Rethinking Gold and Bitcoin

There is currently a lot of binary thinking in gold and bitcoin. Outside of traders who will trade anything with monetary value,  either you get it or you don't.  There is great debate over whether they can act as a store of value.  I didn't get gold.  I thought gold bugs were a quaint class of investors  who were a holdover before the Nixon era- a dying breed being replaced by millennial bitcoin hodlers.  I have gold in minor jewelry,dental fillings, and in serious quantity in various video games but the thought of holding gold as a real-life investment was something I would NEVER consider until just last month.

Can't tell you where these gold bars came from....

After contemplating Ray Dalio's All Weather portfolio which recommends 7.5% gold and 7.5% precious metals, I started digesting some different viewpoints on Real Vision.  I read the full "In Gold We Trust" annual report.  In light of central banks loading up on this age old precious metal, I've dramatically flipped my thinking.  The light bulb went inside my head- the gold wouldn't necessarily be for citizens with a functioning currency to revert to. It was for nation states to give confidence to their currency without going back on a gold standard. The biggest use case playing out is China who is trying to unseat the dollar with the yuan. The Chinese have secretly amassed vast reserves of gold in the last few years and have only made it recently public. Russia started making oil contracts with China in yuan because theoretically they would be allowed to exchange the yuan at the Chinese gold window in Hong Kong.

I am a fiscal conservative and I firmly believe you can't print money the way the European and American central banks have been doing without serious consequences.  You can't crank out trillions of credit and debt continuously and NOT face serious devaluation.  Even in my lifetime, I've witnessed steep asset inflation (real estate and equities) and the continually eroding value of the dollar.  The increasing attack on the dollar confirms my life long belief on inevitable de-dollarization.

I listened to the audiobook version of Currency Wars written in 2011 and Jim Rickards was startlingly prescient predicting the Chinese and Russian attack on the dollar.  More unexpected news is attack from allies. Europeans recently launched  INSTEX so they can do business with Iran bypassing the dollar based SWIFT system. Seeing concrete evidence for attack of the dollar playing out, how does one hop to the conclusion that gold should be an anchoring investment in any portfolio as gold bugs advocate?   Gold has one main role and that is safeguarding purchasing power which historically it has done for centuries.  Had I had sufficient funds, I would buy second piece of real estate instead but instead have gold as an alternative.

So how should gold be represented in my holdings and how much of it. I thought it through

• real physical bullion - not practical for me
• paper gold - the most convenient and liquid
• gold ETF - suffers from counter party risk
• gold CEF - the most convenient option right now
• gold derivatives - too complicated
• gold miner funds - too volatile 

I had bought a thimbleful of paper gold and silver(PHYS/PSLV).  There is more paper gold (gold derivatives) than is above ground so I bought Sprott's CEFs to avert that potential danger.  I think I would start at 1% and at maximum hold 5% of gold and commodities combined (much less than recommended in Ray Dalio's portfolio).  The day I finished Currency Wars and decided to buy gold was 2 days into gold's recent run up which I hadn't been aware of.  In hindsight I could have bought with confidence. I was waiting for a correction which has not yet materialized.

If your grandma gave you the choice of a 30 year T-bill or an equivalent amount of gold to be bequeathed to you in 30 years time, which would you choose? Without a second thought I would go for the gold. How about equivalent amount of gold or bitcoin? Again I surprise myself by choosing gold.

Although gold has been used for centuries almost universally as a medium of value and exchange, Incan empire is one stark counterexample.  When I visited Cuzco decades prior, our professor told us Incans who had gold in abundance considered gold as a crafting metal for religious and ornamental use. Coricancha- a sacred temple in Cuzco- held life size fields of corn, llamas and other creatures crafted in gold- all callously smelted by the Spaniards.  It boggles the mind that the vast Incan empire operated without money or coins or written language. Accounting was recorded in knotted strings or quipu. Maybe in a thousand years, bitcoin and gold would be also considered such a curious footnote in history.