CHISWICK, WEST LONDON – Welcome to another edition of our Friday mailbag, where I answer the latest questions you’ve sent in…
This week, we talk gold, and why I call it “fire insurance”… oil tanker stocks… and “Income for Life” insurance policies – one of the best-kept retirement secrets in the world.
Let’s dive in…
Reader question: Why do you want to hold physical gold/silver when the trading spread is 7-10%? Wouldn’t a bullion-holding company like Sprott, or royalty like Franco-Nevada, or even just a gold miner like Barrick Gold be more efficient and easier to account for?
I use all the gold vehicles you’ve mentioned… physical gold, vaulted gold, gold royalties, and gold mines.
A committed gold owner should know the difference between these vehicles… and when they apply and when they don’t apply. They each have their own benefits and drawbacks.
I will use my personal situation as an example…
First, we are extremely risk-averse because we cannot afford a big mistake. These are our life savings, and we have three young children to provide for. This is serious business for us.
Second, I’m certain that the financial “environment” is unstable and there will be a painful correction in the markets at some point. I just don’t know when. So we’re willing to go “all in” in gold, but the gold vehicles we choose must be suitable for long-haul investing.
Third, I’m cheap, so I’m allergic to commissions, fees, storage costs, and taxes.
Taken altogether, physical gold is my preference, and I use a combination of vaulted gold and gold held in my possession. Then, I buy gold royalties and gold miners with my retirement account funds and funds that I may have to liquidate at short notice.
I keep my investments in gold miners and gold royalties quite small because they are more volatile and more sophisticated than physical gold.
Reader question: Why do the gold and silver markets keep believing the Federal Reserve’s jawboning? Seems every time the Fed mentions “tapering,” gold and silver get hit. The pattern is troubling. This puts a cap on its safe-haven appeal. Very frustrating.
Gold and (to a lesser extent) silver will shine when either A) a sentiment of fear and pessimism takes over in the minds of investors, like it did in Q4 2008, Q4 2018, or Q1 2020…
Or B) mistrust in the U.S. dollar as a long-term store of purchasing power begins to reproduce and multiply, causing a stampede out of the U.S. dollar bond market.
Option B is something I haven’t seen in my lifetime. But I expect it to happen if they keep printing new dollars, spending like maniacs, and manipulating interest rates.
Until we get either of these conditions, gold will lag other asset classes.
By the way, this is how things like this work and how I want it to be…
Think of gold like homeowners’ insurance. Most years, you write a check for $500 but once in a generation, you receive a check for $1 million.
The financial markets are an inferno just waiting to happen and we’ve bought an enormous amount of fire insurance (gold).
I do not expect to make any real money on our gold bet until the flames are 30 feet high… and the fire department isn’t even bothering to fight them anymore.
In the meantime, I’m just grateful that interest rates are near zero and there’s almost no opportunity cost in holding gold. It’s like the fire insurance is almost free…
Reader question: I would love Tom’s opinion on why gold has gone down in value in the most troubling times in the past 150 years. In times when gold should have been going through the roof, it has done nothing but decrease in value.
I have put more money into gold than Tom has, only to see it go down in value while my cryptocurrency portfolio has gone up incredibly (as have my real estate investments and stocks).
I think gold is the worst investment that you could have picked during these times. Regardless of what Tom, Bill Bonner, and Dan Denning say, their prediction on gold, particularly over this period of time, has been a big flop.
See my answer above. The inferno hasn’t started yet. It almost got going in March 2020, but they managed to put it out.
Until the flames are 30 feet high, we’ll just have to keep writing small checks to the insurance company…
Reader comment: I’m confused about the Dow-to-Gold ratio. In the past, I thought the recommendation to sell gold and buy stocks was at a ratio of 5 or below. Your latest Postcards indicate the ratio is 22.36.
We will sell all our gold and use the proceeds to buy great dividend-producing stocks – what I call “corporate aristocrats” – when the Dow-to-Gold ratio is below 5.
Until then, Kate and I will keep almost all our life savings in gold.
If the Dow-to-Gold ratio rises above 22.36, I will close the speculative trades I recommended to profit from a decline in the Dow-to-Gold ratio in The Bonner-Denning Letter. (I will notify Bonner-Denning Letter subscribers when the time comes.)
But it won’t alter our personal financial strategy.
Reader question: You mention regularly that holding a store of gold and silver is your preferred choice for protecting your capital. Unfortunately, in England, VAT [a value-added tax] is payable by everyday taxpayers, like me, on purchases of silver if we take delivery of the metal.
There are bullion dealers in the U.K. who will accept contracts for silver purchases from me but not deliver the silver to me. They claim to hold a dedicated amount of silver in my name. This would not attract VAT directly, as I have not taken delivery of the actual metal. Would you recommend this option? Is there a better way to invest in silver?
I can’t give personalized advice, but as a general rule, I would not use this vehicle. I do not want to place my trust in someone else’s ability to pay me back.
Two alternatives I would consider…
One, buy gold bullion instead. Gold bullion is VAT free in the U.K. and British legal tender gold coins like Britannias are Capital Gains Tax free, too.
Or two, go to the antiques market and buy antique silver objects for less than their scrap silver value.
I haven’t done this myself but I’m sure it’s possible, especially in the U.K., which has the deepest, most liquid markets for antique silver in the world.
Reader question: I don’t understand if importing items to the U.S. has become so expensive due to shipping prices why the tanker stocks are doing so bad. We are seeing container shipments prices have doubled and the stock prices still sink. We have seen the steel, lumber, and copper prices raised and the tankers stock sink.
I have been following you since the pandemic started. I have loaded up on silver, gold, tanker stocks, and Brownstone Research’s (your colleague Jeff Brown’s) stocks. I have also invested in cryptocurrencies. To be honest, the worst return on investment have been your recommendations.
Don’t conflate the different shipping segments. They should be considered separately.
For example, the price to ship a cargo of containers right now is the highest it’s ever been… up about 5X in the last 12 months.
Meanwhile, the price to ship a cargo of crude oil is near the lowest it’s ever been right now… and doesn’t even cover the cost of operating the ship!
The thing is, shipping is a super-cyclical industry. Demand for transporting crude oil may be low right now, but it will come roaring back sooner or later.
We’ve seen it with containers. We’re seeing it now with dry bulk. Oil transportation will be next. And when it comes back, tanker businesses will erupt with cash and dividends.
And remember the big picture.
Oil tankers are the last cheap asset class. There isn’t much downside left in them at this point. Yet, they’re hard assets, made of scrap steel, and they’re scarce.
That’s exactly what I’m looking for in times of increasing inflation.
The fleet is aging and scrap steel prices are at 13-year highs, which has triggered a surge in tanker scrapping.
Meanwhile, there will be no significant new tanker orders for years due to uncertainty around emissions regulations and all the shipyard berths being reserved by the container shipping industry.
So I see oil tankers as great, but unconventional, hard-money shelters for our capital.
Just remember, oil tanker stocks are extremely volatile and behave more like options in their price movements. Also, this is a speculation, so we keep our total portfolio allocation to oil tankers very small… not more than 15%.
Regarding my oil tanker recommendations, my sons, my dad, and my brothers also bought oil tanker stocks on my encouragement.
Kate and I have also lost some of our savings by investing in oil tankers, while almost everything else, including the S&P 500, has risen. So I understand your frustration with the oil tanker stocks.
That said, I can tell you we are still invested, and I’m content to keep holding.
This is a long-term speculation. And my bullish view on tankers hasn’t changed. It may just take a few more years to play out – maybe longer than the 2-3 years I originally anticipated.
Reader question: I recall a while back you mentioned a particular kind of annuity that interested you. Can you please remind me which kind of annuity it is?
It’s not an annuity. The product you are referring to is plain vanilla whole-life insurance from a mutual life insurance company.
A mutual life insurance company is a life insurance company that is owned by the policyholders. We have six policies and we receive dividends on each policy.
It’s what I call “Income for Life.” And it’s one of the world’s most powerful wealth-building accounts.
Our policies just grind away, year after year, compounding our savings tax-free… and offering us liquidity whenever we need it.
And that’s all we have time for today! As always, don’t hesitate to send me your questions and comments to [email protected].
I read every note you send us, and I’ll respond to as many as I can in future Friday mailbag editions.
– Tom Dyson