Which Eggs? Part 1: Boring Bullion

I mentioned in the previous post that Daybreak aims to navigate the murky post 2020 investment waters by putting our eggs into different unconventional baskets. The idea is to make it through to the other side of uncertainty, and maybe even making a cheeky profit along the way.

The baskets do have a few things in common though:

• Limited downside compared to upside

• Underlying sectors are hated, or at the very least viewed with mistrust or uncertainty

• Underlying sectors are here to stay

The sectors/industries that I highlighted were:

1. Precious Metals

   1. Boring Bullion

   2. Miners

2. Energy

   1. Scary Uranium

   2. Dirty Coal

   3. Evil Oil and Gas

3. Equities

4. Cryptos

I will focus on Gold and Silver Bullion in this post, and leave the others for another undertaking.

Boring Bullion

I can now leave the home with nothing but my smartphone. I find my way around town with Google maps, and pay for whatever I can afford with ApplePay. I hail an Uber and on the way home, order my food to be delivered exactly 10 mins after I arrive at my door. All this magic happens without me having to wrestle with my wallet and its archaic contents. On the way, I hook into the human hive mind that is social media, and get myself buzzing with all that connectivity and information. Anything I want to know, see, buy or hear is just a swipe of the thumb away.

I am not sure what the future looks like, but truth be told, I am still calibrating myself to the fibre-optical present.

So what am I doing, sitting here writing about investing in something that was last used as money 50 years ago? Mention bullion and one struggles not to conure up imagery of dragons, dwarfs and beautiful maidens in tall towers. In the age of Bitcoin, Apple, Amazon and Ethereum though, how does one even contemplate putting surplus produce in purified and refined rock?

Hear me out. Besides being shiny, heavy, and relatively expensive, bullion has something that many other investment classes lack: History. History and Liquidity.

Here is a snippet from Wikipedia on the yellow metal's early days:

The earliest recorded metal employed by humans appears to be gold, which can be found free or "native". Small amounts of natural gold have been found in Spanish caves used during the late Paleolithic period, c. 40,000 BC.[74] Gold artifacts made their first appearance at the very beginning of the pre-dynastic period in Egypt, at the end of the fifth millennium BC and the start of the fourth, and smelting was developed during the course of the 4th millennium; gold artifacts appear in the archeology of Lower Mesopotamia during the early 4th millennium.[75] Gold artifacts in the Balkans appear from the 4th millennium BC, such as those found in the Varna Necropolis near Lake Varna in Bulgaria, thought by one source (La Niece 2009) to be the earliest "well-dated" find of gold artifacts.[65] As of 1990, gold artifacts found at the Wadi Qana cave cemetery of the 4th millennium BC in West Bank were the earliest from the Levant.[76] Gold artifacts such as the golden hats and the Nebra disk appeared in Central Europe from the 2nd millennium BC Bronze Age.

The oldest known map of a gold mine was drawn in the 19th Dynasty of Ancient Egypt (1320–1200 BC), whereas the first written reference to gold was recorded in the 12th Dynasty around 1900 BC.[77] Egyptian hieroglyphs from as early as 2600 BC describe gold, which King Tushratta of the Mitanni claimed was "more plentiful than dirt" in Egypt.[78] Egypt and especially Nubia had the resources to make them major gold-producing areas for much of history. One of the earliest known maps, known as the Turin Papyrus Map, shows the plan of a gold mine in Nubia together with indications of the local geology. The primitive working methods are described by both Strabo and Diodorus Siculus, and included fire-setting. Large mines were also present across the Red Sea in what is now Saudi Arabia.

Here are a few more contemporary quotes taken from the very valuable goldsilver.com that might speak to Gold (and silver's) utility and value through time.

Make sure you watch the video of DeGaulle below with captions on.

"There can be no other criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence." – Charles de Gaulle

"Gold is money. Everything else is credit." – J. P. Morgan

Gold is money, everything else is credit. J.P. Morgan was basically summarising John Exeter. Ever heard of his pyramid? Have a look below:

Again, from Wikipedia:

Exter is known for creating Exter's Pyramid (also known as Exter's Golden Pyramid and Exter's Inverted Pyramid) for visualizing the organization of asset classes in terms of risk and size. In Exter's scheme, gold forms the small base of most reliable value, and asset classes on progressively higher levels are more risky. The larger size of asset classes at higher levels is representative of the higher total worldwide notional value of those assets. While Exter's original pyramid placed Third World debt at the top, today derivatives hold this dubious honor.

These guys knew a thing or two. In essence, we believe that gold (and to a lesser extent silver) acts as the bedrock asset in the financial world, underpinning other assets that are widely traded and held. It is money, while everything else is a promise to pay (or credit as JP Morgan stated). In a world where stability is in ever decreasing supply, and central bank balance sheets are supplying credit in every increasing supply, having some money (not currency/paper fiat) in hand can never be a bad thing.

Bullion can be seen as cash held outside the financial system, and could be trusted to be liquid and a store of value when nothing else is. Fiat currencies, or government debt instruments which are also usually liquid and valuable might not hold value when one needs them the most. In extremis, having cold hard cash usually trumps holding paper/plastic/digital currency. Graphs like this one below helps one to at least consider acting to shepard some of one's capital in the shiny heavy refined metals:

In calm weather, boats go out to sea in search for treasure and bounty. Once storm clouds appear on the horizon though, a berth in the harbour until the storm clouds pass becomes priceless. We have had decades of relatively smooth sailing, and while we are not qualified weathermen, we do know that the horizon is currently difficult to make out. So what might happen if a prolonged storm were to manifest? Some historical charts of financial storms and calm seas going back a 100 years:

From longtermtrends.com:

The Dow to Gold ratio indicates the number of ounces of gold it takes to buy the shares in the Dow Jones Industrial Average index. The Dow Jones is a stock index that includes 30 large publicly traded companies based in the United States. It is one of the oldest and most-watched indices in the world. Turning points in the Dow-gold ratio have coincided with turning points in market history: The stock market reached historic highs in 1929, 1966 and 1999 as the ratio did the same. Likewise, the market sat near historic lows in 1932 and 1980 as the ratio hit bottom. The chart below shows the same data on a linear scale.

As I am writing this article, the Dow stands at $34,996 while gold sits relatively unloved on the sidelines at $1810. Gold peaked during financially risky periods in the past at an approximate ratio of 1.41 and 1.73. Will it reach those levels again today?

Remember: The idea is to make it through to the other side of uncertainty, and maybe even making a cheeky profit along the way. Just as a side note, holding some capital in bullion over the last years has been a good decision. Here are a few tables from Goldprice.org that illustrate gold and silver's performance relative to various currencies.

While a consistent 7-13% CAGR going back to 2006 isn't going to get me on Ferrari's most prized customer's list (I know I know. Bitcoin fixes this), it is nothing to sneeze at. Especially when one considers the safety and liquidity that bullion offers.

Finally, I would invite you to watch this documentary on the unique position that bullion holds in our financial landscape, and consider the intricacies associated with holding precious metals as part of a balanced portfolio. It is behind a paywall but I believe it will be well worth your time.

If you do decide to grab yourself some golden goodies, I would strongly recommend allocated storage or self storing bullion. It is a whole other rabbit hole to go into, and we might revisit that theme at another time. There are many reputable bullion dealers and I would invite you to purchase from the best that ships to your area. There are also listed vehicles on the NYSE that we invest in ourselves, namely:

• Sprott Physical Silver Trust

• Sprott Physical Gold Trust

• Sprott Physical Gold and Silver Trust

• Sprott Physical Platinum and Palladium Trust

They are listed on the NYSE Arca and TSX, and offer allocated exposure to the precious metals. Here is a screenshot taken from their PHYS fact sheet. Do note that we are in no way affiliated with the people at Sprott.

As I close, I will reiterate that none of this should be taken as financial advice. We are merely wanting to share the process that we are employing in coming to decisions for our own investments.