Gold Mine or Shaft?

Dennis Miller has been a long-term believer of true diversification, using metals and currencies to help diversify his investment portfolio, owning an account with us that goes back to the 1980s. Over the years, Dennis has taken a liking to writing about financials and investments for retired or nearly retired investors. The days of buying / staggering CDs with 6% interest are long gone, and retirees need to look outside the box for ways to generate returns to their nest egg. Dennis makes it his priority to make certain that retirees understand not only what’s going on in the financial world, but how they can also protect themselves or take advantage of what’s going on. So, with no further ado, here’s Dennis Miller to bring you today’s Sunday edition of the Daily Pfennig® newsletter.

I recently watched the movie “The Big Short” and was reminded of a country and western song.

“Well, I guess, it all sounds sort of funny
but it hurts too much to laugh
She got the gold mine, I got the shaft.”
The movie is based on the 2008 housing crisis and eventual bank bailout. The banks got the gold mine while the public got the shaft. There’s nothing funny about the graphic at the end:

“When the dust settled from the collapse, $5 trillion dollars in pension money, real estate values, 401(k), savings and bonds disappeared.
8 million people lost their jobs; 6 million lost their homes.
… And that’s just what happened in the U.S.”
The pundits’ warnings were ignored. For most, the collapse was a “surprise.” The government said emergency action had to be taken. That’s baloney!

There will be no warning
When it comes to economic catastrophes don’t expect a government warning. The politicians want us to believe they have everything under control.

Since the 2008 bailouts, our inboxes are full of warnings. Each warning is complete with logical financial analysis predicting the end is near. I have written my share – Wolf! Wolf! Wolf!

The US debt clock shows unfunded liabilities of approximately $102 trillion (almost $854,000 per taxpayer). Eventually the pundits’ predictions will come true and things could get quite ugly.

When governments face a fiscal crisis their options are to cut the cost of government, raise taxes, or inflate the currency.

Forget about spending cuts – particularly “entitlements.” Politicians buy votes with our tax dollars. Cut off the freebies and they risk a revolution.

Raise taxes? They go where the money is and grab what they can.

The Federal Reserve wants to create inflation, the granddaddy of all stealth taxation. Devaluing the currency favors debtors (the government is the biggest debtor of them all), while destroying savers.

Since 2008, the Federal Reserve’s balance sheet has increased from around $850 billion to over $4.4 trillion (Fig. 1).

Fig. #1
Federal Reserve Total Assets

Source: Board of Governors of the Federal Reserve System (U.S.); Board of Governors of the Federal Reserve System (US), All Federal Reserve Banks: Total Assets [WALCL], retrieved from FRED, Federal Reserve Bank of St. Louis;, June 28, 2016.

Why are the pundits so concerned? History shows when governments print trillions, inflation is soon to follow. While we may be in a temporary deflation, when the pendulum swings, it could shoot well beyond the 2% Fed target and destroy a lot of wealth with baby boomers and retirees being particularly vulnerable.

How does inflation hurt us?
The highest inflation during most of our lives came during the Carter years. provides the inflation data:


Year Avg. Inflation Rate
1977 6.5%
1978 7.6%
1979 11.3%
1980 13.5%
1981 10.3%


Using the handy inflation calculator you’ll find the accumulated inflation amounted to 59.9%. Assume retiree Joe Saver, bought a $20,000 Buick on 1/1/77 and they raised their prices equal to the inflation rate, that same vehicle would cost $31,984 in 1982.

Joe also bought a five-year 6% $100,000 Certificate of Deposit on January 1, 1977. Assume Joe remains in the 25% tax bracket and does not reinvest his interest. How did his investment perform?

Joe’s $30,000 in interest nets him after tax income of $22,500. When his CD matures the bank returns his $100,000. While his $100,000 would buy five Buicks in 1977, in 1982 it only buys only 3.1. Joe never wrote an “inflation” check, yet the stealth inflation tax siphoned away almost 40% of Joe’s wealth.

Government bonds and FDIC insured CD’s are safe from default; however, your buying power is not protected.

Inflation protection?
For several years I scheduled my visit to the Orlando Money Show to watch my friend Chuck Butler’s presentation. I loved visiting the booths of name brand money management firms. These dapper folks all bragged about their sophisticated allocation formulas for ultra-conservative to high-risk investors – and anything in between. I asked, “How are you protecting your clients’ portfolios from high inflation?” They all said, “We can allocate a portion to TIPS.”

TIPS are Treasury Inflation Protected Securities. Treasury Direct says: “They were first auctioned in January 1997 after the market expressed a strong interest in the inflation-indexed asset class.” (The government sells “government protection” insurance?)

Treasury Direct tells us their main selling feature:

“The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.”

Currently the interest rates for TIPS are 87% lower than that paid for government bonds. Buyers accept less interest for the added safety of protecting the principal from inflation.

Could TIPS have helped Joe? While TIPS didn’t exist in 1977, we ran some estimates. Assume Joe invested 10% of his nest egg in TIPS paying 2% interest. The $90,000 in CDs would earn $20,250 while his TIPS nets him $957 (after taxes). His TIPS returned $15,992 in inflation-adjusted principle. Joe would have sacrificed $1,293 in earnings in return for an additional $5,992 in capital.

TIPS don’t offer “portfolio” protection. Joe may have protected his $10,000 investment from inflation but TIPS did nothing for the rest of his nest egg.

Protecting your portfolio from inflation requires investing in assets that increase in value higher than the rate of inflation. TIPS limit inflation protection to the amount you have invested in them – nothing more. To truly “inflation protect” your portfolio, you must look at other asset classes.

How about gold?
What would have happened if Joe Saver had invested $90,000 in a CD and $10,000 in gold on 1/1/77? Only Gold supplies us with historical gold prices.


Date Price per oz.
12/31/76 $124.74
12/31/77 $124.74
12/31/78 $193.44
12/31/79 $304.68
12/31/80 $614.50
12/31/81 $459.26


On 1/1/77 Joe’s $10,000 would have bought him 80.1 oz. of gold. If he sold them on 12/31/81 he would net $30,113.04 after taxes (wishing he sold a year earlier).

Joe would earn $2,250 less interest – while adding $20,113.04 to his nest egg.

The following chart shows that gold appreciated ahead of the inflation rate during that time.

Fig. #2


Gold would have provided an additional $14,123 in appreciation to offset some of the loss he took in his CDs.

Had Joe sold a year earlier he would have gained another $9,334. Gold traders buy in anticipation of inflation fears and sell early anticipating inflation will recede. Might it be an omen that Gold and Silver prices have jumped approximately 18% and 20% respectively since the first of the year?

More options
Inflation protection is a tradeoff. Investors must factor the need for current income, longevity, risk tolerance and potential reward. All in one basket can be risky, and each investor should seek the right balance.

I believe every investor should have a minimum of 10% in “core holdings” (precious metals). Perhaps the ultra-wealthy can afford to have 30% or more in metals, but most investors cannot. Most need yield and can’t risk too much of their nest egg in any single asset class.

Another excellent level of protection could be foreign currencies that will rise when the dollar falls. My wife and I own FDIC-insured CDs denominated in foreign currencies. The FDIC coverage offers safety from loss due to bank default up to $250,000, however it does not protect against loss due to a fluctuation in the currencies’ value. Much like investors flock to gold, investors should look for (and seek expert advice about) safe haven currencies. Safe haven currencies provide an opportunity for appreciation above the inflation rate, adding diversification and protection to your nest egg.

Having inadequate inflation protection is a huge risk. Much like the housing crisis, things will happen quickly without government warning.

Today we can choose to buy assets to help protect our nest egg from inflation, or do nothing. Gold mine or shaft? It’s no laughing matter.

Chuck here:
Dennis Miller has worked as a consultant with Fortune 500 companies including GE, Mobil, Shell, HP, IBM, Eastman Kodak and AC Nielsen. He was an active international lecturer for 40 years, and authored several books on sales and sales management. He is a contributor to the American Management Association and a member of the Mensa Society, and a proud former U.S. Marine. Today he is a regular contributor to MarketWatch as “RetireMentor.” You can find out more about him here.

One thing to keep in mind is that we at EverBank offer the types of accounts Dennis has just talked about, but then I’m sure you are already aware of that! While our foreign currency accounts are FDIC insured1, our precious metals accounts are not FDIC insured2. Thanks to Dennis for his contribution.

Until the next Daily Pfennig® edition…

Chuck Butler
Managing Director
EverBank Global Markets Group