By Tim Courtney, Chief Investment Officer
From antiquity to the modern age, currency has taken many forms, including gold coins, tobacco leaves, seashells and more.
While we have settled on government-backed currencies for most transactions, there are other stores of value such as gold and bitcoin. The one thing they all have in common is that their prices are determined solely by supply and demand as they create no cash flows and virtually have no utility (outside of small applications for gold). They are worth, as the saying goes, what someone else is willing to pay. In this commentary, we examine these three stores of value.
● Government-backed currency: The most widely preferred form of currency, cash – and particularly the U.S. dollar – is relatively stable and easy to store. However, an ever-present concern is the risk of debasement – when a government lowers the value of its currency.1
While the value of the U.S. dollar has remained largely steady2 as many global entities demand U.S. dollars to settle transactions, this is not the case across the globe. Turkey, for example, is now experiencing currency debasement, and its lira has lost approximately 24% against the dollar this year.3
We believe the odds of a similar, quick debasement in the U.S. to be low, but a more gradual slide lower is possible and many are forecasting this given rising government debt and an increased supply of dollars. We believe it is important that portfolios should at least partially hedge this risk.
● Gold: Unlike government-backed currencies, there is a fixed quantity of gold on Earth and therefore debasement is not a risk. However, gold has its own issues. It is more difficult and expensive to store. Additionally, gold’s price volatility4 is much higher than the U.S. dollar and has actually been higher than that of stocks over the last 50 years. It largely trades based on inflation expectations and fears of market meltdowns.5
The oddity of gold is, as Warren Buffett reportedly said, “Gold gets dug out of the ground in Africa… Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” 6 Historically though it has come in handy as a store of value and, over the long term, appreciated along with inflation.
● Cryptocurrency: Relative to gold, cryptocurrency is easier and less expensive to store. There are also controls on supply so there is less concern of debasement. However, there is no limit on the number of kinds of cryptocurrencies that can be created.
Cryptocurrency – and particularly bitcoin – is becoming more widely accepted and used. However, bitcoin also has complications in that it is even more volatile than gold7 and is dependent on individuals maintaining private keys or access codes. While this is largely a good thing, it can turn out very badly if your access code gets lost.8
In conclusion, though we believe it is fine (and necessary) to have some exposure to these various stores of value, we do not advise holding large amounts of any of these assets for the reasons mentioned above. Instead, portfolios are likely better positioned in productive assets that produce cash flows such as stocks, bonds and real estate. If you have any questions about your portfolio allocations to cash, gold or bitcoin, please contact your advisor.
Sources:
The US Dollar Index is used to measure the value of the dollar against a basket of six world currencies – Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona. The value of the index is fair indication of the dollar’s value in global markets.
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