For the new generation of digital asset traders, traditional investments like gold and silver seem rather boring.
After all, one can hardly blame these young traders, given that the projected percentage return on traditional assets is only a "mere" 40% to 100%, at best. If an asset does not return more than 10-times these days, it is quickly shunned from screens to make room for other cryptic acronyms that warrant attention. This is the world of "portfolio management" these days, thanks to the Fed and its endless quantitative easing liquidity experiment it has embarked upon since the global financial crisis. With all this liquidity sloshing around, one can hardly blame the newbie generation of traders to find even more alternative digital assets to invest in, as clearly anything is better than fiat paper right?
Throwing the name of gold and silver in meetings these days generates little attention. It is too "boring." Sometimes boring can be good. Because managing capital is not only about multiplying your capital, it is also about preserving your gains and net wealth. This is something most people tend to lose sight of, as capital preservation at times is more important than growing your capital, especially during bear markets or recessions.
Since its highs reached in April of $6,5000, bitcoin is now down 35%, whereas gold is up 7%, and Silver up 11% -- that is a 40%-plus spread underperformance we are talking about. Those millionaires could have saved about 50% of their wealth if they switched or rotated a few of their resources into precious metals. But most, like the Fed, think any rallies in gold/silver is also "transitory" just like inflation is.
The bigger question is why must portfolio managers choose between gold and bitcoin? It is simply not an either-or question, as both represent the same top-down dynamics of central banks being left with no choice but to print more and more paper, or deflate away the debt as now it has become too big to fail. There is more momentum behind cryptocurrencies, especially as more and more central banks are adopting their own version of central bank digital currencies and as institutions add this to their ledger as "assets." The sheer demand over lack of supply is what is taking bitcoin higher as the old generation of traders finally throw in the towel and buy the crypto. The real question is not about which one to invest in, it is about how much size one should own of each and when? That is the more pertinent question and can really add to the alpha of a portfolio. Given its volatility and beta and relative illiquidity, the percent size of bitcoin in one's portfolio vs. the percent size of gold or silver is more relevant. Effective risk management is key to really capturing both assets' upside.
Gold has been forming a very strong base vs. not only the S&P 500, but also vs. some cryptocurrencies -- especially as the initial reopening ramp up has played out and now the market is more concerned about inflation or stagflation, even. If the Fed is wrong -- if this inflation spike is not transitory -- equities and bonds will be one of the worst places to invest in. The truth is that they really do not know if it is transitory or not, they are hoping. Just because inflation tends to follow trend gross domestic product growth, one assumes that inflation will come back down. This is not the 1970s, when we were faced by oil shocks together with wage increases, but this time around the supply shocks are clearly causing bottlenecks to keep prices elevated for longer along with extra money in the system generating the inflation.
Gold has outperformed the S&P 500 by more than 10% since April. That is also not too shabby. The problem is that when markets are all up, everyone tends to focus on the double-baggers, but in a flat or down market, something holding its value ("store of value argument) can be useful portfolio diversification, no matter how boring it may seem. There were times when more than 20% return on assets were deemed godly, today over 40% seems too little for most. It is important not to get too greedy and lose sight of valuable opportunities, no matter how boring they may seem, it is important to time and size each one, rather than choose one vs. the other, especially when the risk reward is skewed so much in opposite directions.