The other day I was watching an excellent and classic Japanese film: The Hidden Fortress. This picture stars the inimitable Toshiro Mifune and is directed by Akira Kurosawa. It is about a defeated Samurai clan attempting to smuggle gold across enemy territory to restore the clan’s domain.
I also recently read a Clive Cussler novel: Inca Gold, a mildly diverting story which mixes historical events with legend and fiction. Inca Gold is about a race to discover a hidden cache of gold in South America. While both works are obviously fiction they serve as a reminder of the historical fact that gold has been valued across cultures and across time. One might even say gold is timeless.
Here are a few examples of gold in cultures throughout the world.
A 6,000 year old Gold Pendant
A gold pendant crafted over 6,000 years ago. Photo: via The Daily Mail
The oldest known gold treasure trove is in a Necropolis (burial site, literally “city of the dead”) near the city of Varna in what is now Bulgaria where thousands of gold pieces have been discovered.
One item in the hoard includes a 2 gram 24 karat gold pendant was found thought to date back to 4,300 BC. It is the oldest known gold jewelry.
Other Varna Necropolis gold includes necklaces, bracelets, earrings, a tiara and a gold hammer-scepter.
Each of these bracelets weights upwards of 110 grams. These timeless bracelets look like they could have been forged yesterday. (Varna Regional Museum of History)
The Varna Necropolis was rediscovered in 1972. Only about 30% of the site has been excavated. Although I wonder that it might be better to leave the graves, the remains, and the artifacts undisturbed.
The 3,300 year Old Gold Death Mask of Tutankhamun
Golden Mask of Tutankhamun in the Egyptian Museum
Tutankhamun was an Egyptian Pharoh (colloquially referred to as “King Tut”). He is famous because his tomb, located in the Valley of the Kings, was found largely intact in 1922. It had been robbed twice in antiquity and resealed. But despite this his tomb is still one of the greatest archaeological finds. The tomb of Tutankhamun contained a veritable trove of artifacts including the iconic solid gold funerary mask pictured to the left.
Some of the Egyptian pyramidia were said to have been coated in gold leaf or electrum.
Earliest known Gold Coins over 2,500 years old
Early 6th century BC Lydian electrum coin weighing about 4.7 grams
According to greek historian Herodotus the Lydians (a people located in modern day Turkey) were the first to use gold and silver coins somewhere between 700 BC and 550 BC.
At least some of these coins were made from a naturally occurring alloy of gold and silver called electrum and stamped with a lion’s head.
Roman Gold Coins dating back 2,050 years
Aureus of Octavian, c. 30 BC.
The roman aureus dates back to the first century BC. Although minted prior to Julius Caesar, Caesar standardized the aureus at a weight of approximately 8 grams of 99% pure gold.
But the history of the aureus, like virtually all government issued money, is one of devaluation.
By the reign of Constantine Solidus, the aureus contained just 4.55 grams of gold.
The latin word for gold is aurum and is the genesis of the periodic table symbol of gold: Au. A derivative of the aurum can also be found in the first name of gold-loving James Bond villain Auric Goldfinger.
Inca and Pre-Columbian Gold
The Inca Empire had considerable gold and silver. However, between 1532-1572 Spanish conquistadors systematically plundered, stole and extorted this wealth as they destroyed the Inca Empire. The cups, necklaces and other gold items crafted by the Incas was melted down, cast into bars and shipped back to Spain.
Inca Gold Cup, Picture from National Geographic
A large trove of Inca gold does remain, at least in a legend. Like many others the legend of the lost Inca gold begins in historical fact.
In 1533 the war of succession between two Inca princes had ended. The younger prince Atahualpa defeated his half-brother Huáscar to become Sapa Inca (emperor). Emperor Atahualpa met with Spanish conquistador Francisco Pizarro. Despite being vastly outnumbered Pizarro and his 150 some troops were able to capture the Inca ruler.
Commander Pizarro agreed to release Atahualpa in return for a roomful of gold. This gold was indeed delivered, but Pizarro reneged on the deal and after a show trial had Atahualpa garroted. At this point the line between history and legend blurs.
Legend purports Pizarro had the Inca leader put to death before the last and largest part of the ransom had been delivered. Upon learning their Emperor was killed, the Incas buried the remaining gold in a secret mountain cave. This cave has never been discovered.
Chavín Gold Crown 1200-300 BC
There were of course many other pre-Columbian civilizations apart from the Incas. One is the Chavín culture–an extinct civilization that was located in what is now the northern Andean highlands of Peru. Their achievements included advances in metallurgy, as evidenced by the gold crown shown to the right which could be over 3,000 years old.
Gold Coins of Feudal Japan
The koban (小判) was a Japanese oval gold coin in Edo period (1603–1868) feudal Japan. Shown here is the Keichō-period koban containing 16.5 grams of gold.
Shogun Tokugawa Ieyasu established a metallic monetary system in 1601 which would last until 1867.
One of the units in the Tokugawa monetary system was the koban (小判) which means oval. When first introduced it contained 1 ryō of gold or about 16.5 grams and was considered to be a rough equivalent to four koku (石) of rice.
One koku of rice was originally defined as the amount of rice needed to feed one person for one year. This original definition of a koku of rice would weigh about 150 kilograms (330 pounds). Thus one koban would be worth around 4 years of sustenance.
Although in reality the amount of rice that could be obtained, even with a Keichō-period koban certainly would have fluctuated based on the size of the rice harvest, demand and various other factors, it still serves as an insight into the value of the koban when first introduced.
Like all nearly all governmental systems of money, it was steadily devalued as shown visually with the decreasing size of the koban over the years.
Gold is Timeless
Gold has been valued across the ages and across cultures. In the spirit of modern hubris commentators have declared gold a barbarous relic and a pet rock. Some folks might concede that gold was once useful, but now that we have computers and electricity and bitcoin we don’t need gold. It takes a unique pride or perhaps outright ignorance to make such a pronouncement about an element that has been valued for millennia.
“With Widespread Power Failures, Puerto Rico is Cash Only” reads the title of a recent New York Times article in the wake of Hurricane Maria. This tragedy in the “Rich Port” is a sad reminder of the importance of keeping some emergency funds in physical cash.
The horrible devastation in this Caribbean territory of the Unites States is another reminder why keeping a few months worth of expenses in cash is a great idea.
It’s also a reminder to the anti-cash types that even in parts of the United States, power restoration can take weeks or months and a society without some cash is economically more vulnerable. This isn’t some abstract problem. It has a face, the face of people waiting in line, not being sure if they’ll be able to buy food or gas because they can’t access their bank account or use their debit card.
If there is a power outage I’m not going to want to spend my gold (the average cashier at the quick mart would probably stare at me dumbly even if I tried), I’m not going to be able to use a credit card, Goldmoney or bitcoin—I need cash.
If you think you’re going to be able to wait for a disaster and then go to an ATM at the same time as everyone else then at best you’re going to be faced with a long line. At worst the ATM won’t work or will be out of cash. Banks will have long lines and they could start imposing withdrawal limits to ration the cash they have available.
This isn’t my theory or some doomsday scenario, this is what happened (and is still happening as I write this) in Puerto Rico.
If people held a few months of expenses in cash then they would be in a better position to buy food, fuel, and start repairing their homes and businesses.
Of Course There are Downsides to Cash
I’m as bearish on US dollars and fiat money as anyone. So of course holding cash has downsides: Here are the main ones:
1) It loses value
The dollar has lost most of it’s value since 1913. So the wealth you have in cash will be inflated away as central banks inflate the money supply.
Carrying around a lot of cash is generally considered risky and not without reason. Looting and a general increase in crime is an unfortunate reality in the wake of disasters. There is also the problem of civil asset forfeiture. In the United States, the “freest country in the world,” if members of the law enforcement community suspect you of a crime, they have the means to simply take your money and/or other property and it will be up to you to sue the government and prove you’re not guilty and get your property back.
Civil asset forfeiture in the US is a black and white violation of the 4th amendment, but it happens all across the US and in 2014 more property was taken from US citizens by members of the law enforcement community than was taken by burglars. But I digress.
These Risks can be Mitigated
Think of cash as a form of insurance against: 1) Loss of electrical power 2) Capital controls 3) Negative interest rates
And like all insurance it comes at a cost. The cost of holding cash is inflation and the opportunity to put the cash to work in other investments.
I already own various hedges against inflation, such as gold, silver, stocks, and even cryptocurrency, albeit I remain very cautious of this last one. So the fact that a few months worth of expenses in cash losing value is of little concern.
The risk of theft can be mitigated as well:
1) Keep most of your cash in a safe or hidden place
2) Keep it in various locations around your home and perhaps at other locations as well
3) Don’t carry all of your cash at any one time
4) Dress nicely and be respectful to members of the law enforcement community
If two months worth of expenses is $2,000 I’m not saying carry around two grand. Maybe you keep $900 in a safe, $500 hidden someplace else in your home, and $500 with a trusted family member or close friend and a $100 in your purse or wallet. When you go to the store or gas station only take the cash with you that you need. That way if someone uses force to take your money, they won’t get all of it.
The Upsides Makes Holding Some Cash the Smart Move
1) I can be my own ATM. I’m not reliant on a bank or ATM allowing me to withdraw my money. I hold my money. This is vital when everyone is trying to withdraw cash at the same time.
2) If there is a power outage or communication disruption I can still buy food and fuel. Whether it is an EMP, ice storm, hurricane, brownout or cyber-attack, I can still buy the basics of life until things settle down. While fiat money is weak over the long term, in a disaster cash is still king.
Holding a few months of expenses in cash is a great idea. It can also double as an emergency fund in case you have an emergency repair to your car or home, medical expenses, etc.
Smaller denomination bills make more sense. Acquire $10s and $20s not $50s and $100s. Stores are generally more suspicious of larger denomination bills.
Not only that but it allows you to provide for yourself and help others. If I don’t have to go to the ATM or bank to withdraw cash that means there is one less person in line and anyone who would have been behind me in line can get cash faster. If 20-30% of people or more are prepared for a disaster it means there are much fewer people that need to be helped and there will be more resources to help a smaller number of people who need help. Maybe you’ll be able to share some of your cash with a neighbor and help them out.
Cash isn’t an investment and yes it loses value thanks to central banks, but holding a month or two’s worth of expenses in cash is a smart idea as part of a larger wealth and financial protection strategy. My thoughts and prayers are certainly with the people of Puerto Rico and it is a sad reminder of the importance of cash.
A few weeks ago on the 20th of September the United States Federal Reserve announced it would begin unwinding it’s $4.5 trillion balance sheet starting in October. The Federal Reserve undertook unprecedented action in the wake of the 2008-2009 financial crisis when it expanded it’s balance sheet from $900 billion to as high as $4.5 trillion in order to buy worthless mortgage backed securities and other assets that no one else would–as well as government bonds.
As the Fed unwinds it’s balance sheet by selling assets and not rolling over existing assets, the money supply in circulation will shrink.
If the money supply shrinks will the value of the S&P 500 as well?
So why does this matter? Well, as pointed out at the beginning of the year over at Benzinga.com, the S&P 500 is 97% correlated with the Adjusted Monetary Base. As the Adjusted Monetary Base goes up, so does the S&P 500, as the Adjusted Monetary Base goes down, the S&P 500 goes down.
The Adjusted Monetary Base is the sum of currency (including coin) in circulation outside Federal Reserve Banks and the U.S. Treasury, plus deposits held by depository institutions at Federal Reserve Banks.
So the by reducing it’s balance sheet, the Fed will lower the Adjusted Monetary Base and thus the S&P 500 would experience downward pressure.
But that isn’t the only headwind.
Reduction in Share Buybacks
The Federal Reserve lowered interest rates to near zero for almost seven years. Low interest rates means it’s less expensive to borrow money. A lot of companies have taken advantage of these low interest rates to issue bonds (a way of borrowing money) at low interest rates and then used the proceeds not to invest in people, factories, or equipment, research and development or other business growing endeavors, but instead to use the borrowed money to buy back their own shares.
Bond issues increases the debt companies have on their balance sheets, but also boosts their share prices, even when the companies aren’t performing any better. An example Simon Black of Sovereign Man uses is Exxon Mobil. Exxon is #4 on the Fortune 500.
In 2006, the last full year before the Federal Reserve started any monetary shenanigans, Exxon reported $365 billion in revenue, profit (net income) of nearly $40 billion and free cash flow (i.e. the money that’s available to pay out to shareholders) of $33.8 billion.
At the time, the company had $6.6 billion in debt.
Ten years later, Exxon’s full-year 2016 revenue was $226 billion, net income was $7.8 billion, free cash flow was $5.9 billion and the company had an unbelievable debt level of $28.9 billion.
In other words, compared to its performance in 2006, Exxon’s 2016 revenue dropped nearly 40%, due to the decline in oil prices.
Plus its profits and free cash flow collapsed by more than 80%. And debt skyrocketed by over 4x.
Exxon Mobil is just one example. There are a variety of other blue chip stocks with shares prices that are higher despite lower profits and higher debt.
Share buybacks have declined in 2017. While the trend looks to continue upwards, rising interest rates will make it more expensive for companies to issue bonds and use the proceeds to buy back stock.
Despite the article image and title I certainly don’t know that October will see the stock market dip into the red. It would make sense if it did, but the S&P 500 continues to make new highs in spite of the Federal Reserve tightening, lackluster GDP growth and saber rattling from both North Korea and the United States.
But it is another headwind.
At some point there will be a stock market correction. That is simply how markets work since the advent of central banking and hence the business cycle. It has take much longer than I expected for there to be a correction. I didn’t believe that President Barrack Obama would leave office without seeing a stock market crash, but he did.
But markets have been on a steady climb since early 2009 and the bull market is looking long in the tooth. The S&P 500 could continue to rise for the foreseeable future, but with this new headwind of balance sheet reduction in addition to interest rate hikes, it might be time to take some dollars off the table and pivot some assets into alternative opportunities.