $50 in January 1980. Today it’s at $24. So despite 40 years of relentless inflation, silver has lost 52% of its value in nominal terms.

Even if you take silver’s January 1980 closing price of $35.75, and disregard silver’s intra-day spike to $50, silver is still down 33% over the last 41 years.

Adjusted for inflation, silver has lost over 80% of its value since its peak in January 1980.

So I have to wonder… Given how much higher every other commodity is trading from 1980 prices, is silver an incredible bargain at $24 an ounce?

Reader comment: You stated, “How will I know when it’s safe to come back in from the sidelines? The risk-free rate should be back above 2.6% on the chart above. When that day comes, we will sell all our gold, and put our savings into the financial system and the stock market again.”

What happened to your Dow-to-Gold ratio thesis? Previously you stated that you had a stop loss on your Dow-to-Gold ratio trade, but you recently mentioned that if that stop loss was triggered, you would ignore it, because “it’s the right thing to do,”

I’m starting to wonder if you’re making this stuff up on the fly as long as it supports your original thesis… substituting the Dow-to-Gold ratio with another methodology (the risk-free rate) that currently supports your initial strategy better than the Dow-to-Gold strategy that has been moving against you.

Good question. My core thesis hasn’t changed.

As you know, we have a finite quantity of savings, and we want to live off it for the next 50 years. That is to say, I’m taking a long-term approach to this game, and I’m very risk-averse.

My core position is simple: the financial world is extraordinarily unbalanced. It’s a dangerous time to be an investor or a saver… maybe even the worst time ever…

So we sit on the sidelines and wait for these extraordinary imbalances to equalize so we can safely earn “rent” on our capital again (dividends, interest, etc.).

The Dow-to-Gold ratio is important to me because I’m particularly interested in owning equity in great businesses.

I use the ratio to decide when it’s best to hold gold and protect our purchasing power… and when it’s safe to buy stock in great businesses again.

But, as I mentioned on Wednesday, the Dow-to-Gold ratio isn’t the only “boom-bust” indicator I follow. The inflation-adjusted risk-free rate is also an interesting gauge of economic balance.

It tells us, “this is the minimum return you can expect from your savings.” (When I say minimum return, I mean in terms of purchasing power – very important.)

As I showed on Monday, the real risk-free rate is normally between 2% and 3%. It’s currently close to -5%.

This tells me the marketplace does not desire our capital at the moment. And that confirms our Dow-to-Gold thesis: that it’s best to sit on the sidelines in gold right now.

In short, I refuse to participate in the financial system until these extraordinary and dangerous conditions have passed, which they will.

Until then, we remain on the sidelines patiently, waiting for the adjustment.

Now, as to your second question about my stop loss on the Dow-to-Gold ratio…

I’m glad you asked this. I created some confusion the other day when I said I wouldn’t honor our Dow-to-Gold stop loss at 22.23 if it ever got triggered.

When I first placed my Dow-to-Gold trade back in 2018, I used a lot of leverage, including opening a short position on the Dow using margin.

I also recommended two Dow-to-Gold pair trades in The Bonner-Denning Letter at the time.

I will update Bonner-Denning Letter subscribers on these positions in the next monthly issue… And for those positions, I still recommend honoring the stop loss. (The ratio currently stands at 19.66.)

Where I won’t be paying any attention to this stop loss is in our decision to go all-in on gold with our life savings.

There are gross imbalances in the economy and the capital markets right now. At current interest rates and valuations, I’d have to be crazy to rejoin the crowd and return our savings to the banking system or investment markets.

We’re in the late stages of an epic investment bubble. There’s no way I’m changing my position now…

I hope this clears up the confusion about my position on the stop loss.

Reader question: The tanker stocks I bought last year on your advice are underwater. I do not understand how you can say shipping is in the midst of a boom? Please explain!

There are three major categories of cargo ship: tankers, bulk carriers, and container carriers. Each sector has their own economics and cycles, so I try not to generalize about shipping.

Container shipping is on fire right now… setting new all-time records every week. Dry bulk rates are at high levels last seen in 2010. Meanwhile, as you point out, tankers have hit a slump.

Tankers are making no money at all right now – especially crude oil carriers. (There are several sub-categories of tanker.) Rates are so bad, it’s almost cheaper for a boat not to leave port with a cargo.

But this is why, in my Tom’s Portfolio advisory, we’re diversified across several shipping categories.

Shipping is one of the most volatile industries… so we never want to put all our eggs in one basket. Instead, since I first recommended tankers, we’ve spread our risk across 14 stocks in different shipping categories.

And it’s worked out well so far. Since my initial recommendations, the Tanker Trade in our model portfolio is up 44% on average – including three triple-digit winners.

As for oil tankers specifically, the three tanker stocks currently in our model portfolio are up 0.4%, down 14.8%, and down 30.2%, including dividends.

Now, I’ve written about new propulsion rules and pollution regulations, and how they’re going to be good for the industry (catch up here). The thesis is taking more time to unfold than I anticipated initially…

But I’m still convinced oil tanker stocks have to rise from these levels over the next three years. And I don’t see how they can get any cheaper at this point.

I even encouraged Dusty and Miles to buy a few shares in an oil tanker company with their stock portfolios. We’re just waiting for COVID-19 to go away and for OPEC, the international oil cartel, to increase cargoes. Rates should firm quickly in this scenario…

Reader question: While talking with a knowledgeable friend the other day, I learned that the government doesn’t really print more paper dollar bills like many of the investment letters lead you to think. What really happens is an electronic transfer of money within our government takes place; and I think he said the Federal Reserve is involved.

Can you please elaborate more on what actually happens when the government receives money, but doesn’t actually print more paper dollars?

The government’s role is simple. It spends far more money than it earns and has to borrow the difference. It’s currently borrowing $28.7 trillion, and its borrowings are increasing by about $3 trillion per year.

The government borrows this money from the marketplace. The trouble is, when the government soaks up these gargantuan quantities of dollars from the marketplace, it overwhelms – or “crowds out” – the other participants in the marketplace.

The market can become stressed, especially if there aren’t enough lenders and interest rates aren’t allowed to adjust higher to attract more lenders.

So, in these cases, which has now become pretty much all the time, the Fed steps in and becomes the lender of last resort.

It finances the government by taking the government’s debt onto its balance sheet and crediting the government’s account with digital dollars.

The government can then spend these digital dollars in the economy.

Cash isn’t a big component of the money supply anymore. We live in a credit-based economy running on digital dollars.

So the term “printing money” is really more of a convenient euphemism we use to describe the Fed’s role in expanding the currency units in circulation.

Hope that helps.

And, as always, keep your questions and comments coming at [email protected]. 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 decide to republish your note.)

– Tom Dyson

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