Hyperinflation Yes, But Not Where We Expected

Thu, Jan 14, 2016 - 2:32pm

For the many disciples of Austrian Economics who read this Blog, yes I feel as cheated, bamboozled and perplexed about the prices of gold and silver than any of you. Everything is topsy-turvy. On the back of the greatest coordinated money creation that this little blue Planet has yet seen, the price of gold ought to be $2000, $3000, $5000 per ounce. There are myriad reasons why this is NOT so, but my humble opinion is a conspiracy to keep investors—at least those in Western countries, fully invested in stocks and bonds to support the debt and “drive” the economy. Obama never mentions “saving for a rainy day”. All traditional American values have been tossed out the window for an orgy of consumerism, and nothing more supports this myth of personal entitlement to consume to excess than the market in luxury goods.

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However if you peel back the glitz and the glamour you’ll see it’s not that simple. The Smart Money understands that trying to protect your wealth through precious metals, for today anyway, is not working, because bullion banks, central banks and those privileged with insider information on policy direction can manipulate through the paper markets and hammer you into dust. All this hand-wringing over US interest rates going up a measly 0.25%; it’s pathetic. No savers are being rewarded, no lenders are being rewarded, and if you live on an annuity most likely you are eating catfood. So how do the rich elite preserve or grow their wealth?

All That Glitters Is Not Gold

Prince of Morocco: “All that glisters is not gold.” — The Merchant of Venice (II, vii)

Nary an evening news broadcast goes by without an item where the reporters marvel at the price paid for a painting, a sculpture, a piece of jewelry, a vintage race car or some other high priced gewgaw large or small that no one really needs. So what is happening here? Have the rich lost their collective minds? Is it all nouveau riche Chinese with more money than sense?

Gemstones and Jewelry

2015 saw a whole bunch of superlatives relating to Gemstones and Jewelry and more than a few auction records were smashed. While the value of typical diamonds you would find in the jewelry shop in your local mall went down due to a tussle between cutters/polishers and miners, large diamonds and fancies hit the roof. I want to emphasize here in this essay that I am talking about the highest of the high end goods—not anything you could buy at Walmart or Costco.

Let’s start with diamonds. For a summary of the greatest of the great we have to thank Christie’s auction house.

The world record price for diamonds was broken Wednesday November 11th at Sotheby’s in Geneva. $48.4 million USD was paid for a 12.03 carat flawless deep blue.

This smashed the record per carat only set the night before. Christie’s, also in Geneva, sold a fancy vivid pink of 16.08 carats for $28,523,925 USD to the same buyer.

For the record, I happened to be in Geneva and tried to get into the Hotel Beau Rivage to view the Blue Moon a day before the auction and was turned away by security at the door. Obviously they spotted me as a kibitzer.

Rahul Kadakia of Christie’s said the stone,

“...comes to market at a time when great gems are mirroring prices achieved for masterpieces in the world of fine art. Collectors are looking to jewels as savvy investments that are both beautiful and can appreciate considerably in value over a relatively short period of time.”

November 18th, saw the announcement by Lucara Diamonds of Canada of the discovery of a fantastic gem diamond at their mine in Botswana. The stone at 1,111 carats is the size of a softball, and management has already turned down $55 million USD for it. I was having dinner with an executive of a sister company the evening before the announcement and he said they had to get a manicurist out of bed to do the nails of the girl in the office whose lovely pink fingernails are featured in the press photos.

There were no records set in 2015 for emeralds, but sales of top quality stones were very robust. The record is still held by a stone formerly owned by Liz Taylor. At 23.46 carats it sold for £43 million at Christie’s New York in December 2011.

For a summary of great rubies and sapphires we have to thank Dick Hughes.

The record for rubies got smashed at Christie’s Hong Kong December 1st, with $18,382,385 USD paid for a 15.04 ct pigeon blood set with diamonds.

The 7th of October at Sotheby’s in Hong Kong saw the record for a sapphire broken with a 27.68 Kashmir stone which sold for $6,702,564 USD.


A selection of fancy sapphires from Potentate’s Rock Creek Mine

I spent 11 years on and off working in the diamond industry and now I own a sapphire mine in Montana, USA (https://www.potentatemining.com), so I was particularly interested and heartened by this news item: a cut 12.54 ct vivid blue Montana sapphire was sold for a whopping 4,000 USD at auction December 9th in New York. I also reckon I know a thing or two about colored stone pricing, so I was pretty amused when I read that a 14,909 carat sapphire found recently “was worth 0 million”. In my opinion it’s probably worth ,000, but if he can get 0,000 all power to him. You can see the obvious zoning in the crystal, which is not a desirable feature. I guess with the hoopla over stone pricing the owner subscribes to the Greater Fool Theory and figures he can peddle it for super big money. Incidentally, Forbes says it is 1,404 ct and worth 0 million. LOL

Coins and Stamps

What is happening in the gemstone market is also happening in coins and stamps, but Chinese collectors are almost exclusively bidding on Chinese coins, particularly rarities minted by the various warlords at the end of the last dynasty rule. Russian gold 100 Ruble pieces are particularly attractive to Russian collectors, but they are also buying pretty much everything from ancient Greek to modern coins. Most American collectors opt for American coins and the limited availability of the top coins is driving prices through the roof. Last week on January 7th an 1894-S Barber dime sold at auction for ,997,500 USD. There are lots of superlatives in the coin world, but for fun I am including some stuff on the world’s most expensive coin: the US gold St. Gaudens Double Eagle which sold for .59 million in 2002. The reason it is so valuable is that before the 1933 coins were released President Roosevelt confiscated America’s gold and the mint run was melted down. A couple of coins only were spared the crucible. A further 10 coins eventually surfaced which were seized by the US Mint, but in an appeals case they were awarded back to the owners last April. No doubt we will see these at an auction soon.

The world record price for an ancient Roman gold coin still sits at the ,407,550 USD attained in 2011 for an 8 Aureus medallion from 306 AD but prices at the top end of the market for both Roman and Greek coins have been very strong.

There was no overall world record in stamps broken in 2015, but strong pricing for top rarities. The world record remains with .5 million USD paid in 2014 for a British Guiana one cent magenta of 1856, the world’s rarest stamp.

Vintage and Classic Cars

I don’t know much about cars. I drive cheap rentals usually and I own a Jeep. According to the internet a 1962 Ferrari 250 GTO serial number 3851GT sold at Bonham’s Quail Auction on August 14, 2014 for US ,650,000.00 (,115,000.00 including buyers premium), breaking the record previously held by a 1954 Mercedes-Benz W196 race car, sold for a record million at an auction in England on July 12, 2013. While collectible cars have been sold privately for more, this is the highest price ever paid for a car at a public auction.

For vintage cars a 1931 Duesenberg Model J Murphy-Bodied Coupe sold for ,340,000 USD in Monterey, California in 2011. The following “Duesy” sold for a mere 2,500 USD at Sotheby’s but oh! I just drool over the thought of it.

Painting and Sculpture

At a party recently I confused Manet and Monet. Quel faux pas!! That’s about the extent of my knowledge of fine art. My friend and a knowledgeable person, M. Hadrien Rambach advised me to bid on this unattributed Old Master at Bonhams last October. The auction house has taken down the estimate from the website which was 1,000 to 1,500 GBP, (probably due to embarrassment). I bid £2800, half convinced I was making a blunder. Can you believe that it sold for £194,500!!! C’est incroyable! All I can say is that Hadrien has a fine eye for quality!

The big news in 2015 was that the second most expensive painting ever was sold at Christie’s in November for 0,405,000 USD. The Modigliani to my mind is pretty mediocre, but hell what do I know? The buyer paid with his American Express card and got frequent flyer points for life.

Fine Wine

We have the UK Telegraph to thank once again for a compendium of the superlatives of the wine world. I travel to Hong Kong once a year or thereabouts and there are a few specialty places where you will see Chateau Margaux next to Romanée Conti next to Petrus displayed in the heat of the restaurant (at least they are on their sides keeping the corks wet), and yes the rumors of Chinese businessmen drinking them with Coke are indeed true (well, so they tell me). A good friend of mine just rented a house in Vevey, not too far from Geneva, and found 2 bottles of 1956 Chateau Haut Brion in the cellar. Bugger! The former owner died without drinking them. I can’t be too harsh on my friend though, he shared a 1965 bottle of Beaune with me.

Just for grins & giggles I have included this. No comments at all but a great fun read.

So…

These are all the superlatives. By my reckoning and depending on what item class we are talking about, the top 5% to 15% are hyperinflating. Yup, going vertical. On the back of a stock market that is going “meh”. What’s happening here?

I think that the clues are all there. One must remember that in any transaction there is a willing buyer and a willing seller. The media concentrate on the buyers, but the sellers are just as important. The media never talk about the underbidders either. These are the people who were outbid but presumably aren’t living on foodstamps! Altogether this is the significant 1% or 2% of people who pay for more than 50% of the population’s taxes, but I am sure would rather not. Luxury Goods are not immediately liquid like gold or silver bullion, but they offer many advantages to cash or traditional investments. Remember I am not an investment advisor, so don’t go shelling out on a James Bond Aston Martin on my say so.

Portable Wealth

During the German Weimar Hyperinflation of the early 1920’s there were lots of stories of grand pianos and even houses being sold for a few American dollars. However, if you had gold Marks or diamond jewelry you could easily skip across the border into France and change them into hard(er) currency. Not so easy with a grand piano!

I personally know of two incredible stories of survival. One of a Polish Jew who bought his way into Switzerland while on a work detail by bribing the German Nazi border guards with a few gold coins he hid by swallowing every evening. Another of a young Vietnamese who bought his way on to a boat with a “gold leaf” bar he had hidden under a bandage on his leg. These of course were life and death situations.

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But I digress, the less dramatic that we are considering here are folks whom for whatever reason want to get some of their money “off the grid.” There are still portions of the international housing market that are inflating, but not so much today and it’s slowing down. You can’t pick up an estate and move it; well, not easily. But I think the housing market has or is topping out in most cases. There are all kinds of laws against taking valuables across international frontiers and even state lines without paying the requisite taxes, and I am neither condoning this nor suggesting you do so. But as countries get more strapped for cash they feel entitled to burden the wealthy with punitive surtaxes, luxury taxes, wealth taxes and other nonsense, and, because they are in the minority in a democratic country the wealthy are essentially disenfranchised. The wealthy will then often vote with their feet and take their money with them. Witness the 75% supertax on the wealthy François Hollande tried to impose. Movie star Gérard Depardieu took off to Russia. Eventually the law was tossed out as “unconstitutional”. In 2008 I was living in Ecuador and the Government demanded that everyone make an asset declaration of everything, down to the pictures on the walls. Ominous eh? I skedaddled outta there.

Currency Volatility and Devaluation

Historically, there has always been a safe haven to run to in the last hundred or so years. The currency of choice has recently been the US dollar and we have seen tremendous gains against those countries with commodity-based economies like Canada and Russia, or the emerging market countries like South Africa and Colombia which are all getting smashed. Part of this de facto devaluation is deliberate by governments in a beggar-thy-neighbor race to the bottom to make exports cheaper. Think China. But what do you do if the world’s reserve currency is starting to look sick? Do you honestly think that US businesses with their operations predominantly overseas are going to tolerate a strong dollar forever? Currency volatility is unpredictable and is probably going to be with us sometime. In this market you can get whipsawed easily. Watch for some fun & games if the EU starts to break up!

Cheap Money

The über wealthy of this world have access to capital which the rest of us sadly don’t enjoy. They have the assets to collateralize large loans and leverage up. Cheap borrowing is what is fueling share buy-backs in the equity market but it is also driving the trend in luxury good pricing at the top end of the market. Maybe in a few cases it is chump change for a billionaire to buy a Rembrandt, but most of the wealthy lack the liquidity to simply write a check for it. Ten years ago there were 2 banks in the US that would loan money against art. Now there are 35 with special programs.

Volatility in the Share and Bond Markets

We are not far into 2016 and already we have seen trading curbs and suspension of trading in the Chinese market, which sent shockwaves around the world. An unfortunate “butterfly effect” of globalization is that we are all susceptible to El Niño flooding, even though the floodwaters may be 5000 miles away. Puerto Rico defaults on its bonds and how far does the spiderweb of damage extend? Is there another Long-Term Capital Management fiasco poised and waiting to happen? What if you were loaded up with junk bonds, you’d be in a world of hurt today. And just so you can say you read it here first: this oil downturn, oil rout, whatever you call it, is now a full-fledged Black Swan! Currencies are getting smashed, covenants are being broken everywhere, and no telling what the knock-on effects are going to be!

The Search for Yield

The junk bond market has been turning turtle because it has been too crowded with those looking for yield. US Treasuries don’t pay you diddly unless you want to lock in your money forever, and, there’s always currency risk (unless you have blind and unwavering faith in the system—I don’t).

Bank Bail-Ins

Many years ago when I was a young university student I took a course in Political Philosophy. I enjoyed it immensely. If I could have seen a way to make a living at it maybe my life would have taken another path. We studied Plato, Descartes, Hobbes, Voltaire, and Marx. One thing that has stayed with me is that governments are artificial constructs and they start to lose their legitimacy when they change the rules arbitrarily. I was in Argentina when the archives of the Central Bank “mysteriously” went up in flames. Six years before, the country nationalized all private pensions to swipe the cash they contained. Last month I hired a new assistant from Venezuela. She emigrated to Canada a year ago, and why not? Maduro, and Chavez before him take zero responsibility for the state of the country and blame “wealthy Capitalists” for any and all of its ills. According to Forbes Magazine, the inflation rate is 808% (in August last year). The implied contract between voters and the elected is coming apart.

Many of you reading this will know of the Cyprus bank bail-ins in March, 2013. Uninsured deposits over €100,000 were forcibly converted into Bank of Cyprus shares. This was partly “justified” by the government saying it mostly affected “Russian Oligarchs”. What kind of a defense is that? You may however have missed this news story. A pensioner in Civitavecchia, near Rome, hanged himself after his €100,000 (£72,000; 0,000) investment in Banca Etruria was wiped out. You may also not know that in December, 2014 a law was quietly passed by the EU (Bank Resolution and Recovery Directive) requiring bail-ins to be the norm as of January 1, 2016. It’s already happened now in Portugal and we are nary 2 weeks into the New Year. Scary, scary!

And Finally

I’m not saying that Luxury Goods are the best or even a good way of growing or conserving your wealth. What I am saying is that huge bets are being placed here by people who generally are diversified, international, connected, well-advised, and with political clout, and are more often than not anonymous. During the French Revolution Marie Antoinette, the wife of Emperor Louis XVI was reputed to have said, “Let them eat cake”, when informed that the peasantry were starving. We now know with some certainty that this insensitive remark was a deliberate misquote and slur on the royal house. Marie and her husband paid for their perceived arrogance with their heads. What most people don’t know is that by 1793 when they were beheaded, the Assignat currency introduced by the Revolutionaries had already lost 70% of its value, and the people were pissed and looking for scapegoats! If and when the crack-up comes as a result of all the wanton government money printing that has gone on, you will see the rich demonized again, but they won’t be waiting for the chopping block. They’ll have skipped town with their wealth at the very first signs of trouble.

The preceding content was originally posted at StraightTalkOnMining.com

About the Author

Founder, Chairman, and CEO
Aurania Resources Ltd.
Keith [at] aurania [dot] com ()
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