Skinflint's City Diary
Anyone who has read Charles Stahl, whose column on the metal market and the financial affairs in Wall Street appears in The Spectator this week, will find that his own newsletter Greens Market Comments is worth its few pounds subscription costs. It is available from his London offices at 12 Petersham Place, London SW7. I am saying this to excuse myself from any charge of lifting an interesting idea and the results of a chart from his August newsletter. Precisely five years ago Stahl, who, like me, likes putting his money where he can see it, suggested to his readers that they set up what he called a 'private metalomerate.' He put forward this idea when the conglomerate boom was being justified to the public at its then unsteady height, and price earnings ratios over 100 were thought to be sensible.
Briefly, Stahl suggested a hedge in the physical holding of a portfolio of metals (how the market traders must have hated this). He went on to say that storage facilities for this holding should be bought and that there was a possibility of a three-fold or even four-fold hedge against inflation. The first hedge would be inflation protection alone. Next, security, subject only to a good burglar alarm system, wired into the local police station. Thirdly there would be a high degree of liquidity (even at a loss, should there be a bad slump) which is more than may be said of some traditional inflation hedges such as property, where the market evaporates as it falls. Lastly, there would be the possibility of a capital gain if monetary inflation continued as he expected. Additionally, and as a small bouquet, the little warehouse that he suggested buying to hold his private stock, then estimated to cost $30,000, should appreciate. Anyway, metalomerate No. I contained a total of 770 tons of the rarer industrial metals. They were in fact 200 tons of copper, 200 tons of lead, 200 tons of zinc, 100 tons of aluminium, 25 tons of nickel, 20 tons of tin, 10 tons of cobalt, 10 tons of bismuth and finally 5 tons of silver. The total cost in the summer of 1969 was $1,012,000. During the following five years each one of these metals has risen in price with the exception, for some reason, of the 10 tons of cobalt which went down from $125,000 to $74,000 this year. The total value of the stock pile if it had been liquidated in the summer of this year was $2,147,000 against the original costs mentioned above of $1,012,000. Not bad, though hardly a startling profit — a mere 10 per cent compounded annually. However, taxes (and less fortunately income) have been deferred. An individual in this country would have difficulty under our present regulations in not being assessed to income tax instead of capital gains in the year of realisation, since it would be difficult to argue that the metals had not been bought as a venture in the nature of trade. Presumably Charles Stahl would suggest that a serious holder would treat his stock-pile as an alternative to a dangerous specie, and as a private bank from which realisations are made as and when they are needed for income and to service any gearing rather than to have a complete sell-off on a given date. Stahl designed two other metalomerates, rather larger than the first, and essentially for institutional holders. Metalomerate No. 2 was for US citizens or US-based companies, and contained 120 tons of silver and six tons of platinum, at an outlay in 1969 of $10.6 million. This holding was worth $23 million this summer. Metalomerate No. 3 was no doubt designed for Charles Stahl's contemporary and friendly rival in the newsletter business, the arch gold-bug Harry D. Schultz, it being for non-resident US citizens. This holding contained 2 tons of gold, 60 tons of silver and one ton of platinum, at a cost in 1969, of $10 million. This portfolio, after five long years and a traumatic financial crisis is worth $24.6 million. Now again the profit is good, but the free insurance element in holding these metals has not been taken into account — but it is of very high value indeed, possibly difficult in any other way to hedge.
From all this the most interesting point, if I may repeat it, is taking actual possession of the metals, which has the effect of taking the metals from the market and putting them somewhere where you know where they are. The notional profits in the summer of this year just exist, taking inflation and lack of yield into the calculation, and they also seem to result to some extent from the matter of the timing of the valuation, which was made when most other markets were in trou ble. If Charles Stahl's idea caught on all this metal popping out from bunkers, reminiscent of the attempted pepper corner of the 1930s would make metal markets even more dangerous and exciting than they are now. There are plainly many difficulties, both nationally and internationally, in the chasing up of any commodity,
but I hope Charles Stahl Will forgive me if I say he is pointing the way to a solution. Perhaps he is like Will Rodgers, who said he had a solution to the submarine probleni. in the first world war: his suggestion was to drain the Atlantic Ocean. When he was asked how, he said "that is a detail for the navY. I am a generalist."
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