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Investors seeking alternative assets may find that both digital currencies and gold exchange traded funds have a place in everyday investment strategies.
In the recent webcast, Can Bitcoin Join Gold at the Alternative Asset Table?, Frank Holmes, CEO of U.S. Global Investors and Executive Chairman of HIVE Blockchain Technologies, noted that as cryptocurrencies like Bitcoin have gained in popularity, many drew comparison between crypto and gold, believing that the digital currency would either replace gold or fall short of gold. Holmes, though, argued that both Bitcoin and crypto can go hand-in-hand. Even big-time gold supporters like Ray Dalio of Bridgewater Associates and hedge fund manager Paul Tudor Jones have changed their tune on Bitcoin.
Holmes pointed out that both cryptocurrencies and gold show many similar traits. For example, both are rare resources, are difficult to corrupt, are liquid globally, are volatile and are used for collateral.
Holmes also highlighted the ongoing volatility in the crypto space, especially when compared to traditional safe havens like gold. For example, Bitcoin has exhibited a +/-14% 10-day standard deviation for one year ended June 2021, compared to gold’s +/-3% 10-day standard deviation.
Both assets have been outperformers. Gold has been a long-term performer, generating positive returns on an average annual basis 80% of the past 20 years. Michael Saylor, CEO, MicroStrategy, pointed out that MicroStrategy has outperformed the Grayscale Bitcoin Trust over the past year ended June 2021. Cryptocurrencies have emerged stronger after a so-called crypto winter with Bitcoin prices surging after stagnating for three years.
Looking at gold, Holmes highlighted two significant trends that could support the gold outlook, including the “fear” trade and the “love” trade. On the so-called love side, investors are seeing increased demand from both domestic and international buyers, notably emerging market consumers in the quickly growing China and India markets. The growing middle class in emerging markets exhibits a penchant for gold demand as a safety play and for jewelry.
The precious metal has benefited from the fear trade as well, with ongoing risks driving increased demand for gold as a safety play. We have also witnessed government policy on both the monetary and fiscal side affect the outlook for gold prices as traders try to hedge against potential inflation risks or a weakening U.S. dollar.
For those seeking to diversify a traditional stock and bond portfolio mix, Holmes argued that investors can incorporate a 10% gold rule, along with with 2% to 5% in blockchain and cryptocurrency exposures.
Along with investing in cryptocurrencies directly, investors can gain indirect exposure through crypto miners. Saylor underscored the blockchain technology, the backbone of cryptocurrencies. HIVE Blockchain Technologies was the first publicly listed blockchain infrastructure company. The company provides shareholders with exposure to digital currency mining as well as a portfolio of crypto coins. The blockchain companies have enjoyed a surge in interest, with HIVE shares outperforming both Ethereum and Bitcoin last year.
Along with direct gold exposure, investors can consider gold miners and sector-related ETFs like the U.S. Global GO GOLD and Precious Metal Miners ETF (NYSEArca: GOAU), a smart beta offering that tracks a specialized or rules-based index to help home in on quality players in the gold mining space. The underlying U.S. Global GO GOLD and Precious Metal Miners Index uses quantitative analysis to pick stocks, with a particular focus on royalty companies.
“Royalty companies fund exploration and production for miners in return for royalties on what it produces,” Holmes said.
U.S. Global believes royalty companies are a superior way to target the gold mining segment. Royalty companies are not responsible for costly infrastructure, so huge operating expenses can be avoided. These companies hold highly diversified portfolios of mines and other assets to mitigate concentration. Additionally, they generate some of the highest revenue per employee of all public companies while growing cash flows and dividends.
GOAU includes a 30% tilt to royalty and streaming companies, which could help investors better-manage common risks associated with traditional producers like building and maintaining mines. The lower risk may also diminish risk since royalty companies have historically rewarded investors by increasing dividends at a faster pace than the broader equity market.
Financial advisors who are interested in learning more about gold and crypto can register for the Wednesday, August 18 webcast here.
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