All That Glitters

“Corporations can disappear, stocks can collapse, governments can change and they can fall, booms and recessions come and go – but gold is intrinsic money, and no man or nation has ever doubted its value. And they never will.” – Richard Russell, Dow Theory Letters

I spend a lot of my free time struggling with asset allocation. But not in the traditional fund/institutional sense (my hedge fund mostly only trades equities) but more so from a personal asset standpoint.  I use the term “struggle” loosely – really it’s a fun exercise that I usually find myself revisiting every time I’m about to make a personal investment somewhere, be it a promising new startup I’ve discovered, an interesting special situations deal that lands on my desk or simply when I have to pay a large school bill for my kids (or even worse something bigger and unexpected).

I have a tidy old excel spreadsheet (yes, laugh all you want, I still use Microsoft Office) where I keep track of all of my “investable assets” and I have different allocations modeled out with a nifty pie chart that shows at a glance how I’m allocated. Granted, I don’t have much money to my name to begin with, so slight variations and shifts between asset class percentages make little difference in my “bottom line”. But it’s a fun exercise akin to “what would I do if I won the lottery”, of course on a much smaller scale.

One asset class I’ve been pondering for a while now to include in my broad portfolio is gold. I’ve always had a funny relationship with gold. My dad was a diehard gold bug.  He also was a bit of a doomsday prepper — canned foods, bunch of random banks accounts, a separate post office box to collect mail…and of course some gold and silver buried in a secret location in the crawl space underneath our house.  Gold bugs tend to also be doomsday preppers as the central thesis that gold is the “only stable source of wealth” hinges largely first upon a doomsday type scenario or zombie apocalypse occuring. I used to laugh at my dad when he would tell me about the latest conspiracy theories he had heard and told him to stop surfing the internet so much…

Lately I’ve been reading and hearing a lot about gold. Both from actual gold experts/investors themselves and from the crypto community who like to equate Bitcoin to “digital gold” for it’s use case as a store of value.  But what intrigues me the most about all this chatter in the context of my personal asset allocation is the relative ease in which I finally decided to speculate in Bitcoin vs. the prolonged deliberation I find myself having over actually owning physical gold. As an investor I’m almost embarrassed to not have at least a small allocation in gold, an asset that has been around for thousands of years, has been used as money for just as long, has stood through countless wars and financial crises and is an actual physical metal that you can touch and feel with intrinsic value.

My friends and business partners like to laugh at me when I tell them about my hesitation to buy what is essentially a guaranteed store of value. They send me things like this from time to time to gloat and rub it in:

Source: Twitter

And I’m sure my dad would be saying the same thing if he knew I was long Bitcoin…

By the way, if you are interested in reading one of the best arguments for Bitcoin as being a store of value or “digital gold” from an actual institutional investor’s standpoint, then I highly recommend you read this paper by John Pfeffer, who also happened to present this same thesis two months ago at the famous Sohn Investment Conference in New York.

So why am I even messing around with crypto and this asset allocation mess to begin with?

Ultimately it comes back to my views and insecurities around global markets at this present time.  Markets have been trading sideways for quite some time now, and each and every time I believe we are facing a major risk event, be it a Trump policy error, an interest rate hike or most recently a crisis in Europe (Italy this year), somehow the market seems to find a way to finagles its way out of the mess.  

Nearly every asset class right now has been trading sideways since the beginning of the year (that includes crypto too!) and sideways consolidation like this always results in an inevitable powerful move one way or another. The real challenge is figuring out which direction that move will eventually be. Markets have a tendency to get ahead of reality, whether that is in a time of euphoria or crisis…in stocks, bonds or cryptocurrencies. It’s a function investor psychology and that won’t ever change.

The US has and will be at the center of focus through the duration of this tug of war in market dynamics. And despite the fact that the US’s central bank is on the verge of policy normalization (the ECB and the BOJ continue their easing), the country’s consumer confidence remains high and unemployment has fallen to its lowest level since 2001.  The stock market continues to rally (108 consecutive months) and volatility remains low. At some point one of these forces will supersede the rest and I have to think that this is the catalyst that will finally knock this sideways market into a decisive rally or sell off.

As I wait for the markets to finally shake out and find a direction, I’ve decided to distract myself once again with cryptocurrencies and ponder if they will ever actually be seen as an asset class by institutional investors, or not.  The staunch fundamental investors such as Jim Chanos and Buffett remain adamantly opposed to it but the reality of the situation is that more and more participants are warming up to it, there is simply no denying it.

It took me a long while to “come round” as well and whichever side of the existential argument you choose to stand on, as investors it would be imprudent to simply bury our heads in the sand and ignore the fact that there are real institutions, regulations, custodians, banks, asset managers all looking to “credentialize” cryptocurrency as an asset class.

I always chuckle when I hear someone saying in reference to cryptocurrencies that corrections and regulations are “healthy” for the system.  I know what they are getting at but they sure as hell don’t feel “healthy” if you are long the coins!

It’s the wild wild west right now out there and many (majority) of coins won’t exist 18 months from now. This is another reason why the risk/reward in crypto is simply not favorable enough for me to recommend it as an allocation in anyone’s portfolio…yet.

My thesis stands for this as it did six months ago when I first started seriously looking at crypto: Each investor should find out for themselves what the maximum amount they are truly ok with “losing” and only speculate that amount into this brave new asset class. Make this as easy and asymmetric as possible. And fear not, if it ain’t your cup of tea, let’s not forget that the markets are abundant and there are plenty of other ways to make money.  

Now, back to that physical gold…