Tag Archives: steven-quint

Buy Silver, Platinum, And Palladium To Hedge Inflation

Gold is overpriced compared to historical valuations against other precious metals. Platinum and Palladium are historically cheap. Silver is cheap enough and comes with robust demand. Buying the cheapest metals should provide the best inflation hedge. Diversifying your precious metal holdings will reduce some of the risk. Many governments across the world are in excessive debt. Everyone is worried money printing in the form of quantitative easing will be the only solution. Even now, with deflationary pressures all across the world, it seems the solution for all governments is to devalue their currency to increase exports. With the exception of the British Pound, every major currency in the world has devalued against the U.S. Dollar this year. This has led to deflation within the United States in the form of cheaper imports such as oil, but high inflation outside the United States. This is only temporary, as the United States will eventually have to devalue their currency to compete internationally, fueling the never ending spiral of currency debasement and inflation. Deflation is only temporary; long term inflation will always be the case with fiat no matter which currency you choose to favor. I am not making a case against fiat. I believe any portfolio should have lots of cash due to its optionality. I am also a proponent of the fiat system, the flexibility it affords governments, and the way it allows currency to expand with increasing populations and growing economies. However, I am making a case to have some precious metals as a contingency should this never ending spiral of currency debasement build too much momentum. This is to make your portfolio more robust to a variety of different scenarios, rather than to predict a high inflation situation. I believe now is an opportune time to buy some precious metals since a more expensive U.S. Dollar has lowered the prices. This opportunity might only be temporary, as the United States will eventually need to devalue its currency as well, both to compete in international trade and to pay off its own debt. Fortunately, you can easily invest in precious metals by purchasing shares of exchange traded trusts. You get ownership rights to the metals while knowing they are stored securely behind vaults for a small annual fee. You can also purchase the bullion through trusts very near to the market price of the metal. In contrast, if you buy physical bullion directly then you must pay a premium over the metal’s market value, which can be as low as 4-5% or as high as 30%, depending on the quantity you buy, which country you buy it in, and the form you buy it such as bar or coin. These higher premiums are a deal killer to me in most cases, as I cannot afford to buy in bulk. The trusts I’ll mention in this article are the following: SPDR Gold Trust (NYSEARCA: GLD ); iShares Silver Trust (NYSEARCA: SLV ); ETFS Physical Platinum Shares (NYSEARCA: PPLT ); ETFS Physical Palladium Shares (NYSEARCA: PALL ). Gold is obviously the best choice as an inflation hedge. This is due to its long history as a currency as well as its intrinsic demand as a beautiful, ornamental metal. Unfortunately, gold is very expensive right now. It’s not as expensive as it was a few years ago in 2012, but it’s still very high priced compared to historical standards. I believe at current prices of $1,158 per ounce, gold already accounts for a major currency flight or high inflation scenario. I say this because I can still remember buying an ounce of gold in 2003 at $350 an ounce, which I considered a fair price back then. There are better options than buying gold at today’s prices. These options are silver , platinum , and palladium . All of these metals are relatively inexpensive compared to gold, and all of them are priced significantly below their historic market highs. Let’s take platinum as an example, valued at $1,019 per ounce today. Platinum is currently more than 50% cheaper than its 2007 high, and almost equal to its price in 2005. However, its price in 2005 does not reflect inflation over the last ten years, so today’s price is even cheaper than that. Granted, there were some fundamental changes in the industrial demand for platinum, as auto manufacturers began alternating cheaper palladium in place of platinum to make catalytic converters; this effectively lowered the price of platinum and increased the price of palladium. This is why I recommend to own both platinum and palladium, since they can be used interchangeably in some instances, it lowers the risk to have some of both. This brings me to my next point. It is best to diversify across your metals to reduce the risk of industrial demand falling off for any single one of them. This is why I think holding silver is beneficial to go with platinum and palladium. At approximately $15 per ounce, silver isn’t quite as cheap as the other two metals, at least according to historical standards. Its current price is roughly 200% higher than its approximate price in the mid 1990s at around $5 per ounce. Even so, its value in relation to gold is low, as the gold price to silver price ratio is approximately 77 right now, whereas ten to fifteen years ago is hovered around 45. I believe an admixture of platinum, palladium, and silver is a good way to hedge against inflation, and it is my personal opinion that these three metals combined, at their current market prices, present significantly less risk than holding gold. I think 10-15% of a portfolio allocated to these metals is a reasonable quantity. Disclosure: I am/we are long SLV, PPLT, PALL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The shares of SLV, PPLT, and PALL represent approximately 15% of my brokerage account portfolio.

White Mountains Insurance Group Is Preparing For A Financial Storm

WTM is slowly selling off its insurance businesses. The insurance industry is not what it once was. The WTM management team is one of the few who are awake to the risks. The CEO of White Mountains Insurance Group (NYSE: WTM ), Ray Barrette, has voiced concerns about the insurance industry and the general economic environment in his management reports over the last several years. Barrette’s comments are often times indirect by referring to the insurance market as highly competitive. Other times his statements are blatant, claiming that low interest rates and highly competitive insurance pricing do not offer insurance companies an adequate return for their risk exposure. He has voiced concerns with government debt, inflation and rising interest rates, which of course could bankrupt an insurance company if these scenarios happened sharply and unexpectedly. The investment management of WTM coincides with Barrette’s viewpoint. WTM has kept its bond portfolio very short term, far more conservative than the industry average. Large cash holdings are always on the books. WTM has also favored insurance lines that are short tail, as long tail lines can take many years for the claims to settle and are exposed to inflation risks. In my opinion, WTM is one of the most conservative and cautious insurance holding companies operating in the insurance space. There are other cautious holding companies, such as Fairfax Financial Holdings (OTCPK: FRFHF ) and Alleghany Corporation (NYSE: Y ), but WTM has them beat in its paranoia. Not only does WTM have shorter term bonds than these other companies, but WTM has been selling its insurance companies off whereas other insurance holding companies have been buying them and trying to consolidate. On July 27th WTM announced its sale of Sirius Group for 127% of its book value in cash. I found this surprising, as this company accounted for nearly half of WTM’s consolidated premiums and was by far its most profitable underwriter, having combined ratios in the 70-80% range. Selling a core asset such as this implies a bleak outlook for the insurance industry. The sale of Sirius Group is not the whole story. WTM is also selling its portion of Symetra Financial Corporation (NYSE: SYA ), of which it owned 17% of the outstanding shares alongside other partners such as Berkshire Hathaway (NYSE: BRK.A ) (NYSE: BRK.B ). After selling Sirius Group and Symetra Financial, only one of its three major insurance companies are still on WTM’s books, and that is OneBeacon Insurance Group (NYSE: OB ). WTM also has several other insurance holdings such as HG Global/BAM, but they’re small compared to what has been sold off. I believe these actions taken by WTM are very wise. The insurance industry has come under a lot of pressure in recent years. The macro environment has interest rates near zero percent interest. In normal times during the last several decades, low interest rates would push insurance companies to charge higher premiums to balance lower investment returns. However, the current state of the world comes with pathetically low rates, high debt both public and private, and irresponsible governments that simply will not operate within a balanced budget. Low interest rates and overpriced bond and stock markets are forcing other investment managers to seek returns elsewhere by invading the insurance space. Because of the new entrants, existing insurance companies cannot raise their prices during low interest rate environments. This is squeezing the profit margins out of the industry in an unprecedented manner. Warren Buffett has recently commented on the poor state of the insurance industry. Buffett stated that insurance has become “fashionable” for investment managers. I can understand his frustration, but I don’t think fashionable is the right explanation. Other investment managers are going into insurance because there are few other places to go with their money. The investment environment is dismal right now, and additional profits from insurance float are seen as a relatively safe way to enhance returns with few other options. WTM is cashing out of the insurance business, and at a premium to book value. This is truly contrarian when the rest of the insurance industry is trying to consolidate through mergers and acquisitions to become more competitive in a crowded industry. WTM is playing it smarter. WTM is accumulating large cash holdings and investing in startup companies, mostly services, that require minimal capital upfront. WTM’s portfolio is slowly being transitioned into a barbell, with a highly defensive cash component, and a small but highly aggressive component composed of start up companies. A barbell such as WTM’s is the best way to play the current macro environment, in my opinion. If deflation sets in, their large cash position will rise in purchasing power and provide many opportunities in an ensuing market correction. If inflation sets in, WTM’s cash will devalue to some extent but at least their insurance exposure will be reduced. Insurance companies could drop substantially in value under a scenario of high inflation and/or rapid interest rate increases. WTM is a very well managed company. I have been a fan for many years. However, I do not own shares of WTM right now because I perceive them to be fairly valued. The premium over book value that WTM is receiving in its sales of Sirius and Symetra is already reflected in the current share price. The share price has risen substantially since the sales have been announced at the end of July. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.