Digital Wealth and Counterparty Risk
Countering Counterparty Risk with Diversification
- First-class postage was 4 cents.
- A Coke was 10 cents.
- A gallon of gas was 31 cents.
- Tennis shoes were $5.
- A new car was $2,500.
Back When I Was Born...
A Good Night's Sleep... Worth Its Weight in Gold?
Now, if gold really is a reliable store of purchasing power – it's not called "the gold standard" for nothing! – then 56 years later (God, am I really that old? LOL), an ounce of gold should still buy me six nights at Motel 6. If it only buys me five nights or four nights, gold has not maintained its purchasing power. So, let's find out if gold has maintained its purchasing power to buy the same number of nights at Motel 6 since the day I was born.
Upon checking, the Motel 6 in my area is charging $60 per night. Now, are the rooms at Motel 6 ten times larger than they were in 1962? Nope. So, why do they cost ten times more? The reason is that the dollar's purchasing power is only worth 10% of what it was in 1962. It's lost 90% of its purchasing power! That's no good. So, how DID gold do? Did it lose purchasing power so that an ounce of gold can only buy five nights or four nights or three nights or even fewer today?
Let's do the math:
Gold is at $1,900 today. Motel 6 charges $60 a night. That means that an ounce of gold will buy me more than a three-week stay at Motel 6! That's $1,900 ÷ $60 = 31 nights. Politicians will tell you that rising prices is the result of "corporate greed." They've redefined the word inflation to mean rising prices and blame inflation on those companies who increase their prices. This incorrect definition even shows up in modern dictionaries. But rising prices is not inflation. Prices don't "inflate." That's not even English. Prices rise. Rising prices is not inflation, it is the result of inflation. Here is how an old (1951) Webster's Dictionary properly defines inflation:
The Moral of the Story
- While the dollar has lost most of its purchasing power in just my lifetime so far, gold hasn't lost any. Gold remains a true store of wealth and has maintained its purchasing power over time. Motel 6 has raised its prices tenfold. The moral of the story is this: Store wealth in hard assets to preserve value. Real estate and new construction prices in most areas will continue to rise, along with retail prices for everything from big-ticket luxury goods to groceries. If you want to keep up with inflation and ensure that you have a nest egg that will provide for your family in your golden, you must store wealth in a way that doesn't just keep apace with the cost of living, but with the cost of thriving. Since 1919, everything has almost gone up a hundredfold. For example, a loaf of bread in 1919 cost 4 cents. That means that in the past 100 years, the U.S. dollar has lost 99% of its purchasing power... and, yes, it will ultimately lose all of it and go to zero. All fiat currency in human history eventually goes to zero. Visit my Paper Currency and Bank Notes Collection. “I have seen a grievous evil under the sun: wealth hoarded to the harm of its owners, or wealth lost through some misfortune, so that when they have children there is nothing left for them to inherit.” – Ecclesiastes 5:13-14 In summary: saving dollars is unwise. That said, there are are a few reasons to save some actual green cash:
- If you think your bank account may be frozen or confiscated by a creditor or the IRS.
- If you think you might need cash to purchase something from someone who refuses to accept a check or credit card. Heavy equipment auctioneers and precious metal/coin dealers often demand cash.
- If you don’t want a record or paper trail of a transaction.
- If you think you might get arrested and will need to make bail.
- If you are planning a trip. It's good to bring some cash with you when you travel, since you never know when there might be a problem with your credit card.
- There are very few products you can buy today that will stay in working order for decades to come. Well-made guns can last almost forever when cared for properly, and they rarely depreciate. A rifle or pistol is an heirloom that can be passed on from generation to generation. Anti-gun legislation often has the effect of increasing the value of the guns being regulated or banned. When there was talk of banning rifles like AR-15s and AK-47s, prices quadrupled and gun stores' inventories were depleted almost overnight. There is also nearly always a spike in gun sales after mass shootings for two reasons. Law-abiding citizens fear that government regulation will become stricter. Secondly, people buy guns for protection whenever a public shooting takes place. Is it ethical to invest in guns? Billionaire Warren Buffett once answered that question by explaining that his personal political views should not enter into the investment choices he makes for Berkshire Hathaway, the $500 billion conglomerate he leads. “I don’t believe in imposing my views on 370,000 employees and a million shareholders. I’m not their nanny on that.” – Warren Buffet Even without Mr. Buffet’s blessing, with some 100 million unarmed people having been slaughtered by tyrants in the last century, I believe that guns are the ultimate social-responsibility purchase. Antique and unfired guns command higher prices. People own guns for different reasons. Guns are owned by:
- Second Amendment activists,
- people concerned with self-protection,
- gun sport enthusiasts,
- and investors.
- The one big disadvantage: Before you pull the trigger on investing in guns, remember that guns are dangerous if left unsecured in homes with children or with people who are suicidal.
Nick’s Tips Regarding Antiques:
- Only buy antiques that are both authentic (not reconditioned) and undamaged. I only sell such antiques.
- Many investment-grade antiques are made, either partially or completely, from precious metals. Therefore, an increase in the price of gold and silver will put additional upward pressure on the value of antiques that include these precious metals. Consider buying such antiques.
- In the future, people will accent their modern interiors with small antiques. So, choose antiques that don’t take up a lot of room. If it can't fit through a standard doorway, who would realistically ever buy it from you? Smaller is better, and also less expensive to store.
- Don’t cater to the ultra-rich by storing million-dollar Ming vases. Buy antiques that are in the upper-middle range of the market where most future antique buyers will be. Antiques in the $250-to-$15,000 range are in the sweet spot.
- You may want to enjoy your antiques in your home while you are storing them, using each piece as it was designed to be used. A future buyer will likely want to do similarly. So, curate a functional collection.
Nick’s Tips Regarding Guns:
- Obviously, clean your guns before storing.
- Keep guns safely locked up.
- Try to maintain a steady relative humidity in the room.
- Use gloves when handling or showing the guns to others.
Lots and Raw Land
- How much are the property taxes? How much will they be after you buy the land?
- What are the zoning and permitted uses?
- Are accessory buildings permitted? Often, they are not unless there is already a primary residence on the property.
- What are the building height restrictions?
- Are there any covenants (restrictions)?
- What is the topography? Is it in a floodplain or does it contain a wetland?
- What utilities are available? Is there public water, sewer, gas, and/or electrical? What is the water tap fee?
- Are there any easements?
- Will you have public or deeded access to the property?
- Are there any contaminants or environmental concerns? Was there ever any industrial pollution or contamination on or near the property?
- Is it susceptible to wildfires?
- What is the soil type and what can it be used for? Is there topsoil?
- Does it come with mineral rights?
- Is or was there mining underneath?
- Look for ways to quickly generate income with the land. Leasing it to a nearby farmer or a hunter, or for self-storage, parking or billboards can provide some revenue to reduce carrying costs and “babysit” the land while you hold it.
- With vacant land, you don’t need to know or do anything. There's no construction, no renovations, no expertise, no maintenance.
Nick’s Tips Regarding Raw Land:
- Talk to the neighboring property owners about the land.
- Look for elderly farmers who are retiring.
- View mature hardwood trees as a valuable asset.
- Look at its proximity to other desirable locations, such as schools and shopping.
- Purchase in the path of growth.
- Buy at the bottom of the market, during a recession, and then sell in the recovery.
- Avoid buying any property governed by a homeowners association (HOA).
Groceries and Staples
“Precious treasure and oil are in a wise man's dwelling.” – Proverbs 21:20
Nick’s Tips Regarding Food Storage:
- Buy in bulk to save as much as 80%. Can you buy stocks at an 80% discount?
- Store your food in a cool, dry place away from sunlight. A basement is ideal.
- Store what you eat and eat what you store.
- Rotate your stock.
- a love for the model (nostalgia);
- the mechanical skills to maintain the car; and
- the room to store the car indoors.
I don’t believe classic cars are a good investment any longer because millennials don’t care much about cars. They grew up using Uber and Lyft. Also, older cars are horrible to drive. They are small, uncomfortable, and handle worse than the cheapest new car. That said, I confess that I own a 1929 Ford Model A pickup truck. Visit my Classic Car Collection.
Nick’s Tips Regarding Classic Cars:
- If you are going to invest in a classic car, store it right. Here are some storage tips:
- Give the vehicle a good wash and wax. Putting on and removing a vehicle cover will lead to unwanted scratches if the car is dirty.
- Change the oil and filter.
- Fill the antifreeze.
- Fill the tires with air.
- Fill the fuel tank (preferably with premium) and add fuel stabilizer. The fuller the tank, the less room there will be for air, which carries moisture that can lead to fuel contamination and rust.
- Run the vehicle to move the fuel stabilizer into the carburetor.
- Put baking soda boxes in the interior and trunk.
- To keep out insects and vermin, put a plastic bag over the air cleaner/air inlet and exhaust pipe(s), or cover them with aluminum foil.
- Place mothballs in the tailpipe and around the outside of the car.
- Spray dry Teflon lube or silicone spray on all the weatherstripping to keep it from bonding to the doors.
- Close all the windows and doors.
- Select a dry, dark location with concrete flooring. If you must store your car on a dirt floor, place a plastic barrier under the vehicle, and place carpet pieces or plywood under the tires.
- Unhook the battery and store it separately – preferably, where it will not freeze.
- Place the vehicle on jack stands. This step stops the tires from getting flat spots and adds longevity to the suspension.
- Cover the vehicle with a breathable fabric (or just a cotton sheet) that doesn’t trap moisture.
Sports and Entertainment Memorabilia
Nick’s Tip for Investing in Memorabilia:
Nick’s Tip Regarding Stamps:
Wine and Whiskey
- I don't recommend investing in wine for the following reasons:
- It requires some expertise.
- You have to store the wine correctly.
- You will probably want to insure it.
- Wine takes up a lot of space.
- Wine bottles break.
- Some wine spoils.
- Your investment might suffer loss from use (drinking it).
- You’ll likely have to wait a decade to see significant appreciation.
- Selling the wine at auction takes a lot of work and the auction house charges fees. Wine is liquid without liquidity.
- When I was a teenager, I had a friend from a wealthy family. I was staying overnight at his house one night as his father prepared to go on a business trip, leaving us alone. His father's last words were, "Boys, stay out of my wine cellar. Most of the wines are inexpensive, but there is one bottle down there that's worth $25,000." After he left, and being all alone in the house, we just couldn't help ourselves. We headed to the wine cellar. Surely we could pick out some cheap bottle of wine that my friend's Dad would never miss. We chose the dustiest old bottle out of about 300 bottles of wine and, that night, we drank it all. Unfortunately, that was the lone, ultra-expensive bottle of wine.
- I do recommend investing in whiskey for the following reasons:
- It’s not possible for whiskey to get too old. It may not be getting any better after a certain number of years, but it doesn’t get worse. The minimums are ten years for bourbon, and 20 years for scotch.
- Whiskey has an almost indefinite shelf life. As long as the bottle is kept out of direct sunlight, the Scotch Whisky will neither improve nor deteriorate, even if it is opened.
- And, in a survival situation, whiskey can be used as a combustible, a solvent, and a disinfectant.
- Drinking a little whiskey each day has several health benefits.
Old Paper Currency and Banknotes
- Many cryptocurrencies are decentralized. They don’t collapse at a single point of failure.
- They are somewhat anonymous.
- You can fly anywhere with access to your cryptocurrency.
- It is easy and fast to transfer between parties around the world.
- It is an easy asset to hide from creditors.
- Some cryptocurrencies such as Bitcoin are deflationary in that the limited number of them will ultimately begin to decrease forever as passwords are lost accidentally or upon a death.
- Inflation protection. Governments can’t print them.
- Price volatility.
- It takes a lot of energy to mining for cryptocurrencies and that is bad for the environment.
- It takes a lot of energy to transact in cryptocurrencies. For example: One Bitcoin transaction uses as much energy as it takes to power the average American home for 6 weeks. Using Bitcoin isn't just expensive, it's unconscionable.
- They are backed by nothing. Someone makes them up on their computers.
- They have a short 14-year history as money or a store of wealth.
- They are not supported by the banking system.
- They are not an investment in a productive, profitable company. It’s speculation.
- You are speculating that someone in the future will pay more for your cryptocurrency than you bought it for. And of course that buyer has to be of the belief that he/she can one day sell it for more than they paid you for it. They only goes up and down based on demand.
- They are competitor to the government’s currency which makes it a target for regulation and even prohibition.
- Market manipulation by large players.
- You can lose access to all of your cryptocurrency if you lose your passwords.
- Transactions can’t be reversed.
- Transactions do not come with legal protections.
- Counterparty risk.
- A lot of cryptocurrency is held in exchanges like FTX which could steal from you.
- They are not widely accepted by many merchants.
- Digital transactions leave a trail. In early 2022 the U.S. Department of the Treasury confiscated a whopping 3.1 billion dollars worth of cryptocurrencies across numerous platforms from people around the world. This not only proves the government can find your cryptocurrencies, but that they also have no problem taking them without due process.
- Cryptocurrencies aren’t scarce. There are 23,000 different cryptocurrencies and this number keeps growing. Anyone can make their own. Would you invest in a business that had thousands of competitors?
- Cryptocurrency promotors spend millions on advertising. They are running a "Gold is dead" TV ad promoting Bitcoin. And FTX recently paid $130 million to put its name on the Miami-Dade County Sports Arena. Where is all that money coming from? Cryptocurrencies don't produce anything to make money to pay for advertising.
- Central banks are launching their own digital currencies to compete with the existing ones.
- Calculating the capital gains tax owed each year is a nightmare.
- A solar flare could shut down the internet and destroy cryptocurrency records instantly.
And on that note, we come to precious metals.
Silver and Gold
MarkupYou pay a premium when you buy silver or gold, but it is relatively small compared to anything else you buy in life. Costco, at 15%, has the lowest markups of any retail store in America. Their margin is often described as “razor thin.” Silver and gold have premiums of half of that (around 7%). If you buy right and in any serious quantity, you can often get that premium down under 3%. StorageBoth are compact (albeit heavy) stores of value. Gold, however, is worth significantly more per ounce than silver and it is also the denser of the two metals, making the volume of gold worth far more than an equal volume of silver.
Indestructibility Silver and gold – especially gold – are nearly indestructible and will last thousands of years. If you are storing gold in your home and your home burns to the ground, your gold melts into gold.
Difficult to Counterfeit Gold in particular is difficult to counterfeit because it is one of the heaviest metals. Fake bars can be detected by simply measuring their specific gravity.
Transportability It’s easier to transport gold than silver, but both can be moved and shipped easily. Silver and gold coins and bars are regularly shipped when bought and sold.
Fungibility Silver and gold are considered 100% fungible in that one ounce of silver or gold anywhere in the world is worth what every other ounce is worth.
Market Price It’s a simple matter to look up the value of any silver or gold coin or bar without a professional appraiser. Prices are always available online in real time.
Divisibility Both silver and gold are easily divisible. You can buy and sell gold dust or gold bars. Both are used in coin money and come in multiple denominations.
Used in Jewelry Both silver and gold are used in making jewelry.
Used in Industry Both silver and gold are used in industry. Silver is a good electrical conductor and has the highest thermal conductivity of any metal. Silver is used to make solder, silverware, solar panels, media storage, and batteries. Gold is used in dentistry, cell phones, computers, medicine, architecture, and satellites. Gold is so malleable that NASA covers the visors of their astronaut's helmets with a see-through layer of it to fend off dangerous effects of solar radiation.
Liquidity Both gold and silver are extremely liquid assets. When you are ready to unload some metal, you can sell it at virtually any pawn shop, coin store, jewelry shop, on eBay, or to individuals. The gold and silver markets are about as liquid as it gets, so you never have to worry about getting stuck with either.
ScarcitySilver and gold are scarce. They are both hard to find and getting harder to find and more expensive to mine every day. All the gold ever mined in all of human history could fill only about two Olympic-size swimming pools. There is even less silver than gold.
History For thousands of years, silver and gold have been used for monetary exchange. All civilized nations recognize gold as the number-one standard of value. Central banks around the world don’t store diamonds... they store gold. As Chief Global Strategist for Euro-Pacific Capitol said:
"Gold has worked for thousands of years, but now, with the Internet, it works even better" – Peter Schiff Legitimacy "No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."- Article I, Section 10, Clause 1, U.S. Constitution.
Anonymity You can buy and sell silver and gold for cash. There is no state, province, or country that requires its citizens to report their silver or gold holdings. Beauty Silver and gold – especially gold – are unbelievably beautiful. One moreGold's competitor, the U.S. dollar, has recently been weaponized by President Joe Biden. Biden put other nations on notice that if they do or say something America doesn't like, he will use the dollar's status as the world's reserve currency to harm them. He even confiscated other nations' dollars. This has caused the world to seek to de-dollarize and turn to gold as a safer store of wealth.Silver and gold – especially gold – are unbelievably beautiful.
My personal advice for investing in gold is to buy pre-1933 U.S. coins in any denomination. This provides a smidgen of numismatic value and some additional demand simply because they are old, while still maintaining their minimum melt value. Visit my Gold and Silver Coin Collection
“The court hereby orders that you work until you physically can’t work any more, without possibility of parole. This may mean you must labor for years, decades, or even the rest of your entire life. And at the end of serving your sentence, the court orders that you have no more assets than when you began serving your sentence.”
Don’t work for years and end up with nothing to show for it. No one cares that you once had a lot of chips in the middle of a poker game. What you have at the end of your career is what matters.
If you found this article to be of value to you, please make a small donation to Cozy Coats for Kids and follow me on Twitter at twitter.com/gromicko About the author, Nick Gromicko