Much is being said about the “fiscal cliff,” the Federal Debt, monetary policy, entitlement reform, taxation and the business climate. Whatever way events occur, all paths lead back to fundamentals. The dominant fundamental condition impacting rare coins and precious metals is the inevitable fall in the value of the dollar.
A falling dollar pushes up hard asset prices, which attracts more buyers, which in turn, pushes up prices even more. Limited supplies of rarities could send prices to ballistic levels.
A weaker dollar is driven mainly by huge Federal debt combined with artificially low interest rates. The Fed must keep rates low as high rates would increase interest costs on the $16 Trillion debt to intolerable levels. The Fed keeps rates low through quantitative easing: money printing.
Political benefits are huge. Politicians can promise entitlement benefits without raising taxes directly to pay for them. Yet, each step in that direction weakens the dollar. Should it weaken too much, we will have collapse. As we have seen with the Euro, this could take a long time. Thus, upward trends in hard assets should persist for many years.
However, it is also possible we could reach a “tipping point,” due to natural calamities which might disrupt food supplies or electronic infrastructure, cyber attacks, war, replacement of the dollar as the world’s reserve currency, monetary default of a major state, large shortfalls of tens of trillions in unfunded federal government liabilities, sudden widespread belief that the dollar is at risk or other horror.
Do not be fooled by comparing the dollar with other currencies. Countries from Asia to Europe are also printing, manipulating the value of their currency down. This enables values between dollars and other currencies to remain relatively constant even while all currencies lose ground against hard tangible assets like gold, silver and coins.
Economic weakness, uncertain business climate, and potential instability if government cannot meet its obligations create powerful incentives for individuals to reduce risk by switching assets into tangibles. The prospect of increased taxes drives people toward areas with privacy advantages; Rare coins and precious metals enjoy an advantage here over virtually every other area of investment.
Wealth preservation remains the name of the game. This is unlikely to change any time soon. Prices of most non-food goods and services are low due to years of flat economic growth. An increase in economic activity, such as might occur through dramatically increased energy production—unlikely due to the results of the presidential election—or any other cause, would heat up the economy, driving prices for non-food and energy itemsback to normalcy—much higher than today.
Thus, even with economic recovery, rare coin and metals prices should rise, because increased economic activity will put in play literally trillions of dollars that are now sitting idle, currently generating no economic growth or profits. The inevitable, unavoidable result is massive inflation.
This leads to the remarkable conclusion that, regardless of what happens in the spheres of economics and politics, prices for rare coins and precious metals are headed upward.
The simple explanation for this is that conditions necessary to drive up precious metals and rare coin prices are already in place and are irreversible, a debt that cannot be absolved except by payment.
Specifically, it would take heroic and painful action to stop Federal Debt from reaching $20 Trillion by 2016 and $25 Trillion by 2020, or to stop the printing of Dollars, or reduce the increasing percentage of GDP devoted to entitlement spending. None of that is likely. Furthermore, some conditions driving debt are completely out of our control, such as the transformation of baby boomers from producers of tax revenue to consumers of tax revenue.
Investment oriented buyers see historically small spreads between bullion and gem quality $20 gold coins. They see low prices for rarities for which the supply is thin and realize that increased buying will drive prices up. Many buyers, including foreign investors are sitting on significant cash. And they can move quickly.
They see the opportunity, and they are buying. That trend is strengthening. Also strengthening is the activity of collectors who now view lower prices and the availability of exceptional material as an opportunity to own the coins they have always wanted, with the very likely prospect of strong future profitability as a superb bonus.
If you have not already put at least 20% of your investment capital into precious metals or coins, you are advised to do so immediately. The dollar will weaken. The question is how much. Since any weakening of the dollar strengthens coins and gold, a strong presence in hard assets has low downside risk. Of course, failure to follow this strategy in the face of a seriously weakening dollar could be potentially devastating.
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Posted by: Daniel H. Crabtree | 01/30/2016 at 05:51 PM