People are talking about inflation again
You’ve probably seen an image like this one posted on social media. Talk of inflation is more and more common of late. As I write this (June, 2021):
- The CPI is reported as 4.2%, but 10 year Treasuries are yielding 1.528%. According to official measures, if you purchase Treasuries you are losing 2.67% of your purchasing power every year. But that official number doesn’t include things like energy and food, and they perform some interesting tweaks to their data.
- If we calculate CPI the same way we did in the 1980 or 1990, the current inflation rate looks to be somewhere between 8% and 12% annually. This means that by investing in 10 year Treasuries you’re losing ten percent of your buying power annually.
- Subjective measures vary, but we’ve seen lumber increase in price something like seven times over the last 18 months. We’re told this is due to Covid. Gas costs are up (this is due to ransomware), and where I live the cost of steak is up around 70% over the previous month (this is apparently also due to ransomware.)
- Housing markets are at all time highs. In my small town we are seeing offers $100,000 above asking price on some houses from out of town investors.
The reasons may vary, but it’s getting more expensive to live. Maybe it’s due to the pandemic, maybe it’s people not choosing to work when they get paid more on unemployment, maybe it’s increases in the money supply, maybe it’s all of these or something else entirely.
Regardless, people are noticing. And they’re starting to talk about it.
So where do precious metals fit in?
For better or worse, precious metals are seen as a way of preserving wealth against inflation. Is this true?
Silver from 94 AD until Now
I think this comment from another site is a good starting point:
The Romans minted a popular silver coin called the denarius, which contained roughly 0.12 troy ounces of silver. The Book of Revelation notes that one denarius could purchase a quart of wheat (1.7 pounds), or three quarts of barley (3.8 pounds). And historical evidence shows that a denarius would also buy three kilos (100 fluid ounces) of olive oil.https://lenpenzo.com/blog/id47735-historical-gold-and-silver-benchmarks-for-job-wages-and-commodity-prices-2.html
Let’s price two of those items by converting that denarius to dollars (using its melt value) and comparing it with the modern equivalent products:
- Now, as I write this the COMEX price of a troy ounce of silver is $27.64, so the value of metal in that denarius would be worth about $3.32 in today’s money.
- This means a pound of wheat in ancient times cost the equivalent of $1.95 in today’s money. Looking at Kroger’s prices for organic wheat flour, the best price is $5 for a 5lb bag, so we can get about twice the wheat that the ancients could. Which you’d expect — technology is a deflationary pressure — modern agriculture can produce more food for less money even when sticking to organic methods and materials.
- 25.4 fl oz of Kroger Extra Virgin Olive Oil costs $5.29. This means 100 fluid ounces of olive oil today costs $20.82, which is significantly more expensive than historical prices. Of course, domestically produced Kroger Pure Vegetable Oil costs $4.77 for 100 fluid ounces, which is marginally more expensive than the ancient historical price.
So, silver appears to have maintained quite a bit of purchasing power since Revelation was written a bit over, 1,900 years ago.
Gold From 1850
Another quote from that same site (to save me from doing all the number crunching on my own) will allow for comparisons using gold:
In 1850, a pound of beef or bacon could be had for ten cents; this is when gold was $20.67 per troy ounce. Not surprisingly, this lines up with the historical narrative that one ounce of gold has always been able to buy approximately 225 pounds of beef or bacon.
More recently, an acre of farmland in Kansas could be had for $20 US dollars in 1900. Keep in mind that the $20 gold double eagle coins that were in circulation at the time contained 0.9675 troy ounces of the yellow metal.
Meanwhile, at the end of World War II, a loaf of bread in the US could be purchased for as little as a silver dime (0.07 troy ounces), and a gallon of gasoline cost a silver quarter (0.18 troy ounces).
As I write this gold is trading at $1,893, so we can do a quick check: if an ounce of gold used to purchase 225lbs of bacon, that would mean we should see a bacon price today of $8.41 per pound. Instead, a pound of bacon is about $5.
How about Kansas Farmland? I found a report from last year that showed:
FORD COUNTY, Kan. (KSNW) – The USDA released that Kansas’ farm real estate value has dropped nearly 3% in worth averaging $1,900 per acre, a $60 decrease from 2019.
Farmland prices are shockingly close to what they were in Kansas 121 years ago if we just use these two data points. Or at least, they are when priced in gold.
We can check the cost of bread using Coinflation, which shows a Roosevelt dime’s melt value today is about $2. Wonder Bread Classic costs $2.50 today, but Kroger White Bread costs $1.39. Pretty close? Yep.
My conclusion from this quick look at historic food and land costs: gold and silver do an adequate job of protecting purchasing power over time.
What about Bitcoin?
I need to state up front that I’ve been wrong about Bitcoin from the beginning. I was aware of Bitcoin when it was worth less than $1, and if I’d put $10,000 in BTC when it was worth one dollar my net worth would have exceeded half a billion dollars a month ago. Huge miss.
My problem with Bitcoin is simple: it’s a token that has value because people think it has value. “Yeah, but that’s the only reason gold has value — because people think it does!” you might reply. You’re right, but pretty much every human society in all of recorded history valued gold as a store of value.
I could quote Aristotle on the appropriate characteristics of money, or Adam Smith on the difficulties of a cattle rancher exchanging his product (whole cows) for other products (the classic example of a pint of beer), because cows aren’t readily divisible (or they weren’t before freezers were invented.) Instead, I’ll link to Grant Williams examination of the periodic table from the perspective of “what would make good money?”
So, historically gold and silver have been the best form of money. In the last decade we’ve seen the blockchain (and bitcoin in particular) take off in value, and many of its adherents claim that it’s the perfect asset. They see bitcoin going to $1 million per coin, and they may very well be right — again, I’ve been wrong on Bitcoin since the beginning — but to me it’s another un-backed asset that has value because it’s popular.
When I became aware of it Bitcoin was pitched as a decentralized currency — something the people could use that couldn’t be inflated away by those in power. Then it turned out Bitcoin tops out at somewhere between 4 and 7 transactions per second, worldwide. Visa averages 1,700. Worse, in April it cost $58 per transaction (it’s down to $5.38 yesterday) which means even if it were fast enough it’s too expensive for purchasing a $5 cup of coffee.
Now we hear that Bitcoin is actually a store of value. But we’ve seen 80% corrections in Bitcoin valuations a few times now, and stores of value shouldn’t be that volatile.
Please save the “have fun staying poor, Boomer” comments. You may be proven right in the end, and I hope all your investments work out well — even those investments I choose not to make. When comparing ten year old tech with thousands of years of consistent acceptance and wealth preservation, I’m going to choose the latter. If I was trying to place a $20,000 bet that I thought might exponentially increase my wealth then crypto (Bitcoin probably would be part of a “balanced” crypto portfolio) would definitely be in the running.
But I’m thinking about something more like a stablecoin here.
Kinesis coins: the ultimate stablecoins?
A stablecoin is a digital asset that’s supposed to maintain its value. It’s something you can exchange your cryptocurrencies for when you want to move out of a market.
The primary stablecoin right now is USDT (Tether.) Each Tether is supposed to be backed by $1, but apparently each tether is only backed by 2.9¢. Some smart people are calling Tether a scam and suggesting Tether will cause cryptocurrency markets to collapse. I don’t know, but what I’m hearing looks sketchy, so if I were looking to park my crypto profits somewhere I’d look for an asset-based digital currency, and Kinesis is the leader here.
Kinesis is physical gold and silver, stored in secure vaults, but it’s transferable on a blockchain. It’s got the characteristics of a cryptocurrency, but the asset being tracked on the ledger is physical gold and silver, which should protect against inflation as well as it ever has.