Hard Assets In An Age Of Negative Interest Rates

Tyler Durden's picture

Authored by Marcia Christoff-Kurapova via The Mises Institute,

Time is the soul of money, the long-view - its immortality.

Hard assets are forever, even when destroyed by the cataclysms of history.

It is the outlook that perpetuated the most competent and powerful aristocracies in continental Europe, well up through World War I and, in certain prominent cases, beyond; it is the mindset that has sustained the most fiscally serious democratic republic in the Western world, that of Switzerland (as demonstrated in this article).

In this view, the stewardship of money, formerly known as “banking,” is a serious matter of serious wealth management and not a weird-science lab experiment of investment products ultimately designed for hedge fund managers’ tax arbitrage schemes.

More than ever the focus on hard assets is a dire call to arms given the deformed market culture of central banking monetary magic. Despite the early promise of the Trump presidency to reinvigorate the economy, the United States remains mired in economic stagnation built up over so many years of debt-driven policies, easy-money policies, and the ZIRP fiasco fostering a bizarre-world situation in which the actual economy is doing poorly while the market is soaring. In such an environment, the allure of the centuries’-old tried and true has never had more appeal.

In a word, the hard asset vision is about building wealth outside the stock market. It refers to three main strategies overall: 

1) land ownership and/or farmland, forestry and agriculture

 

2) gold, other precious metals, and certain base-metal commodities, and

 

3) The (Old Masters/Classic Modern) art market.

Where this last is concerned, we mean art as investment and not art-as-commerce, such as that which contaminates today’s insipid and overpriced world of ‘Balloon-Dog’ bad art. The auction world of Rembrandt and Picasso; of El Greco and Gerhardt Richter has been on a tear, is smashing records, and cannot be ignored as an excellent safe-haven vehicle, as outstanding works of art traditionally always have been.

To begin with, physical gold and precious metals remain an investment enigma despite being market-leading performers for the past seventeen years. Gold is a must-have portfolio asset amid the aggressive debt levels and monetary debasement that have so unhinged the market. Silver, for its part, in addition to its prestige status, also has innumerable industrial applications and throughout the precious-metal bull market since 2000.

Russia, in this context, is leading the charge in the long-view outlook. For the past three years, the Bank of Russia has been the world’s number one stacker of gold, and, thus far in 2017, has taken the lead position among international central banks in buying the commodity.

At its current pace, Moscow will unseat China for the number five spot of gold-holding nations by the first quarter of 2018.

Currently, the gold-to-GDP ratios of the world’s leading powers are: Russia 5.6%; the Euro Zone 3.6%; the U.S. 1.8% and China 1.5%.

Yet countries buying up gold versus investors who do so are two different worlds. Ninety-five percent of the world’s gold is held as a wealth store.

In other commodities, zinc and copper have been the big movers. Zinc, the key galvanizing agent, claimed the status of the best performing metal last year. Copper began its resurgence in 2017, and in late August of this year, a host of commodities broke out of multi-month consolidation patterns. Nickel and cobalt are also coming into the spotlight as metals essential to the rapidly growing lithium ion (Li-ion) battery sector.

The art world lags not too far behind that of precious metals in terms of history’s preferred storehouses of value as protection against uncertain times. Art as investment has long been a favored strategy of the European elite since, effectively, the High Middle Ages and has never gone out of style. In modern times, the phenomenon of an ever-growing collectors’ base and less supply of museum quality works has been accepted as a meaningful way to protect investors’ cash during economic difficulty. Though continually eclipsed in the media by the brasher contemporary art market, Old Masters (and Classic Modern—the great 20th century works) have shown stable, often spectacular, results over the past ten years with both categories reaching record-breaking highs.

Art, to be a safe haven, must be an investment and not a whim - just as it was for the Liechtenstein family who acquired Leonardo da Vinci’s Ginevra de Benci so many centuries ago. In the wake of the World War II near-bankruptcy of that eponymous principality (whose monarchs were not and are not supported by taxes), that painting was the first of the major, big-ticket art sales of the 20th century, when it was sold to Paul Mellon and The National Gallery of Art in Washington DC. Ginevra continues to hang there today (and to date, is the only Leonardo painting in possession of the United States).  While the average investor may not be in a position to store wealth in a Renaissance master or a Picasso, there are always the underrated gems or the new discoveries that can and will bring in the most unexpected of windfalls decades down the line.

Finally, farmland is seen by many as an excellent addition to a precious-metal portfolio. As Jim Rogers predicted in early September, fortunes will be made in agriculture “and when an industry breaks full faith, even mediocre people make a lot of money” in that sector. Hard asset investors continue to include farmland in their portfolios “for a combination of income generation, diversification and inflation-hedging”. Historically, farmland, like forestland in continental Europe or Latin America, has been a unique asset class demonstrating low-correlation to traditional asset classes, and which performs well as inflation rises.

Cash reserves, land as cash, the endless applications of Nature’s resources to industry; the prestige, privacy, and long-term value of beautiful art: such has been the outlook of the hard-asset philosophy.

Today, that cult of independently-minded investors will laugh all the way to the bank - precisely by avoiding the paths laid out, and so horribly deformed, by those very banks.

 

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illuminatus's picture

Seems to me the tail is firmly in control of the dog, and that dog is wagging his ass off. How much more often do I need to hear the same story again, only to see the financials kicking hard assets ass again? Since when are humans or modern markets anywhere near rational or sane? As long as we let the masters of the universe run this insane asylum, we'll be not only inmates, but slaves.

knukles's picture

All financiaL value is a function of discounted present value of money (DPV) or expectations, likewise discounted in some form.
As rates fall, all future cash flows become worth more.
Including perceived value of a non-financial nature when (as is always) the cost /benefit is examined.
Bonds and stocks have had massive rallies.
Because rates have fallen, by and large.
But an asset need not have a cash flow to constitute value.  Think gold or a home!

At some point financial assets could conceivably become over valued such that the Fed's inflation carries past those assets classes into others.

Hope-a-hope-a-hope-a-hope

Blue Steel 309's picture

All those millions of Acres seized by the federal government for "nation parks"? That may be the ace in the whole to dig us out of the end of the fiat dollar.

Scuba Steve's picture

yea, held as a lien by Rothschilds when IMF "refinances" our debt with SDR's.

JRobby's picture

The dog is dead.

"A dog starved at his master's gate, predicts the ruin of the state"

HockeyFool's picture

You've turned really dark of late.

El Oregonian's picture

And when it comes to value, if you can hold it and it can keep on producing enough to consume and still have enough left over to replicate, then you will be ok.

Yukon Cornholius's picture

The 13/300 are as firmly in control as they ever have been. Goy have no clue and no choice.

nomad943's picture

Owning land as a hard asset might make sense in a culture that isnt so dependant on the property tax cure-all. In America it would be the fastest depreciating asset imaginable with tax rates in the 5-15% range annually

brushhog's picture

I pay 1.9% in one of the highest property tax states in the nation. Never heard of 5-15% property taxes. Thats nonsense. What alot of people miss is that there is a 30% tax on capital gains from gold. So you cant escape the tax man no matter what you do. Decent land should pay its own property tax many times over.

Kafir Goyim's picture

there is a 30% tax on capital gains from gold

Long Term Capital Gains are 20%.  What 30%?

brushhog's picture

There is a special capital gains rate for precious metals ( might be for all things considerd "collectables", not sure ). It is around 30%. Different category. 10k made as a capital gain in the stock market is taxed at a lower rate than 10k made in a gold sale.

"Holdings in precious metals such as gold, silver or platinum are considered to be capital assets, and therefore capital gains may apply. When it comes to tax purposes, the IRS classifies precious metals as collectibles, and thus they may potentially be taxed at the maximum collectable capital gains rate of 28 percent."

https://www.jmbullion.com/investing-guide/taxes-reporting-iras/capital-g...

Silver Savior's picture

Wrong! Sounds like you don't like gold. 

knukles's picture

Tax policies folks!

Yes, gold can be subject to either a 20% or 30% casp gains tax depending on if YOU, the owner, filed the proper papaers with the IRS.
Any propsectus (like PHYS, etc.) will clearly outline the tax area in question and point the buyer toward the more beneficial alternative.

Second, I'll CALL BULLSHIT on the supposed forever low property tax assumptions.
Take CA.  CalPers and CalSters are grossly underfunded when using an ABO let alone a PBO calculation, the discount rate for withdrawals and estimating future cash outflows is too high as are projected rates of return.  In other-words, in a highly suspect accounting model (it is what it is, kiddies) for future benefit funding and payments, an already sick and dying patient is going to fall upon cold no blood pumping times when the state(s) finds their pension problem front and center.
Revenues will be needed.

Now, in CA, when there's humongoloid shortfalls at the state level, they dip into local/county/city property tax revenues.  Yep, they just stick their hand in the cookie jar and take what money they need.  And all the participant entities are contractually bound to continue contributions. 

So ..... at some point, your property taxes are going to be used to fund state pension schemes.

Screwed again.
Honest!

 

brushhog's picture

Nonsense. Property taxes are self limiting. Raise them higher than most people in an area can afford, they sell. A glut of houses on the market and soft demand due to high costs brings the values down and the taxes with it. Property taxes can never rise beyond what is affordable in the area. It's tied to the market.

Silver Savior's picture

They will allow the owners to default on their taxes then come in and take their land. This is all a very sick time and I would be very afraid of land ownership. 

Government needs you to pay taxes's picture

If the land will grow food, you've got the inflation risks hedged . . . or at least you can survive on what you grow.  Property tax is municipal, mostly.  You and your neighbors have a lot more control over these increases.  If the Feds came to tax it, then yes, they could push a lot of farmers into default, but you would have options on how to handle that, including taking a few scalps.  No hedge is perfect, every avenue has risks.  Give me good land and trusted family and we will hold fast until the end.

Blue Steel 309's picture

If logic ruled market forces, libertarians might not be considered retarded by anyone with an IQ north of 120.

Silver Savior's picture

Yep very true. They even got my mom for a new fire tax at a few hundred per year. The money just keeps adding up. 

spdrdr's picture

Doesn't Proposition 13 leave property taxes the same as they were years ago, for old residents?  Not doubting you Knucks, but it will be an *ahem* disproportionate impact upon new residents post Prop 13, if property taxes are the first recourse to try to bail out CALPERS and similar.

HockeyFool's picture

I had some gold coins but I lost them. If I ever find any again and I go to my local coin dealer to sell them, he's not going to charge me capital gains tax.

Silver Savior's picture

My mom has to pay around $2500 per quarter. That is insane! And this house is tiny and sits on a quarter acre!

brushhog's picture

She pays 10k a year for a tiny house on a 1/4 acre? Must be in a seriously rich area. It goes by a percentage of the value, the national average is about 2%.

Silver Savior's picture

Nope, the house is valued at around $350,000 and has a wooden foundation lol. That's life around here. It's like you guys are speaking a forgein language when you name off these low prices. Probably why I can't agree with you. 

brushhog's picture

Wow. Well thats an unusually high property tax rate. The national average is something under 2%.

Silver Savior's picture

Wish it was 2% Both my mother and I wish she was not given that house. It has been nothing but trouble and now has an equity loan out on it. It's a mess. I guess the only hope is a sale with some of it given to the bank? 

HRH Feant2's picture

No one forced your mother to take the house.

It sounds like she should have liquidated the property on day one. Did she do that? No. She went out and got a loan. That equity loan is her responsiblity. Too bad. When adults sign on the dotted line there are consequences.

If the house, or property is worth $350K and has a $100K loan, your mother should sell it. That still means she gets $225K (after selling costs) and could easily buy a nice house in a rural part of Commiefornia or move to Arizona and live like a queen in a small community with lots of people as clients for her housecleaning business.

JohnG's picture

If money isn't an issue you could short sell it.

HRH Feant2's picture

It sounds like money is a problem for this guy and his mother. Should have sold the day she acquired the title.

For people that have never owned property they are not aware of things like property taxes and maintenance costs.

On the other hand the tax rate compared to the valuation of the house does seem out of whack. Only one solution: liquidate and relocate.

Blue Steel 309's picture

I don't believe anyone has calculated a national average in decades. And then you have to question methodology. Average by region, by number of houses, by value? There are plenty of statisticians who don't understand statistics.

There was a recent article on ZH proving that, but the message probably went over most peoples heads.

JohnG's picture

Find yourself a good apraisal company and challenge the valuation.

I do this every year and am a serious pain in the ass to the county tax assesor's office.

I own 650 acres of trees.  It's a pulp farm.  I contract with Weyerhauser to harvest and replant every 5 years, one-forth of the property.

It's boring, steady, and a good place to hunt.  But every fucking year, every year, they want to raise my taxes as if it's worth more.  It get's worse after every election.  Greedy mother fuckers.

Sooooooo, I challenge it, show them just how wrong they are, and win.

It's coming up soon......

JRobby's picture

New Jersey or Connecticut?

Dammit Walter's picture

There is a 98% tax on FRNs (since inception).

nomad943's picture

Try a liberal mecca like New England.

brushhog's picture

Im in New England. I pay 1.9% which is the average in my state and most every state in NE. Never heard of anyone paying anywhere near 5%, let alone 15. Nobody would buy it, the value would drop and the tax along with it.

nomad943's picture

Live free or die NH. First sign on the highway you saw when you entered our fine state right after the live free or die said to stop and pay toll. Now it welcomes ez pass but the result is the same. Tax on 195,000 valuation is 11,000 a year.. whoo-hoo. We gonna buy us ipads for illegal alien students again.

Silver Savior's picture

Very true. There is a community near me where the housing lots are very cheap but no one wants to move there due to high taxes. It looked like the deal of a century until I read into it. Then in an unrelated story, my mom was a house cleaner for an eldery lady and my mom ended up with the house and now it has a 100k loan against it so that my mom could keep the property taxes up. It is financially ruining her. 

Land is on my stay away from list. I don't need all that worry and expense.

HRH Feant2's picture

You, and your mother, are financially illiterate.

No one forced your mother to take that house. But rather than turn a gift into a blessing you curse the person that gifted your family because you are too ignorant to take advantage of that gift.

Did the house come with a $100K loan? That isn't a large mortgage. Your mother should have been able to refi that and have P&I of $500 a month.

Once people reach a certain age, in many counties, all you have to do is go to the tax assessor's office and fill out a form to be exempt based on one of the following classifications: age, income, veteran status, and disability. In my county anyone over the age of 68 that makes less than $35,000 a year or anyone that is a 100% disabled veteran is exempt from property tax. All they have to do is fill out a form. Even if you have more money or income, in many cases the assesor's office will agree to let you live in the home until you pass away and collect on the property taxes once you die.

Let me guess, you and mommy dearest don't have a book on estate planning? Just a wild guess.

JohnG's picture

Dude's asking for suggestions.

Fuck you for being an asshole.

HRH Feant2's picture

No, this dude has been here for months, pissing and moaning and throwing it in people's faces how he lives for free and want UBI and all that socialist shit pushed by Bernie and clan.

Just one more person in the free $hit army that thinks the rules don't apply to them. Fuck him. Mommy could have bailed, sold that house for cash, and left Commiefornia. Did she do that? No. She got something free, got $100K in cash/equity loan (I am guessing that money didn't go to remodel and improve the house it probably went to pay off debts and to buy a new car!)

Not my fucking problem and I am sick to death of this loser promoting communism as a way to improve his life while it destroys mine.

Silver Savior's picture

I don't live for free and never said I did. Why are you being such a stubborn jackass. I don't live anywhere near there! But fucking yes I do want UBI. You got that right! I am proud to say it!

Silver Savior's picture

They classify it as a vacation home since she does not live there. 

HRH Feant2's picture

Not my problem. If she is too stupid to rent it out and make enough of a profit to pay the taxes, so what?

And you are coming here to whine about your mother not being able to pay taxes on a house she doesn't live in and can't afford to keep?

Fuck off.

tion's picture

You need to put it to work! 

Agroforestry is a very intriguing option for maximizing profits on a per acre basis.  Whether it's an orchard with livestock and understory crops or timber with high value understory crops.  Me, I am obsessed with black walnuts, chestnuts, fancy pigs, and high value specialty crops :.D

Mcguyver's picture

My land generates cash money with my labor that more than pays for what it costs me in taxes... Far more. And that income it provides being physically frown unbeknownst to anyone else creates an obvious benefit

iampreparedru's picture

My rate is 2.8% which is 18% of gross on a new commercial re. Very hard to cashflow when 18% is taken off the top and probably going higher. Thought i had a good hard asset now i am divesting out of the usa.