Wednesday, March 27, 2013

Review Of American Hard Assets, Issue No. 2

About six weeks ago I reviewed the first issue of American Hard Assets (referred to as "AHA" for the rest of my article), a new magazine that I had found at Barnes & Noble.  I was happy to see it, enjoyed reading it, and of course wished them well.  I then sent them $29.99 to subscribe.

Issue No. 2 is out, I received it by mail.  I also received the happy news that they would "comp me" for a one year subscription, my FIRST tangible benefit of writing this blog...

Two general comments on this magazine.  As I get more issues to read, I will become more familiar with their "rhythm", the same sense that I have become familiar with Barron's, I will better understand how they structure their regular features and columns.  Also, the magazine is geared to the wealthy, especially collectors.  You pretty much have to have a decent amount of money to be a collector of anything of high quality.


The Cover Story is about diamonds.  Diamonds are a hard asset, and so count as a class worth examining for ownership.  The first article ("Rock Solid: Diamond Investments") is a primer on "Investment Diamonds 101", investment diamonds serving just that: NOT meant to be worn, but to be securely stored.  Diamonds, while extremely hard (the hardest natural material) are not particularly TOUGH, they can be chipped or cracked if they are struck.  Better to just keep it in the safe...  A loose definition of an "investment diamond" would be a colorless diamond of 5 carats or more (less weight if a fancy colored diamond, more below).

There is a handy one page introduction to grading of diamonds as well as a table showing approximate values of a 1 carat diamond of various colors (colorless to well off-white in color) vs. clarity (how many and how serious the flaws that are present.  Fine diamonds are usually colored on a scale of D to Z, D being colorless (fine diamonds are typically D - F in color) and have a clarity (flaws) of flawless through a 10x loupe (F and IF grades) and the scale sliding down through the very, very small inclusions (flaws) towards larger flaws.  Let me illustrate PART of the table (from 21 April 2011 at

1 carat flawless (IF) colorless (D): $28,400
1 carat VVS1 (very, very small inclusions 1), very slight yellow (E): $17,400
1 carat VVS2 (slightly more inclusion than VVS1), color F: $$11,900
1 carat VS1 (very small inclusions), color G: $9000
1 carat VS2, color H: $7500

Investment diamond prices are not "linear"!  The author estimates that a 5 carat clean (say VVS1 or higher, my estimate) of D color would go for perhaps $1,000,000 at auction in Hong Kong, well over 5 times the 1 carat flawless D colored above...

Note!  I briefly worked at a jewelry store as my first job!  I found it relatively easy to only grossly grade diamonds (you really need to be trained...), especially grading color.  Diamonds are graded by trained professionals using a 10x loupe.  At lower grades (starting S1, colors h - J), an amateur can see off-color and the flaws (dark spots or internal cracks) by careful observation.  I never got to the point where I could grade colors D - G, nor being able to tell a VVS2 from a flawless...

Let me get to the Bottom Line re investing in diamonds.  The article states (and I strongly agree) that anyone entering this arena of investing must do a LOT of work to learn about diamonds, and that would take a lot of time and not be easy.  Diamonds are NOT like gold in that sense!  You can be almost brain-dead and succeed in gold.  Also, there is a big "Bid / Ask" spread that I have seen (in smaller diamonds) that is very unattractive.


The second article on diamonds I found very interesting ("Adding Some Color to Your Portfolio: Investing in Natural Fancy Colored Diamonds") by Benji Margolese.  "Fancy" here means rather strongly colored diamonds, these are rare, and the colors are strong enough that they go for a premium to colorless diamonds.    A few years ago I first learned about colored diamonds, they had outperformed, and apparently have still outperformed, clear diamonds.  Here is a quotation of interest from the article:

"Colored diamonds are among the rarest items in the world.  Less than 0.1% of diamonds mined are considered quality colored stones."

Quality diamonds are "brilliant" they shine..., so fancy colored diamonds will not only display rare colors, but sparkle while doing so, very attractive!

The prices are very high, and fancy colored diamonds are even more specialized (and so need even more education...) that regular diamonds.

Margolese's article discusses pink "Argyle Diamonds", Argyle being the source of most good pink diamonds.  The Argyle mine (owned by Rio Tinto) is in Western Australia.  These diamonds are in much demand by the very rich...  And the Argyle Diamond Mine is approaching closure...

At the end of the article, Margolese mentions some points, I comment on most of them below:
  • "Well Established", meaning that colored diamonds are well known and accepted by the wealthy (especially in Europe).
  • "Long Term Growth", well, uh, at least for the past few years...
  • "Portability", yes, you can carry a fortune in your palm...
  • "Privacy", he writes that they are not reportable for tax purposes, but what about any capital gains on re-sale?
That final point (taxation of gains from re-sale of diamonds or gold) as well as information re declaration of valuables (gold, yes, diamonds?) upon leaving the USA if the total "monetary instruments" (etc.) is over $10,000...  THIS would make a fabulous article, I will email this notion to the publisher...

A major supplier of colored diamonds (retail I imagine) is Leibish & Co. of Israel.  Check out their website (they had an ad in the magazine this month), chock full of beautiful colored diamonds:


It looks like AHA is going to collect short articles in their "World News Updates" section near the beginning of each issue.  I like this, they can provide several different items that otherwise might get lost.  Inc Liberty Head Nickelluded this time are short articles on a 12 lb gold nugget found by an amateur prospector in Australia (a winner!), a hike in import taxes in India re gold and a piece (for coin collectors) on a 1913 Liberty Head Nickel that has surfaced recently (one of just five in existence).


Mike Woodcock edits "2013 Predictions", an article with predictions from experts on a few different hard assets.  I will mention each prediction with a comment.

-- Resources and Commodities, Haydn Pallister  (Associate, Corality Financial Group) is kind-of bearish on the group (Europe, China) while Stan Shamu (IG Market Analyst) is bullish, especially if the global economy grows.

-- Gold, David Lennox (Fat Prophets Resource Analyst) expects no meaningful changes in our US deficits and debt while also expecting China to buy ever more gold, his target is $2300 - $2500, (I presume by year-end).  Ben Woldridge (Associate, Corality Financial Group) predicts a stagnating gold price.

-- Silver, David Lennox expects overall demand for silver to continue to rise, his target is $40 - $45 per oz.

(I pass on commenting on the Iron Ore and Crude Oil predictions, as it is hard to invest in the particular commodities per se, you can buy the companies producing them).

Mike Woodcock provides his brief summary, as well as a "Contract For Difference" (looks like a hedge to me, example: buy gold, sell iron ore) comment.

My summary: I myself am becoming less interested in predicting...  I have been reading books saying that most predictions are worth very little.  N. N. Taleb and Nate Silver (in recent -- 2012) books both make the case that it is better to find one's risks and vulnerabilities (and then plug those holes in your financial ark) than try to identify what will happen...  Nonetheless, I always read predictions by people who know more about something of interest than I do.


Greg Canavan (who writes a PM-oriented newsletter) writes: "Silver: A Brief History of Demonetization", in which he shows silver's role as money in the USA, its demise as money and its possible re-emergence as money.  Canavan clearly likes silver!

Gold and silver have both served as money in US history.  But, there have been fairly dramatic swings in whether silver or gold was the "most favored" money.  Much of this was due to discoveries in big New World mines.  As a large amount of gold was discovered, for example, gold would displace silver (and vice-versa).  These swings in relative gold and silver prices caused "monetary issues", one metal would be pushed out...  Gresham's Law (bad money drives out the good) in action, repeatedly...

By 1900, the US government had de-monetized silver, that is, instead of gold and silver counting as money, we were essentially on a gold standard.  It took some time for the rest of the world to join (China and others stuck to silver for a while, silver was inflationary, due to more silver entering the world system), but in the end even China (in 1935) left a silver standard.

But, China is now buying silver as well...  He predicts silver will become re-monetized, and that the future is bright for silver.


AHA provides a nice two page graphic spread on world regional production of and demand for gold.  The graphic is very "macro" and general, the production of and demand for gold varies considerably by world region (eg, North America produces more gold than it consumes, Asia is the opposite).


Numistatist (coin expert) and author Fred Reed writes "Encore, Encore" an article about the US $50 Gold Buffalo bullion coin as well as providing a history of the design (the same as for the Buffalo Nickel).  There may be a special "Proof" piece that might become available (the US Mint will assess demand for the "Reverse Proof" proposed coin) this year.  Reed also provides a history of the Buffalo Nickel / Gold Buffalo design.  If you like coin-collecting, this article will likely be of great interest.


The next article "New Money From Old Money") (author not given) is a history of the Krugerrand!  The South African government wanted to find a way to sell more gold, but not peg its value to their own currency (the Rand).  The solution was to make the coins with 1 troy ounce of gold, and allow its value to just float alongside the value of gold.  The Krugerrand by 1980 owned over 90% of the gold bullion coin market...


Nigel Moffat writes: "What's Best for You: 'Allocated' or 'Unallocated' Gold?".  He explains the difference (in brief: allocated gold is held by someone else: you own the bar, unallocated means you have a claim on a pool of gold).

What's best for you?  Well I don't know about you, but for me it is best to just hold the gold yourself.  Jon Corzine (MF Global scandal) robbed their customers of ALLOCATED gold...

But, the article has some beautiful pictures of 400 oz bars of gold from the Perth Mint!  (Mmm, gold porn...)


Except for an article on "Renovating to Sell" (discussing economics of flipping condos as well as fixing them up for resale), the rest of AHA has articles on Collectibles.  And here I refer back to my general comment in the third paragraph re AHA being somewhat-strongly oriented to wealthy collectors.  It takes serious money to collect items like the below...

Nicholas Forrest ("Is It Or Isn't It?") writes on the problems in the art world of getting the genuine thing (fraudulent or forged art).  This problems is most serious in prints, as many artists allowed prints to be made, but in different quantities...

Ed Estlow ("Best Watches for Investments?") advises us that Rolex and Patek Philippe are the two brands of watches of greatest interest as collectors' items...  Another article (no author named) explains "complications" in high-end watches, "complications" are additional features (beyond showing you what time it is) such as dates, days of the week, phases of the moon, etc.  Complications require more workmanship to produce, so in fine watches, they contribute to scarcity and higher prices in investment watches.

Hillary Gates ("Wine: Consumer Good or Investment Gold Mine?") writes on investing in Bordeaux (SW France, arguably the premier wine production are of the world) wines.  An expert she quotes said that top end wines have outperformed stocks since the Great Depression and that wines follow a seven year cycle.  Gates also writes about "wine futures" (similar to futures in the financial markets, except that most people actually delivery).  They key issue (beyond having to LEARN about wine, like learning about diamonds...) is that wine must be stored properly to retain its value.

Mark Prendergast writes ("Questions of Ownership") about the dangers of buying art whose provenance (ownership history) is not clear...  Careful who you buy expensive art from...  (He provides a source for checking authenticity and provenance on some art:

Johannes Werner interviews Mark Salzberg (he is now Chairman of Numismatic Guaranty Corporation (NGC), one of two recognized companies who grade and "slab" (put into tamper-resistant plastic holders)).  It is a long interview.  Salzberg has been a collector of many things, starting with coins when he was very young.  He then went on to collect a variety of other things (California art, wines, Zsolny vases, Van Erp lamps...  His collections would be worth A LOT more money than I am ever going to see.  Salzberg has been trimming his collecting of some things and re-focusing on coins, his first and greatest love (my words).


Near the end of this AHA issue are some short pieces in "Mining News" as well as upcoming events of interest to investors and collectors.

Finally, John W. Garibald writes "HindSight" which looks suspiciously like an editorial (see Thomas Donland of Barron's...).  It is a rhetorical letter to incoming Secretary of the Treasury Jack Lew.  He asks Mr. Lew to tackle the real issue: spending, particularly entitlement spending.  Well, OK, I agree with sentiment (and prescription) of his piece, but it isn't going to happen...  And, those decisions would have to be made by President Obama (with the "help" of Congress), not the Secretary of the Treasury...



If you are interested in hard assets in general, particularly beyond just gold, then I highly recommend this issue and the magazine in general.

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