Three Ways “Old Money” Hangs Onto Its’ Riches

by Jim Rickards, Daily Reckoning While America claims to be a class-free society, the opposite often seems to be the case. Americans are obsessed with social status in all its forms whether based on celebrity, artistic or athletic accomplishment, or just plain money. Although royalty is not legal in America, our economic royalty including Bill Gates and Warren Buffett are as highly regarded as any English duke or earl. When it comes to status, we don’t look just at the size of one’s bank account, we make distinctions based on the nexus of money and social standing. This leads to contrasts such as “old money” and “new money” with the former connoting generations of life on country estates and Ivy League credentials while the latter is something flashier. The Astor family have been wealthy for over 200 years and practically define old money in America. Yet as one goes abroad, there is an even older kind of money, true dynastic wealth that has existed in some families for 300 years or longer. This type of wealth has survived not only business cycles but also war, invasion, the collapse of empires, revolution, and natural disaster. In order for family wealth to persist through so many centuries and through such adversity, something more is needed than ordinary investment skill. This rare kind of success in wealth preservation requires a longer view, infused with a sense of history and a keen appreciation for worst-case scenarios that too frequently become real. When one inquires of family members and representatives as to what it takes to preserve wealth over centuries and not just cycles, the frequent reply is “a third, a third, and a third.” This is shorthand for dividing one’s wealth into one-third land, one-third gold, and one-third fine art. Obviously some liquidity is needed for day-to-day expenses and some room can be made for a speculative portfolio, but the basic idea that land, gold, and art outlast and outperform riskier assets such as stocks, bonds, and cash seems sound when viewed from the perspective of centuries and not just years or decades. This may be difficult to grasp for Americans who have been badgered with mantras like “stocks for the long run” by Wall Street salesmen more concerned with their commissions than their clients. Stocks can indeed perform well for long periods. Yet stocks, bonds, and even cash all involve some claim on a third party and therefore contain credit risk in addition to whatever market risk they embed. The investor is always at the mercy of the issuer. Companies eventually go bankrupt. Bonds eventually default. Every paper currency in the history of the world has eventually proved worthless and there is little reason to believe the reigning paper money champions such as the dollar, euro, or yen will prove different in the fullness of time. In contrast, the value of land, gold, and art is intrinsic. If you own it, you own it. There is no issuer who can suddenly make your land disappear or turn your gold into confetti. A painting cannot go bankrupt. Of course, it is possible that a totalitarian regime or an invading army might confiscate tangible wealth. Yet, even then there are defensive strategies that have been pursued with success. Continue Reading>>>

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