We hear the ads on TV and radio all the time: “Buy gold to protect your assets because the crash is coming.” Or, “Growing government debt will render the dollar worthless in the face of wild inflation.”
Some people say there’s something even better than gold now: Bitcoin and other crypto currency.
Let’s look at some of the data. Over the last 30 years, stocks, as measured by the S&P 500, rose 7% more than gold. That’s not per year, that’s over a period of the last 30 years, so they’re performing pretty closely together, and to its credit, gold has kept up pretty well, though not exceeding stocks. However, gold is much more volatile. For the statisticians out there, the standard deviation (up and downs!) of gold over time is 24% higher than the standard deviation of stocks.
And, in the words of Investopedia, a neutral financial reporting platform, “Indeed, if we go way back to the 1920s through today, stocks blow gold away.”
So, at least historically, gold has not appreciated more than stocks, nor has it been a better inflation hedge than stocks.
Warren Buffett, the famous billionaire investor, does not like gold or other commodities, asserting that these investments, unlike most company stocks, produce no product or service and pay no dividends or interest.
Over the last few years, another item has caught the attention of investors as an alternative investment: crypto currencies, which include Bitcoin. The belief among many of its investors is that a bitcoin investment is an excellent safe haven asset because it is not contaminated by government monetary policies--or lack thereof--nor is it tied to the ups and downs of stock markets. What could be better than a stable value of property insulated from the stock market and something that could be used as currency?
As it turns out, developing patterns reveal, lo and behold, Bitcoin is behaving more and more like the general stock market. That’s right—rather than being an investment that counters and protects against stock market fluctuations—and inflation—it tends to follow their trends, and increasingly so. As investment analyst Charles Edwards states, “Almost every bitcoin correction (drop) in 2021 has correlated with an S&P 500 (stock) correction of -2% or more.” This means that when the stock market drops a lot, so does Bitcoin.
Why is this true? Probably because, rather than being a hedge, investors have come to look at Bitcoin like any other investment: favorable in good times, and scary in bad times. It still leaves us wondering what our investment strategy should be with these components. The conventional wisdom for an investment strategy has been: For diversification, buy a little gold or bitcoin, say just 10% of a person’s portfolio. But the problem with that: If I buy just 10%, and the sky falls in, having only 10% in gold will still not prevent disaster for the other 90%. I’ll still be on the street selling apples (or in Florida, oranges).
If, on the other hand, I load up my portfolio to be 90% gold or bitcoin, I then have no income, and in the long-term, poorer growth—but I will have lots of volatility in asset price—and in blood pressure. Conclusion: Gold may not serve an effective role at all in a long-term portfolio.
However, if owning gold or bitcoin is still an itch that you need to scratch, know that there are easy ways to add them to your portfolio without having to store gold bullion in your garage. We can help.