inflation hedges

MarketWatch: ‘Rare Coins Could Outperform As Investments This Year’

“Alternative” investments seem to be attracting more attention these days.

On January 19, I pointed out a recent Town & Country magazine article about jewelry investing.

This afternoon, the MarketWatch website (a subsidiary of Dow Jones & Company) published a piece about rare coin investing. Ryan Vlastelica reported:

With inflation expected to rise this year, and a concurrently strengthening U.S. dollar seen eating into any gains that might be made by pure gold, investors may want to consider a niche asset class as a protection against market turbulence: rare coins

Between 1979 and 2014, the most recent year for which data is available, coins with a minimum score of 65 posted an average annual return of 11.9%, according to a study by Penn State University. That’s near the average annual return of 13% posted by equities and more than twice the 5.5% average annual gain of gold bullion. Coins with a lower score, between 63 and 65, had an average annual return of 10.1%.

Coins posted a higher correlation with inflation than other asset classes, according to the study, with the relationship about twice as strong as for gold. The correlation between coins and inflation is 0.58 (perfect correlation would be 1.0). It’s 0.27 for gold bullion and 0.15 for stocks. The higher the correlation, the better it works as a hedge

(Editor’s note: Bold added for emphasis)

When it comes to rare coins, prospective investors might want to heed an adage made popular by numismatic literature dealer Aaron Feldman in the last century:

“Buy the book before the coin.”

You can read the entire article on the MarketWatch website here.

By Christopher E. Hill
Survival And Prosperity (

(Editor’s note: A qualified professional should be consulted prior to making a financial decision based on material found in this weblog. If this recommended course of action is not pursued, then it must be understood that the decision is the reader’s and the reader’s alone. The creator/Editor of this blog is not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information contained herein.)


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Jeremy Grantham Publishes ‘The Longest Quarterly Letter Ever’

On Survival And Prosperity’s “Crash Prophets” page, I list the latest investment activities/recommendations of four “crash prophets” who saw the 2008 economic crisis coming- Dr. Marc Faber, Jeremy Grantham, Jim Rogers, and Peter Schiff. I’ve already added entries under Faber, Rogers, and Schiff. And tonight, I’ll finally be providing material for Jeremy Grantham, chief investment strategist of Grantham, Mayo, Van Otterloo & Co. (GMO). As I’ve noted before, the British investor has a special talent for correctly-calling the direction of the markets. For example:

• In 1982, said the U.S. stock market was ripe for a “major rally.” That year was the beginning of the longest bull run ever.
• In 1989, called the top of the Japanese bubble economy
• In 1991, predicted the resurgence of U.S. large cap stocks
• In 2000, correctly called the rallies in U.S. small cap and value stocks
• In January 2000, warned of an impending crash in technology stocks, which took place two months later
• Saw the 2008 global financial crisis coming. In April 2007, said we are now seeing the first worldwide bubble in history covering all asset classes.

Grantham’s individual clients have included former U.S. Vice President Dick Cheney and former U.S. presidential candidate John Kerry.

Grantham pens a quarterly investment letter on the GMO website. And he’s just released the latest installment, entitled “The Longest Quarterly Letter Ever.” The publication is divided into three parts:

• “Part I: Investment Advice from Your Uncle Polonius”
Grantham provided solid investment advice, insight into being an investment manager, and pointed out the high level of optimism Americans have
• “Part II: Your Grandchildren Have No Value (And Other Deficiencies of Capitalism)”
Discussed capitalism, particularly its shortfalls
• “Part III: Investment Observations for the New Year”
Reviewed 2011, and provided investment recommendations for 2012 and beyond. It’s this part of the newsletter I’ll be focusing on in the rest of the post.

The co-founder of GMO thinks global equities are closer to being good value than U.S. stocks:

The majority of global equities are within spitting distance (a technical term) of fair value. Only the S&P 500 is materially overpriced…

Long-term “developed market” government bonds are unattractive:

So in asset allocation there is one great opportunity – avoiding duration in fixed income – and one pretty good opportunity – down weighting most of the U.S. market.

Grantham sees inflation ahead of us, and offers suggestions (stocks, commodities, possibly gold) for hedging against it:

The 800-pound gorilla (the one that prefers bond holders to bamboo) is not in the room yet, but you can hear him thumping his chest up in the hills. He will come eventually, and before he does, you should remember that stocks are underrated inflation hedges… Equities have been tested over and over again in different places and in different decades and they have always been found to be very effective hedges. Serious resources – oil and copper in the ground and forestry and farmland – will almost certainly also be good and very probably much better than broad stocks in the short run. Gold may be good too. Who knows? But for stocks to work dependably as inflation hedges one has to have a several-year time horizon

He suspects prices of agricultural commodities could come down in the short-term:

Given less bad weather I argued, prices could fall a lot. Since last spring, there has been some terrible weather in Thailand (the world’s largest exporter of rice), in the Southern U.S., and in parts of Argentina. But, on average, the weather has indeed been less bad than the previous year and world grain output is likely to be up quite a lot. As a consequence, prices, which had weakened an average 25% plus since the early summer peak (before the recent rally), will likely come down some more. I am, though, more convinced than ever that the biggest of several substantial problems we face is that of feeding the 9 or 10 billion people that are likely to exist one day, with finite land, finite soil, and, perhaps above all, finite mined fertilizer.

Grantham thinks investment opportunities might still be found in farmland:

While some farmland in the U.S. has appreciated rapidly and perhaps by too much, farmland is an extremely varied and complicated market both in the U.S. and globally, and one that is inefficiently priced. With care and experience, reasonable investments can be made, although a sell-off would of course make for even more attractive opportunities.

He sees a long-term opportunity in natural gas:

Everyone who has a brain should be thinking of how to make money on this in the longer term.

And metals producers show promise in the long run:

Metals producers were down almost a third from their high until the recent rapid rally. They are now (February 9) down about 20% to 25%. Some may still be vulnerable. Gold producers, though, look cheaper than the metal itself after badly underperforming the metal last year, reaching one of their weaker ratios for a while. Still, my old recommendation from April holds: these are all great long-term investments that are dangerous short term. There are two investment approaches that work. My choice is to average in. (It is what I personally have been doing.) An alternative is to know the markets short term better than the market does, which is tough; although probably a few experts can do it. The third approach, I definitely don’t recommend, is to just follow the herd up and down (although of course some small numbers do this well, too).

The investment strategist summarized these recommendations for readers:

Summary of Recommendations (with apologies for the lack of changes)
• Heavily underweight U.S equities, but not the high quality quartile, which is almost fair price. Non-quality equities, in contrast, have a negative imputed 7-year return after their handsome rally in the last 3 months through to mid-February.
• Slightly overweight other global equities, which are almost fair price, down from a little cheap at year end.
• In total, be about neutral in global equities. Yes, there is more than our normal fair share of potential negatives lurking around, but on our data: a) most of the negatives are reflected in stock prices; and b) all fixed income duration is dangerously overpriced. This last situation is, of course, engineered by the Fed, which hopes to drive us all into taking more risk, notably by buying more equities. I hate to oblige, but at current equity prices it just makes sense to do what they want. As mentioned earlier, equities are also good long-term hedges against inflation.
• Underweight as much as you dare long-term bonds, especially higher-grade sovereign bonds.
• In the long term, resources in the ground, forestry, and agricultural land are attractive, but come with the usual caveats of the risk of short-term over pricing, so average in.

Great stuff as usual from Mr. Grantham and GMO. You can read the entire investment letter on the GMO website here (.pdf format).

(Editor’s notes: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein; info added to “Crash Prophets” page)


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