Welcome to this week’s mailbag edition of The Daily Cut.
And if you’re joining us for the first time, it’s great to have you.
The mission of this newsletter is to plug you into the best research, ideas, and recommendations from Bill Bonner, Doug Casey, Teeka Tiwari, Jeff Brown, E.B. Tucker, and the rest of the Legacy Research team.
Each Friday, we feature answers to the questions your fellow readers send to their favorite analysts. (You can write us, as always, at [email protected].)
Kicking it off this week… a question on our favorite precious metal, gold, for Strategic Trader editor E.B. Tucker.
But if you’re a fan of tech… make sure to read to the end. Our tech expert, Jeff Brown, fields an important question about the future of Elon Musk’s electric carmaker, Tesla (TSLA).
Reader question: I’ve read a lot on the virtues of owning physical gold (and silver) as insurance. However, no one’s ever said what you might do with it if our currency collapses and you can’t sell it for cash.
How do you get “change” for an ounce of gold when you’re buying groceries? I’m not alone in questioning this, as I’ve had other people ask me.
– Catherine C.
E.B.’s answer: Thank you for the question, Catherine. This is very important. You will (hopefully) not buy groceries with gold or silver coins. They’re not meant to help you transact daily business.
Gold is an asset. There will be a time when you’ll trade your gold or silver for another asset. Owning gold simply means you have something to exchange that’s solid, real, and tangible that you know holds its value over long periods. Government currencies won’t cut it.
One other point that may help. Although I say gold is an asset, it’s not, in my opinion, an investment. Trading dollars into gold means you can trade the gold back into something else later.
The value in gold is that it protects you against the devaluing of the paper we call money. That perspective can help when making decisions about where gold fits in your portfolio.
There’s been a lot of buzz around E.B. this week at Legacy. On Wednesday, he held his first special event of the year. It was all about an obscure speculative security that 99% of Americans have never heard of.
But it’s allowed him to rack up gains of 110%… 155%… and 868% in the Strategic Trader model portfolio.
As I showed you in Tuesday’s dispatch, these obscure securities don’t just allow you to score big wins. They also help you reduce your risk… which is the Holy Grail of investing.
You don’t want to miss out on this. I wish I’d jumped in on it when E.B. first recommended it. Go here to watch for free.
Meantime… that wasn’t the only question we got on gold. Bonner-Denning Letter coauthor Dan Denning tackles the next one…
Reader question: Will someone please tell me why Nixon took us off the gold standard? I was too stupid then to know what was happening. (I’m not much smarter now.) But what I don’t understand is how Nixon had the authority to do that. With a stroke of a pen, he changed the financial history of this country? How was that possible?
– Frank G.
Dan’s answer: Those are great questions, Frank.
The short version is that Nixon did it because, in 1971, annual U.S. consumer price inflation was running at more than 5%. And economic growth was stagnant.
You remember it as stagflation. We had a growing budget deficit, thanks to the Vietnam War and LBJ’s Great Society. We also had a “balance of payments deficit.” We were importing more than we were exporting.
As a result, we were sending billions of U.S. dollars outside the U.S. These were held in foreign banks, mostly in Europe. Before August 1971, our trading partners could convert those dollars into gold at a fixed rate of $35 an ounce at the U.S. Treasury. And the value of the dollars overseas exceeded the dollar value of gold held at the Treasury.
The French, under President Charles de Gaulle, knew the only way out for the U.S. was inflation – aka dollar devaluation. So they started to demand the U.S. trade in French-held dollars for the gold it held in Fort Knox and other vaults.
Before this run on the nation’s gold could pick up speed, Nixon convened a secret meeting at Camp David on Friday, August 13, 1971.
Nixon… his Treasury secretary, John Connally… and a young Paul Volcker agreed to suspend the direct convertibility of gold into dollars, impose wage and price controls, lay a 10% tariff on imports, and devalue the dollar.
Nixon announced it all in a televised speech on Sunday, August 15. It became known as the “Nixon shock.”
Now to the second part of your question: How was this possible?
Blame FDR and a Congress that ceded legislative authority to the White House under the guise of a “national emergency.”
It began, on April 5, 1933, with FDR’s Executive Order 6102. It forced Americans to turn in their gold to the Treasury in exchange for $20.67 an ounce. That was the fixed exchange rate between the dollar and gold at the time.
But in 1934, FDR fixed the price of gold at $35 an ounce. He had the authority to do so under the Gold Reserve Act of 1934. And that’s where Nixon’s authority derived from.
(Not a bad deal, huh? Confiscate gold at $20.67 an ounce in 1933. Then revalue it at $35 an ounce. This handed the Treasury a windfall profit on the difference.)
The authority behind the Gold Reserve Act is, at least indirectly, the Trading With the Enemy Act of 1917. It gave the president the authority to oversee and restrict trade between the U.S. and its enemies.
Presumably, this was supposed to mean foreign countries with which the U.S. was at war via declaration of war by Congress. But Congress later amended that act to allow the president the same powers in peacetime.
That’s what left Nixon with so much power to kill the gold standard and usher in the fiat money system we live with today.
Next up, another topic that has readers buzzing – our self-driving future. It’s one of the major profit trends Jeff Brown has put on his readers’ radars.
Reader question: You described the availability of fully autonomous Tesla vehicles as “completely changing the nature of car ownership.” I agree. If I can get a ride to my destination in a Tesla whenever I need one just using a smartphone app, what is my incentive to own a Tesla vehicle?
Wouldn’t it be more cost-effective for me to ride in other people’s vehicles and let those people bear the burden of buying the car and paying for the insurance, whatever recharge fees are due, and other upkeep?
– John R.
Jeff’s answer: Thanks for writing in, John.
To catch everyone up, the future of transportation will be shared autonomous vehicles (SAV). You’ll order a taxi on your smartphone, and a self-driving car will arrive to take you to your destination.
Tesla is a leader in this trend. All Tesla vehicles made during the last 18 months or so have the hardware for autonomous driving. With a simple software upgrade that gets pushed out over the internet like a software upgrade on your computer, they can become fully autonomous overnight.
Once that happens, Tesla owners will be able to opt to have their cars “join the fleet” when not in use. These vehicles would serve as self-driving taxis and earn the owner an income while they’d otherwise be idle.
But you’re right. If riding in a shared autonomous vehicle is an option in the near future, would we even need to buy a car?
The answer is it won’t be necessary. But some will still want to have their own cars. Others will prefer riding in SAVs.
Researchers estimate that, for folks who drive fewer than 10,000 miles per year, it’s likely cheaper to use ride-hailing services such as Uber as your main mode of transportation.
And that’s accounting for current costs for ride-hailing services. With SAVs, the cost to hail a ride will plummet. The biggest expense – the driver – will no longer be part of the equation.
In fact, I believe riding in some SAVs will be free. Waymo is Google’s autonomous vehicle division. It will likely offer free rides in exchange for the opportunity to collect more data on riders so it can help advertisers target them.
Given the choice between taking free rides in SAVs or dealing with the various expenses of owning a car, I think we know what most consumers would opt for.
This transition will dramatically change the automotive industry. It will also affect the car insurance industry… the rental car industry… and anyone who owns parking lots. We’ll also need new companies that will clean and service massive fleets of shared autonomous vehicles.
Finally, Postcards From the Fringe author Tom Dyson warned that income-driven investments are toxic. And one reader wants clarification…
Reader question: I am intrigued by your comment that income investments are toxic. I get what you mean as it refers to stocks and bonds, but what about real estate? About a third of my net worth is in rental real estate, and the income is great.
The risk I see is a decline in rental income caused by widespread unemployment… but I can’t see how that could drop by more than maybe 20%. What do you think?
Tom’s answer: Rental real estate is clearly a better asset to own going into the inflation period I’m anticipating than say, a corporate bond. It’s an example of what I’m starting to call “hard money.” And it’s a “workhorse” in the sense it generates income for its owner.
I should have made a distinction between financial income investments, such as stocks and bonds… and income investments on tangible, productive assets, such as timberland, farmland, small businesses, or rental properties.
The former, without exception, are toxic income investments. They’ve been pumped up by decades of easy money and manipulated interest rates. The latter are safe havens and exactly where you want to be over the next decade.
(The humbler, the better, in my opinion. Renting cheap starter homes to young families in Kansas will weather the storm much better than luxury condos in London.)
That’s all for this week. Don’t forget to weigh in on these and the other investment themes we track for you.
Would you give up car ownership in favor of using shared autonomous vehicles? What assets have you built positions in to prepare for a crisis? Are you buying gold?
Send us your thoughts… and any other questions you’d like our experts to answer for you… at [email protected].
February 7, 2020
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