CHISWICK, WEST LONDON – Greetings from my mother’s house… It’s time for our weekly mailbag edition, where I answer the latest questions you’ve sent in.
Below, I explain why our Dow-to-Gold “magic number” is not absolute – and how we’ll use it to time our exit from gold and into stocks…
We discuss gold’s “realignment” in the monetary system, and a potential new soft gold standard…
And readers weigh in on our nomadic lifestyle – and what it means for both mum’s belongings and our kids.
But to kick it all off, an important question about what I call asymmetric outcomes…
Reader question: Teeka Tiwari is so compelling with his crypto wisdom. Others I won’t name, who are all good guys, too, push gold mining stocks, etc. I’m in the last 15 years of my life. My husband is very ill. Inflation will make our modest savings disappear quickly.
We’ve invested 10% in gold and silver and have it vaulted with a company you’ve recommended. Makes me nervous to vault in case of war, famine, and electromagnetic pulse (EMP) threats, but our life and home are not secure enough from thieves.
If we took 10% more for gold and silver, and some for Teeka’s crypto, what do you think? I worry about the coming crash and the dollar devalued on bank savings. Should I throw it all into an investment account and hold it there? What do you recommend? I’m a total novice as you can tell but trying so hard to learn. Thank you.
I’m answering your question first because I think it’s the most important question I’ve received all week.
It comes down to outcomes. If you lost 50% of your savings next year, how would that affect your lifestyle? If you doubled your savings next year, how would that affect your lifestyle?
I don’t know your personal situation, so I can’t give you personal advice, but typically, toward the end of our lives, these outcomes are asymmetric. What this means is, the pain of losing money is far greater than the benefit of making some profits.
To give you an example of what this means, I used to have this discussion with my mother all the time. She was at the end of her life and I’d tell her there was no benefit for her in taking the risk of owning stocks, or crypto, or even gold… and that she should go 100% to cash.
“If the market tanks and you lose half your savings, it’ll destroy your standard of living,” I’d tell her. “But if the market doubles and you make a big profit, it won’t make much difference to your standard of living. So you’ve got everything to lose and nothing to gain by taking investment risk. Better to be in cash.”
Reader question: I understand that the characterization of your personal Dow-to-Gold “bet” is good for what you are trying to accomplish as a newsletter writer – simple, unambiguous, and attention-grabbing. However, I see three serious issues:
Viewed over 200 years, the ratio has an obvious upward bias.
With the upward trend in the ratio, dropping below 5 becomes harder and harder over time.
Around the middle of 2011, the ratio got remarkably close to 5 – somewhere between 5.6 and 5.7. Had you been using 6 instead of 5, you would have pulled the trigger. Since that moment, gold has risen about 11.5%, while the Dow has risen about 170%. In other words, by using the arbitrary ratio of 5, a significant run in the Dow has been missed (over 10% compound growth!).
My conclusion is that – with a practical timeline – the odds of the ratio hitting 5, followed by the Dow having a strong multi-year run, are way too low to use as an investment thesis.
Thank you for your thoughtful email. The Dow-to-Gold ratio drifts higher over time because the Dow benefits from the power of compounding but gold does not. So I completely agree with you that the “magic number” for selling stocks and buying gold should adjust higher over time, too.
Here’s the thing: If you compare a chart of the Dow-to-Gold ratio with a chart of the Dow’s valuation in terms of earnings, you’ll see they’re very similar.
In other words, the Dow-to-Gold ratio is really a valuation indicator for stocks, expressed by two traded instruments (gold and the Dow). So in addition to watching the number 5, we’ll also be keeping a close eye on stock market valuations relative to previous bottoms in 1980, 1950, and 1933.
I’m not using 5 as an absolute number for selling gold and buying stocks. We’re using it as a limit for the minimum that we’d be willing to trade gold for stocks at. Once we go below 5, we’ll use a trailing stop loss system to capture the biggest gain we can.
Reader question: Thank you for recommending Harry Browne’s book. I have searched several used book sites and cannot find it on any of them. Any suggestions?
Harry Browne’s book, 99% of Everything You Need to Know About Money & Its Effect Upon the Economy, is only available in ebook format.
However, an earlier Harry Browne book, How You Can Profit from the Coming Devaluation, has a lot of the same content. You can buy this book in hard copy if you don’t want the 99% of Everything in ebook format.
Reader question: Always enjoy and agree with many of your thoughts. I was a bit stunned chatting with some friends over an outdoor breakfast this week. Conversation from one went…
“All this money-printing does not matter. New economic thinking says that as long all major world economies are pumping out relative quantitative easing (QE) at similar speed, they cancel each other out. Therefore, their currencies keep in step with each other, not causing any problems for a particular country or currency. German hyperinflation after the first world war, Zimbabwe’s collapse, and Argentina’s hyperinflation were all individual, one-country problems at separate times. Can’t happen when they all act together.”
I was stuck for words. Help me out with my reply for the next breakfast!
This is why we call our thesis the “synchronized global currency devaluation,” and why we own gold and expect commodity prices and consumer prices to rise. Because we expect all the major central banks to print money together, as your friend also points out.
Except, I think the fact they’re all doing it together will be infinitely more destructive than if only one country was doing it, because it’ll cause the first globe-spanning inflation in history.
Reader comment: Your mum’s house is beautiful, and it looks like she had lovely things. I think I do, too. But the reality is my kids don’t want any of it when I go. We live in a retirement community in FL, which holds a garage sale twice a year. We CAN’T even give the stuff away.
I’m talking collectibles that were highly desirable and expensive 30 years ago. The only stuff they want is the stuff they can sell for big bucks… and, of course, a few memorabilia (very few)! We asked them. It’s your memories of your mum that you will always have in your heart, not a storage unit filled with her stuff.
I agree. We must get rid of almost everything. Unfortunately, antique furniture is completely out of fashion at the moment and is almost worthless.
Reader question: You say you would be buying gold with the proceeds. What form of gold, and from what company is it safe to buy and not get cheated? Your advice at this time would be greatly appreciated by many of your readers, I believe.
We will probably buy gold in a vault through a company like Perth Mint, Sprott, or BullionVault.
For buying gold bullion, I use Apmex, among others. And for pre-1933 coins, I call Van Simmons at David Hall Rare Coins.
Also, you could visit a local gold coin dealer in the town where you live and compare their prices with the prices you find online.
Reader comment: Maybe you have been in America too long. It all seems about making big bucks quickly; money seems to be a god at times. It’s all very well traveling, lovely, but I think children will benefit more from staying in one place when they are a bit older.
A friend of mine’s mother moved a lot. He had 11 schools in the time whereas I had 2. Albeit his father left at 9 years old. But it has not done him a service at all. He either did some of the curriculum twice, and some of it not at all.
He has no long-term friendships that most of us have, and says that he would not wish that on anyone. Hence, he made sure his children had the same base for their childhood. I wish you all the best.
I can see how 11 different schools would be detrimental to a child’s education. Our kids will only go to one “school,” our homeschool.
However, we would like to give them the opportunity to make friends and be part of a community, so we’ll have to incorporate this into our plans, once fear of COVID-19 has disappeared.
In the meantime, we’d like to keep traveling because it’s working for us.
Reader question: Love how your family is living. Would love to do it but at 81, and my wife at 84, our endurance couldn’t handle it. Anyway, on to my question. What I’ve never seen addressed in any financial newsletter that recommends gold is this. In a financial crash:
How do you use gold bullion, coins, bars or whatever form to buy groceries or gas…
Why would the government not confiscate gold like they did in the early 1930’s especially if they thought it was a threat to their plans for us common folk.
You can’t use gold bullion to buy groceries or gas. It would be terribly inefficient. You have to first trade your gold for cash and then spend the cash. We’re buying gold as a store of value, not a medium of exchange.
I find it unlikely that the government will ban gold. Gold was exiled from the financial system 50 years ago. I just don’t think the benefits of banning it outweigh the costs anymore. (Remember, in 1933, the last time they banned it, gold was circulating as money.)
If anything, I think they’d be more likely to revalue gold without banning it. Especially if the U.S. is in a power struggle with China, whose citizens also own a lot of gold.
Can you imagine the outcry if the U.S. banned private ownership of gold, revalued it, and boosted the wealth of Chinese gold owners while preventing American gold owners from getting the same boost?
Reader question: I have been visiting local coin dealers and calling places you have bought from in the past. I know you have said to get whatever gold has the lowest premiums, which would be bars, for sure. Do you only look at the lowest cost when buying gold?
Coins are more “expensive,” but they also are worth more because of rarity. And most consider coins more desirable, especially the pre-1933 coins. Do you also buy coins? Would you buy the Liberty Heads coins that are pre-1933? How do you know if you are overpaying?
I buy coins. I don’t own any gold bars. Most of my coins were minted in the U.S., and a big chunk of them are Liberty Heads, minted pre-1933. I do have some foreign coins, too, and some modern ones.
Coins are more desirable than bars and tend to trade at higher premiums. I suppose it’s because coins are more recognizable and, therefore, more easily marketed. But I’m torn about what advice to give you.
On the one hand, I don’t mind what form the metal comes in, I just want to get as much of the metal for my cash. On the other hand, I imagine coins will always trade at a premium to metal bars, and so I’d recoup that premium whenever it came time to sell.
In other words, there’s no penalty for paying a premium because we will recoup that premium when we sell. With this logic, we might as well buy coins.
I’ve recommended not paying more than a 4% premium over the gold weight for a gold product. I realize that’s getting more difficult by the day, particularly for gold coins. It seems like physical gold is disappearing from the market.
However, I just did a search online of some reputable dealers and I was able to find a few gold coins trading under 4% premium. But only barely. Once the premiums go above 4% on coins, I’ll probably start buying gold bars.
Reader question: I was reading Jim Rickards’ book, The New Great Depression. Jim also sees a realignment for gold in the future, rather than a new gold standard suggests. The Federal Reserve could simply buy gold at progressively higher prices after making its intention known in advance.
This is a straightforward open-market operation, using gold instead of Treasury notes. As the gold price increased, the dollar would be devalued (as would other currencies) and inflation would arrive like clockwork. Inflation would melt the debt, the downturn would end, and real growth would happen.
Do you think the simple proposal would work and replace a new “Bretton Woods” agreement?
Yes, this is exactly my thinking. Also, by revaluing gold, the Treasury could reinforce the value of the dollar again (albeit a much-depreciated dollar). We’d have a soft gold standard again.
And that’s all we have time for this week! As always, please keep writing us at [email protected].
I can’t give personalized investment advice, but I’ll answer as many of your questions as possible in future Friday mailbag editions.
– Tom Dyson