‘Todo es posible nada es seguro’. These words came from the lips of a fellow local passenger during a hair raising bus trip through the narrow winding mountain roads of the Andes in Peru many years ago. Yet they could be applied today to the current state of the whole world. When I try, as hard as I can, to envisage the global landscape over the next 10-20 years, I realise there may be a stronger case than ever before for holding insurance assets or Off-The-Grid Assets (OTGAs)©. These are defined as assets that not only act as a safe haven or store of value during a major economic crisis, but are not directly connected to the global financial system. Central banks cannot control their supply or price nor can they create more of them.
There are two principle categories of OTGAs. The first and most obvious category are precious metals. Gold, silver, platinum and palladium would all fit the bill. They are as old as the hills and are finite in quantity. Even though there exists quantities of these metals yet to be mined, their quantity cannot be enlarged as easily or cheaply as that of fiat money.
The second category of OTGAs are premium grade supply-capped cryptocurrencies (PGSCCs)©. This category is limited only to a handful of cryptocurrencies which are both of premium grade and a store of value. By ‘premium grade’ I take into account factors like trust, reputation and adoption. And by ‘store of value’ I mean that a cryptocurrency has a finite and capped supply. Bitcoin is, by far, the principle cryptocurrency and it should represent at least 50% of a cryptocurrency portfolio. It is the oldest cryptocurrency, has a supply cap of just 21 million coins, and its current value represents at least 50% of the entire global cryptocurrency market. Only two other cryptocurrencies make the cut as a PGSCC. They are Litecoin and Z-Cash. Litecoin is one of the oldest cryptocurrencies and has a supply cap of 81 million coins. Z-Cash is a more recent cryptocurrency established in 2016. It is very similar to Bitcoin with the same supply cap yet unlike Bitcoin it has the additional option of being a privacy coin. Monero is a pure privacy coin yet Z-Cash has a better reputation. The second largest cryptocurrency, Ethereum, is not a PGSCC since it does not have a supply cap.
Although there are a lot of unsavoury people and entities operating in the crypto space, one of the few important crypto related organisations is the Gemini exchange founded by the Winklevoss brothers who both have an enormous personal stake in Bitcoin. This is arguably one of the most, if not the most, trusted and safest cryptocurrency exchange currently in existence. Gemini also offers the option of insuring any cryptocurrency holdings on their exchange. Unlike other cryptocurrency exchanges, only a very selective number of cryptocurrencies can be traded on their exchange but these include all three PGSCCs; Bitcoin, Litecoin and Z-Cash.
Precious metals in bullion form can be stored and insured securely in the vaults of reputable dealers such as Sharps Pixley. This works very well if you have large quantities of gold which is currently trading at over $1400 per troy ounce. However for cheaper precious metals like silver, storage and insurance becomes more costly. Precious metals only count as OTGAs in physical coin and bullion form. Precious metal ETFs or shares in gold and silver miners are not OTGAs. In the case of PGSCCs, they become true OTGAs when they are kept in cold storage on a hard drive in a secure location and not all on a cryptocurrency exchange where they are then vulnerable to hacking attacks.
Land and edible commodities like crops are not OTGAs for the following reasons. Land is highly illiquid and carries the added risk of expropriation if a tyrannical government ever came to power in its jurisdiction. Edible crops, on the other hand, are much more liquid yet they are perishable. Even tinned foods with a longer shelf life do eventually perish. Precious metals and PGSCCs are immune from these limitations.
Precious metals and PGSCCs each have their own unique advantages. The most obvious ones for PGSCCs are the negation of physical storage costs and cross-border transportation hurdles, and of course their finite supply caps. Since PGSCCs are digital assets, unlike precious metals, one doesn’t have to worry about physical storage or transporting them between borders. They can be stored in digital wallets either on a cryptocurrency exchange platform or in cold storage on a hard drive. Even though precious metals are rare, their supply is not fixed and who knows how big potential deposits of gold and silver are not just on this planet but on other asteroids and planets throughout the solar system. It is entirely possible that at some point in the future asteroid mining could dramatically increase the current supply of these metals. Yet whether this occurs in my life time is debatable.
The advantages precious metals have over PGSCCs are their tangibility and lack of need to be powered by electricity and by extension the internet. What’s more, precious metals have been around for thousands of years whereas Bitcoin has only been around for ten years and it still remains to be seen whether Bitcoin will endure as a store of value in spite of its unique advantages and current position as the dominant and leading cryptocurrency.
Yet we are currently living in a world of ballooning public and private debt and high equity valuations fuelled by low interest rates and quantitative easing. At the same time levels of inequality have risen along with a palpable sense of discontent across the world bringing with it an emergence of populism and radical parties and politicians. The final paragraph from a recent short article entitled How I Learned To Love Gold by Alasdair McKinnon, who manages an investment trust in the UK called The Scottish Investment Trust, is very succinct and prescient in describing this current environment and its future consequences…
Today, we are more than 10 years into a monetary experiment that ‘saved the system’ but is losing popular consent. Cheap money has driven asset prices but has increased wealth inequality, especially between generations. Demographics dictate that, in the not too distant future, those without assets are likely to be running the institutions and making the rules. In the interim, a new breed of politician is prepared to rip-up the economic rule book in their quest for power. This shift won’t necessarily prove a bad thing but, regardless, it seems a favourable environment for gold.
Such a situation is likely to manifest in the future and would create a very favourable environment not just for gold but for all types of OTGAs as more people lose trust in owning devalued fiat currencies and worthless government bonds.
By Nicholas Peart
(c)All Rights Reserved