The "Old Money" Secret To Wealth

Authored by James Rickards via DailyReckoning.com,

I believe that we’re heading for another liquidity crisis or financial crisis. That doesn’t mean it’ll happen tomorrow, but there are disturbing signs that it might not be too far off.

It doesn’t mean the world’s going to end. But investors who aren’t prepared could see large portions of their portfolios wiped out. It could take years to rebuild them, and many investors just don’t have the time to recoup those losses.

But how do you prepare? You might want to start by looking at how “old money” preserves its wealth. Today I want to explore that.

On a cool evening in the fall of 2012, I joined a private dinner in Rome with a small group of the world’s wealthiest investors.

We dined at Palazzo Colonna, a private palace that’s been owned by one family for 31 generations or 900 years. My dinner companions were mainly Europeans, some Asians and relatively few from the United States.

Amid marble, gold, paintings and palatial architecture, I mused on the meaning of old money compared with the new money crowd that congregated for cocktails near the Connecticut home in which I lived at the time.

Old Money vs. New Money

Old money has proved they know how to preserve wealth over centuries, while the jury is still out on new money busy buying yachts, jets and exotic vacations.

In the United States, the “old money” is generally about 150 years old with fortunes dating to the mid-19th century. Families in this category include the Vanderbilts, Rockefellers and Carnegies.

Some U.S. family fortunes are almost 200 years old. But most of the great wealth today isn’t old at all.

It comes from success in the past 30–50 years including Mark Zuckerberg, Jeff Bezos and Warren Buffett.

Yet in Rome I was ensconced in a 900-year-old fortune still intact. Here was a family fortune that had survived the Black Death, the Thirty Years’ War, the wars of Louis XIV, the Napoleonic Wars, both world wars, the Holocaust and the Cold War.

I knew the Colonna family weren’t unique; there were other families like them throughout Europe who kept a low profile. These families are only too happy to be overlooked by the Forbes 400. That type of wealth and longevity could not be due merely to good luck.

In 900 years, too many cards are turned from the deck for luck alone to be sufficient. There had to be a technique.

How Do They Do It?

I turned to a striking Italian brunette to my right and asked, “How does a family keep its wealth for so long? It defies the odds. There must be a secret.”

She smiled and said, “Of course. It’s easy.” You just invest in “the things that last.”

She added that the secret was, “a third, a third and a third.”

She paused, knowing I needed more, and continued, “You keep one third in land, one third in art and one third in gold.” Her advice followed the first rule of investing — diversification

She meant that wealth should be allocated one-third to land, one-third to gold and one-third to fine art (of course, some cash is needed for operating costs and some business investment is fine also).

But the “old money” shows that true wealth preservation comes from art, gold and land rather than stocks and bonds.

That doesn’t mean you shouldn’t own stocks and bonds. You should — I own them myself. But for long-term wealth preservation, you should also dedicate a portion of your portfolio to the assets that “old money” invests in.

Many of my readers know that I recommend they hold 10% of their investable assets in gold. I’ve also written about the value of fine art.

But there’s another old money asset you might want to consider: diamonds.

Diamonds Are Forever

The cliche from ad campaigns about diamonds being “forever” rings true. And crucially, it’s no longer just a haven asset for the super wealthy. Diamonds are a protection asset for investors with a resale value.

As strategist Yoni Jacobs writes, while investors focus their attention on gold and silver (for good reason) they miss important benefits of diamonds.

Consider these four reasons he lists as to why diamonds are a good investment:

1. Highest Value per Unit Weight. Diamonds are the most valuable items in the world. And they are the most portable. A small number of diamonds can make you wealthy. So this portability is essential to store wealth in case of emergency. Would you rather carry a few diamonds in a small bag or have to carry gold bars?

2. Diamonds Have Industrial Use. Having the highest hardness and heat conductivity of any bulk material, diamonds possess tremendous value for industrial use. In fact, 80% of mined diamonds are used industrially. Many investors think the value of diamonds is only based on demand and speculation. The reality is they serve an important industrial purpose.

3. Necessary for Global Growth. With infrastructure projects developing in many emerging countries, roads and highways must be built. Diamonds are used in many tools for stone cutting, highway building and other technologies. Demand for diamonds used in these ongoing projects will increase, along with higher prices.

4. Diamonds Have Emotional Value. The value that diamonds give as gifts is immeasurable. Whether it is for engagement rings, anniversary gifts or Valentine’s Day presents, diamonds will always be a valuable asset and in demand for emotional relationships around the world. Diamonds’ portability may be one of the most important things to consider as the world faces turmoil.

Priceless

In some future crisis, when gold has spiked to $10,000 per ounce, a similar weight of diamonds would take you into the tens of millions range!

And like land, gold or art, diamonds are nondigital. They cannot be wiped out by power outages, asset freezes or cyberbrigades. That’s crucial in a time of looming central bank digital currencies (CBDCs) or as I call them in the U.S. context, “Biden Bucks.”

The biggest difference between diamonds and gold is that the market for gold is much larger. Gold is a more liquid investment that’s easier to assign a price to. But that is changing as we speak.

In fact, this year, the world’s second regulator-approved, exchange-tradable diamond commodity will launch. It’s a sign of the growing demand for alternatives to cash as a store of wealth.

I’m not suggesting you just rush out to buy diamonds. There are many factors that contribute to a diamond’s value. You need to do your homework and maybe solicit professional assistance.

But you want to create a portfolio that can stand the test of time. Land, gold and fine art are among that.

Diamonds can be too.