Here’s a 1:1 look at them
This summer has been a whirlwind, especially in the markets.. And at my firm, one of the best parts of the summer was having a trio of young interns working with us. That means enthusiasm. It also means we were treated to some excellent academic reasoning (they were all current students or recent graduates). And, it means that the inevitable question came up, early in the summer: “Rob, what do you think of Bitcoin?”
I thought about pointing them to my past articles on the subject of Bitcoin. Instead, I bottom-lined it for them: I think that block chain technology is a big part of our future. However, trying to pick winners among the cryptocurrencies is something I shall not attempt.
Why such a crypto-wimp?
My reluctance to dabble in that Bitcoin debate is because I am too old. After all, I wrote a while back about the vigorous discussions I have had with a group of friends regarding the virtues and risks of this new phenomenon that tempts young investors to go all-in like a Texas Holdem game.
Rather, it is that Bitcoin violates one of my longstanding, self-driven investment rules: do not mess around with securities that are so volatile, you just know that no one really knows what they are worth. That is where I land on Bitcoin. Enough said.
The other Bitcoin
I am not the first one to draw comparisons between Bitcoin and another type of security that is getting a lot of attention recently. Gold, after years in the investment doghouse, has come back on the scene. It never went away, of course. However, it might as well have.
After all, the stock market has done well over the past decade. And bond yields have dropped, and now crashed, which makes returns on bond investment temporarily strong (oh, we will cover that in another article soon, believe me!). So, with traditional investments doing well, and the U.S. Dollar remaining strong, gold has been an afterthought.
Partying like its…2011?
Gold was a hero to many investors before and during the Financial Crisis. Its price tripled from September, 2006, through the same month 5 years later. And then, the appetite for risk returned to the market. This pushed gold to the sideline as a sexy portfolio tool, as has happened in the past.
But here we are, in 2019, and gold is back in the conversation. I am not a big fan of gold or Bitcoin as long-term investments. However, I am always a fan of making money and protecting capital. That led me back to gold for the first time in a while. However, it did not lead me to Bitcoin.
Crypto-wimp, part 2
You see, gold has a track record that goes back thousands of years, well before modern market history. Furthermore, when you really think about it, what is any investment really worth? Answer: what someone else will pay for it.
Critics of gold as an investment say that it is really just a hedge against inflation. There is little sign of inflation right now. And, gold and Bitcoin are viewed similarly, as alternatives to traditional currencies like the U.S. Dollar and Euro.
Start using others’ fear to your advantage
However, I am paying more attention to gold these days because it has a historical significance that is related neither to inflation nor to global currencies. Rather, it has historically been a classic fear trade. That is, when markets freak out, gold has historically been one of the places people rush to (pun intended).
Remember, in order to profit as an investor, you really only need two things: to identify a trend, and for perception and emotion to rise in your favor. In a market starved for good long-term value, it makes sense to pivot to such areas. Gold might just be one of those, as the market’s concerns about tariffs, rate cuts, global instability and corporate earnings turn into that freak-out I noted above.
Bitcoin and gold are (cor)related to each other
However, Bitcoin investors will quickly point out that cryptocurrencies are another, and perhaps more hip way to hedge and/or exploit a potential investor freak out. That may be the case. But the chart below shows you why I am choosing gold over Bitcoin and its brethren.
Gold (represented by GLD, and Exchange-Traded Fund) and Bitcoin have developed an interesting pattern over the past several years. Their prices tend to drift separately (e.g. they are “not highly correlated”) during the first half of the calendar year. Then, in the second half, and particularly the 4th quarter of the year, their correlation rises sharply. In English, that means that when Bitcoin’s price sprints higher, gold is often spiking as well.
Choose your weapon
Now, Bitcoin’s price typically goes up at a much higher rate than gold does, at least when it’s “hot.” However, as I said earlier, that is more of a turnoff to me as an investor. I don’t want to have to re-analyze a holding like that every 8 seconds. So, for me, gold is more like a calmer version of Bitcoin. And, that is something that I never dreamed I’d be writing 10 years ago, much less 20 years ago.
Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors
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