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Monthly Depth Report – March 2024 – The “Store of Value” Debate

With inflation continuing to erode the purchasing power of the dollar and both gold and Bitcoin hitting all-time highs this month, there’s been increasing interest in the concept of what constitutes a store of value. Michael Gayed has asserted that a store of value can’t have tail risk. That means if an asset can have a catastrophic loss, it can’t qualify as a store of value. First, let’s examine why he’s right.

Many years ago, I was a senior analyst at an investment firm. A junior analyst was assigned to work with me, and while smart, he was both very inexperienced and very confident. One day, he brought me analysis on a variety of companies where he had made comparisons based on sales per share. I explained to him that because he wasn’t taking debt into account, his analysis was incorrect. A company could take on huge amounts of debt, sell dollar bills for 90 cents and have massive sales per share while destroying shareholder value. Without including the parts of the capital structure senior to the equity, the analysis was inaccurate. The young analyst confidently informed me that this was his version. It’s how he did the calculation. I promptly ended the conversation.

Gayed notes that without definitions, there’s no point in having any conversation. After all, if the meaning of a thing changes depending on who is using the term, then that term has no meaning at all. My encounter with the confident (and incorrect) analyst supports Gayed’s point.

In my opinion, the issue with Gayed’s definition is that it’s so strict that nothing qualifies. Lengthy threads on Twitter/X have determined that the dollar, Bitcoin, government bonds, and even gold all have tail risk. Therefore, nothing qualifies as a store of value. This makes the term a description of a hypothetical perfect Aristotelian form without anything in the real world that could be considered a store of value. It takes the term from a practical description of an asset we’d use to describe how we save and turns it into an unreachable standard.

So, I agree with Gayed1 that a store of value shouldn’t have tail risk (or the risk of catastrophic loss), and I agree with him that definitions matter. However, I do think the term store of value is an important concept and that there are circumstances where the term applies. While I agree that nothing is perfect, where I differ from Gayed is that depending on your needs and timeframe, something can act as a reasonable (if imperfect) store of value. Plus, if we’re going to aim for perfection on this one, it’s worth pointing out that the sun is going to destroy the earth in the next few billion years, so nothing is permanent.

The Concept of Time and Circumstances:

I’ve spilled gallons of digital ink over the past 2 ½ years explaining how the US government is intentionally debasing the dollar resulting in constant loss of purchasing power. This graph sums it up perfectly:

Michael Gayed is a fantastic person who’s been a huge help to DKI. He’s also an award-winning writer and researcher who has incredible expertise in finance and investing. While I am taking a slightly different view on this specific matter, I have great respect for his intellect. He has also had the opportunity to read this letter, comment, and offer corrections prior to publication.

Purchasing Power of the US Dollar

Does this look like a “store of value” to you? Point to Gayed!

Given that our $35T of national debt is increasing at the rate of over $3T a year, it’s easy to see the plan is for the government to continue to debase the dollar and for it to lose purchasing power every year. However, there are circumstances where the dollar would qualify as a store of value based on time and/or circumstances.

Imagine you were planning on buying a house here in the US next year. You’re going to have to make your down payment and pay your brokers, attorneys, and inspectors in dollars. Keeping your down payment in the stock market, in gold, or in Bitcoin runs the risk that those assets might experience significant decreases in their price in dollars over that time period. If you know you want/need to buy something in dollars in the next year or two, saving in dollars is your obvious store of value.

Now imagine you live in Argentina or Egypt. People in those countries have been desperate to get their savings out of their failing currencies for years. They don’t care that the dollar may lose 2%, 5%, or even 10% of its purchasing power in a year. For residents of those countries dealing with massive inflation rates or devaluations of their local currencies, any opportunity to acquire and save in dollars preserves huge amounts of value.

Long term, because the dollar will continue to lose purchasing power, it’s not a store of value. As the above examples show, the concept of store of value can be situational. Time frame and personal circumstances can determine the value of an asset. Let’s go through the most popular examples and figure out if or when something would be a store of value.

The Dollar:

As noted above, the dollar is a good store of value if you need to buy something in the near future, or if you need to pay bills in dollars. It’s a great store of value if you live in a country with a failing currency. It’s a terrible long-term store of value. In fact, all fiat currencies are terrible stores of value because they all go to zero. There are no exceptions. The longest-running current fiat currency is the British Pound at more than 350 years. That’s great except it’s lost 99.5% of its value in that time. At what point can we call that a failure to preserve value?

Other Fiat:

These would be the other government-sponsored currencies. They too will go to zero and will not not be a good store of value. Like the dollar, it can be useful to have some of these fiat currencies if you need to buy something in the near-term or need it to pay bills that are denominated in that currency. I currently own enough dollars to pay my bills and no other fiat currencies.

Gold:

The yellow metal has the best claim as a store of value compared to anything on this list. It’s been accepted as a form of money for thousands of years. I once saw analysis that claimed that one ounce of gold has been able to buy a nice outfit or men’s suit for millennia.

There have been just under 800 fiat currencies in all of human history and they’ve all gone to zero. (We note that some fiat currencies currently being used have lost enormous value, but haven’t gone to zero…yet.) Hundreds of countries and currencies have fallen, yet gold remains.

A couple thousand years ago, the price of peppercorn per ounce was actually higher than that of gold. That relative value didn’t last, but it’s another point in Gayed’s favor regarding figuring out what will and won’t hold value. This brings up an important point about non-monetary uses.

Peter Schiff has been a smart and articulate advocate for gold as both an investment and a store of value for years. He claims that much of gold’s value relates to the fact that it has practical industrial uses. I disagree. While gold does have some industrial use, both silver and copper have more industrial applications. You can check the chart below to see that more practical applications do not translate into greater value. In fact, there have been many forms of money that had no practical value at all including the Rai stones of Yap, seashells, and glass beads. Schiff knows a lot about gold, but I’d argue that gold has been a store of value for thousands of years despite its industrial applications, not because of them.

Gold, Sliver, and Copper Price Comparison B

Gold price on the left y-axis with silver and copper on the right y-axis. This chart allows you to see prices of these metals and that more practical usage correlates with smaller price gains.

Gold, Sliver, and Copper Price Comparison A

Monthly Depth Report – March 2024 – The “Store of Value” Debate

One key point about the gold market is it’s much larger than the actual amount of gold in existence. While the physical supply of gold increases by around 2% – 3% a year, there are massive amounts of financial gold. Those are financial contracts based on the price of gold that typically get settled in dollars instead of metal. There have also long been unproven accusations that some otherwise reputable gold depositories have liabilities exceeding their assets.

There’s an old story about a farmer who sells piglets in the spring for delivery the fall. The idea is that you buy a baby pig in the spring. The farmer feeds and cares for the pig all summer, and a few months later, you plan to arrive at the farm to pick up your fat pig. Then you hear a rumor that the farmer has ten piglets, but has sold 15 of them. Concerned, you visit the farmer and express your concern. The farmer happily takes you out to the pen and points out “your” pig. That may seem reassuring at the time, but you can’t know if the farmer will have enough pigs to satisfy all of his customers until everyone shows up in the fall to collect. If there are ten purchasers for ten pigs, then all is well. If more than ten people show up to collect their previously purchased pigs, then there’s a problem and the farmer is going to have to buy emergency pigs in the “spot” market which at that point, is going to be very expensive.

That’s the potential situation with gold. If everyone with financial contracts for gold refused to settle in dollars and instead asked for delivery of the metal, there would be a massive shortage and the spot price of gold would skyrocket. This might sound like a crazy hypothetical, but the US government confiscated the gold of US citizens in the 1930s and promptly devalued it. More recently, when European allies who had been storing their gold in US vaults asked for the return of their gold, it took the US government years to come to an agreement to fulfil those requests. That made a lot of people suspect the US didn’t hold as much physical gold as it claims. To this day, I don’t know the truth and am not in a position to make any claims of malfeasance.

To me, the biggest problem with gold isn’t as a store of value; but rather, the question of what you actually own if you don’t hold the physical metal. If you do own physical gold, that has been subject to theft, confiscation, and fraud like the farmer who sells 15 pigs but only has ten to deliver. Recently, the FBI raided a facility providing safe deposit boxes on suspicion of illegal activity. They opened every box and confiscated anything worth more than $5,000. It took years of lawsuits for law-abiding citizens to recover their assets. Even storing gold and keeping it safe from your own government is a challenge. Now imagine if you wanted to leave the country with “your” gold. Under certain circumstances, it’s easy to imagine you’re more likely to have that gold confiscated than to be allowed to exit with it.

Other Metals Like Silver and Copper:

Covered above. Copper is useful if you need to build something. At times, silver has been useful as a secondary currency. At times, it has been considered money for transactions that are too small to warrant the use of gold. I own a small amount of silver, but it’s been a volatile investment for years without much appreciation. The silver market also has a well-earned reputation as highly manipulated. I don’t mind having a 1% position in silver but would consider it more of a trade or investment than a store of value.

Real Estate:

For centuries, real estate has been an excellent store of value. Many families have maintained immense wealth for generations by owning and controlling land that contained natural resources, had strategic value, or could be used for agriculture or other commercial purposes. The downside of real estate is it’s an illiquid asset and comes with expenses for upkeep and taxes. As land appreciates in value, owners find themselves with consistently increasing property tax bills proving that even if you own the title to real estate, it’s hard to claim you own something if the government can tax you to the point where you need to sell it. Many family farms have been broken up by inheritance taxes through generations with each subsequent generation owning fewer acres if they have to sell parcels to pay death taxes.

One of the biggest problems with real estate is that you, by definition, can’t move it. You might buy property in an attractive area that has an increasing crime rate a decade or two later. The value of your property will degrade over time. In parts of the world subject to invasion or changes in government policies favoring confiscation, property owners might find they no longer have the right to property they owned a day earlier. As I write this, there have been countless stories in the press during the past week about people in the US losing their home to squatters. While the idea of stealing a house has been lampooned in films, that’s exactly what we’re seeing today and with the support of law enforcement.

For much of human history, land and gold were the best stores of value. Today, land comes with massive tail risk. This is one where I’d consider the Gayed principle regarding catastrophic tail risk before thinking real estate is a store of value instead of an investment.

Energy: 

Oil and gas have been the source of many fortunes both real and imagined. Much of the story of human progress has been based on our ability to access more energy-dense materials and make use of them. Even now, the material quality of people’s lives is closely tied to energy usage, and much of the industrializing world desperately wants more access to energy as a means to a better life. Because of this, demand for energy is increasing and will do so for decades to come.

Because oil and gas are priced at the margin (the last barrel of oil sold), small changes in supply and demand can cause large swings in price. In a strange episode, early in the Covid lockdowns, the price of oil went negative because people ran out of places to store it and closing down production can be expensive.

Oil and gas also come with substantial governmental, regulatory, and taxation risks as policies can change from one Presidential administration to another. Due to long-term imbalances created by consistently increasing demand combined with governmental efforts to limit supply, I like energy as an investment. Since it’s largely priced in dollars, energy can also be an excellent hedge against inflation. The extreme price volatility, geopolitical risk, and domestic regulatory risk make it hard to consider energy a store of value even though I believe it will increase in price in the coming years.

Food, Water Filtration, Medical Supplies:

For many years, people who devoted some of their money, space, and effort to store emergency supplies were derided as “preppers”. Somehow, the idea of being prepared for adverse circumstances got associated with being crazy or socially undesirable. Then, we had Covid lockdowns, supply chain disruptions, fears that shopping in a supermarket would get you sick, and people lining up outside Costco at 5am hoping to buy rolls of toilet paper. I saw packages of toilet paper selling on Amazon for more than $100. All of a sudden, the preppers started getting calls from friends and neighbors who wanted advice.

On one hand, these items all have expiration dates so would be hard to classify as a store of value according to the standard definition. However, if you’re really hungry, you’d take a can of tuna fish over dollars, gold, and diamonds. If you’re sick, you’d value medicine over oil, silver, and land. Whether you want to label these items a store of value or not is irrelevant. The whole point of this piece is to consider time frames and circumstances, and these things can save your life if supply lines fail. If you’re worried that neighbors might be snarky and call you a “prepper”, you’re free to not discuss this with them. My take is that something that can save your life during an emergency is definitely a store of value even if it expires unused. The worst-case scenario is you have some extra tuna fish to eat before it expires.

Bitcoin: 

This is a tough one. I own a lot of Bitcoin because it’s clear that the US government has made the decision to debase the dollar at an accelerating rate. Inflation is going to be more of an issue going forward than it’s been during the 40 years between 1980 and 2020. Even if inflation over the next few decades is “just” 5% – 10%, that loss of purchasing power compounds over time. Bitcoin is limited to just 21MM coins with an issuance schedule that gets cut in half every four years. As of April, Bitcoin will have a better stock to flow ratio than gold. Owning a deflationary asset during inflationary times seems like a great way to save and invest to me.

Bitcoin is a new technology, and we’re all aware that its price in dollars has been volatile. DKI subscribers have seen their investments in Bitcoin rise between 300% – 400% since I recommended it in 2020. For people in countries with failing currencies (Argentina, Egypt, and many others), saving in Bitcoin has been the best way for them to preserve value. In their circumstances, Bitcoin has absolutely been a store of value.

My take on it is that over time, Bitcoin will become a store of value. This will be more apparent as the largest industrialized economies like the US, the UK, the EU, and Japan all are running massive deficits and are debasing their fiat currencies. Bitcoin is a great solution to that. It’s going to take some more time, better education and understanding, and a decrease in volatility for Bitcoin to become a store of value. As of now, it’s an investment that I like. I believe it’s heading for store of value status eventually.

Conclusion:

Michael Gayed is correct to point out that if there’s the possibility of catastrophic loss, then something can’t be a store of value. My alternative take is that depending on your timeframe and circumstances, there are things that can act as an excellent store of value. As is typical when I disagree with Michael, I find that we don’t really disagree; but rather, are just thinking on different timeframes. For those of you who want to know more about Michael’s thoughts on conditions-based investing, you can sign up for the Lead-Lag Report. There’s even a free option.

Let me know what you think. Is the dollar a store of value? How about gold? If you own Bitcoin, do you consider it an investment or a store of value? What assets do you think I missed? I’m interested in your comments.

Time to Wrap it up for This Month:

DKI has started to partner with sponsors to reach our growing audience of investors and financial professionals in the weekly 5 Things and these monthly letters. If you’re interested in connecting with hundreds of family offices and thousands of individual investors, please reach out at IR@DeepKnowledgeInvesting.com. The open rate for our emails is around 2x – 3x the industry norms.

DKI has started to increase our video content focusing on each week’s 5 Things to Know in Investing. Robb Fahrion of Flying V has been a fantastic host, and new intern, Andrew Brown, continues to find ways to improve video quality and distribution. For those of you who prefer watching to reading, please check out our YouTube channel and feel free to leave your comments and thoughts there as well. Recent guests have included Laks Ganapathi on the environmental costs of electric vehicles and Phil Kessler on the Constitutional implications of a potential TikTok ban. Check out who we have lined up to join us on camera in the coming weeks.

DKI has apartnership with Tidal(@leadlagreport on Twitter).  If you’re a financial advisor with more than $50MM under management, please reach out to us so we can arrange for you to get a premium subscription to Deep Knowledge Investing at no cost to you through Tidal.Michael Gayed runs the program, has been a great partner and friend, and is an expert on conditions-based investing. A chat with him and a subscription to DKI both provide great value and definitely qualifies as a store of value.

If any of you have questions, concerns, or thoughts regarding issues we should address in a future depth report, please feel free to reach out to me at IR@DeepKnowledgeInvesting.com.

If you think a friend, RIA, family office, or portfolio manager would be interested in this monthly commentary, please feel free to pass it on to them. Also, if you send this letter to more than 5 people, please get in touch and let me know.

 

Thanks for being part of Deep Knowledge Investing,

Gary Brode

 

    1. Michael Gayed is a fantastic person who’s been a huge help to DKI. He’s also an award-winning writer and researcher who has incredible expertise in finance and investing. While I am taking a slightly different view on this specific matter, I have great respect for his intellect. He has also had the opportunity to read this letter, comment, and offer corrections prior to publication.

 

Information contained in this report is believed by Deep Knowledge Investing (“DKI”) to be accurate and/or derived from sources which it believes to be reliable; however, such information is presented without warranty of any kind, whether express or implied and DKI makes no representation as to the completeness, timeliness or accuracy of the information contained therein or with regard to the results to be obtained from its use.  The provision of the information contained in the Services shall not be deemed to obligate DKI to provide updated or similar information in the future except to the extent it may be required to do so. 

The information we provide is publicly available; our reports are neither an offer nor a solicitation to buy or sell securities. All expressions of opinion are precisely that and are subject to change. DKI, affiliates of DKI or its principal or others associated with DKI may have, take or sell positions in securities of companies about which we write. 

 Our opinions are not advice that investment in a company’s securities is suitable for any particular investor. Each investor should consult with and rely on his or its own investigation, due diligence and the recommendations of investment professionals whom the investor has engaged for that purpose. 

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