Gold or Bitcoin: when speculative assets become universal currencies.
Asset allocation is crucial for managing a diversified portfolio. Furthermore, in selecting a fund for your portfolio, you may look across styles, geographical regions, and asset classes themselves. All are important. Should this not be enough, today we have to confront ourselves with traditional asset classes struggling to produce positive returns given the global economic slowdown deriving from the recent pandemic. In times like these, alternative assets may provide a better outcome for investors.
This section of the article has been written by Christian Porter,
Investment Associate at Kuros Associates.
THE GOLDEN GOOSE
“Commodities such as gold and silver have a world market that transcends national borders, politics, religions, and race. A person may not like someone else’s religion, but he’ll accept his gold” - Robert Kiyosaki, American businessman & author.
Commodities, like gold and Bitcoin, are alternative asset classes that can provide benefits to investors when used effectively in an investment portfolio by enhancing risk/return metrics. Historically, both report low correlation with traditional assets and as such, provide diversification benefits to most portfolios by reducing overall correlation (beta) to asset classes such as equities or bonds. The advantage of diversification is that it can drastically reduce unsystematic risk, or simply put, the risks related to your investments.
Gold, and potentially also Bitcoin, can provide hedging against inflation. For instance, in periods of high inflation, gold can maintain its value due to its physical nature, and as implied by Robert Kiyosaki’s quote hereinabove, is a universally accepted value carrier (although very impractical to carry!). With the current pandemic, levels of uncertainty are at an extreme, and global macro-economic output is severely damaged. In response to this, gold has rallied +24% year to date (YTD as of October-end 2020). Forecasts suggest that the economic recovery will take longer than expected, which may see gold continue to benefit. A clear example of this is the Federal Reserve’s action to keep the benchmark interest rate near 0, until 2020; a dramatic policy change when only at the end of the last year the Federal Reserve refused to cut rates from growing pressure from President Trump.
HEAVY TO CARRY
Investing directly in gold is one option, but is both costly and impractical for many, including storage costs as gold bullion is best not kept under the mattress. Alternatively, exchange-traded commodities (ETCs) can provide a more accessible option, which track the performance of gold, providing a return in line with gold spot prices.
Gold will remain attractive and hence, will provide a defensive element to portfolio returns in uncertain times. However, if your investment approach is ‘Midas Investing’, in which you focus mainly on gold, the opportunity costs could be extreme, along with missing out on the benefits of diversification. Factoring in both the positives and negatives on offer from holding gold, if included in a diverse portfolio based on an investor’s profile can provide superior risk-adjusted returns. The key here is that any asset is a tool that can be used to enhance a diverse portfolio, rather than dependent on the outcome of one investment, much like a lottery ticket!
This section of the article has been written by Tancredi Cordero,
Kuros Associates Founder & CEO.
FROM HARD INGOTS TO HARD CIRCUITS
One of the main features that made gold famous is its anti-inflationary power. Finite quantity and shrinking sourcing have been vital to establishing the yellow metal as one of the favourite hedgings against inflation. In the end, as the late JP Morgan said: “Gold is money, everything else is credit”, and that is very much true today as it was back then - or maybe even more looking at how much credit. However, it is since the 1930s at first and then since the 1970s that major central banks have partially and then entirely abandoned the Gold Standard. That means that the fiat currency, or cash to make it simple, isn’t any longer a note of credit that people have against the gold reserves of a national state. Today money is just paper, or data inside a server that is made not of any gold but silicon, and other non-precious metals. So is gold still gold? Yes, it is, but precisely for the same reason that cash is not anymore a credit (but rather a debit), someone around the time of the last financial crisis of 2008-2009 came up with a possibly revolutionary idea.
BITCOIN IS A NEW GOLD
On the 3rd of January 2009, Bitcoin was created. In the first block of code its demiurgic founder, who lives under the pseudonym of Satoshi Nakamoto, wrote the following words: “Chancellor on brink of second bailout for banks”. This cryptic at the time, now prophetic, message wanted to introduce the main reason why Bitcoin was created, which is to protect private citizens from the deflective folly that central banks all around the world have subscribed to. It is probably not a case that the nom de plume chosen by Bitcoin’s founder is Japanese. In fact, Japan has famously pioneered a deflationary monetary policy since the late 1980s.
However, if we move away from any conspiratorial speculation, and we look at the facts, since Bitcoin appeared the Federal Reserve balance sheet ballooned from 1.5 Tln to about 7 Tln. At the beginning of 2008 the Fed balance sheet was just around 800 Bln and comprising only of Treasuries - now they buy ETFs! Satoshi wasn’t just right; he was spectacularly right.
I believe it is no wonder that Bitcoin is surging in popularity and it won’t take long before Bitcoin is accepted as a day-to-day currency in shops and even groceries (unlike gold). But more importantly, from an investment portfolio perspective Bitcoin is a great diversifier, a hedge against inflation and probably also the only hedge that ordinary people have against the addictive power of printing money. For money may be the root of all evil, but when the devil has a printing machine with unlimited paper and ink, then we may well find ourselves in a real inferno.