Gold has been steadily rising in an ascending triangle trading pattern since December of 2015. It’s my belief that gold bottomed in December of 2015 at $1045.4 per ounce. I don’t believe that gold will ever trade below $1045.4 again.
The highs being around the same level and then falling combined with progressively higher lows is what leads me to describe the last three years of gold price moments as an ascending triangle.
The high since gold bottomed in 2015 is $1,377.5 which occurred on 6 July of 2016. In the time between then and now gold has failed to match this high or make a new one. The price of gold has come within $20 on five separate trading days–three of which were in 2018 and one of those breakout attempts was last week.
Gold has been trending upwards in an ascending triangle. The blue dashed line is what I’m calling the December 2015-December 2016 support trendline
Fundamentals for What to Buy and Charting for When
Charting is more of an art than a science and I don’t think it works well in isolation. The fundamentals of an investment need to be in place to determine what to invest in and charting may provide some insight into when an investment will move in a given direction.
Now commodities don’t have balance sheets or cashflow so the fundamentals are based on supply and demand.
The supply of gold, while growing, is fairly static, I anticipate the demand to increase substantially given my view that stocks and bonds are in a bubble and that the US Federal Reserve will step in with low interest rates and QE to reflate the bubble, as they did after both the 2000 “dot-com” crash and the 2008-2009 crisis which will eventually destroy the dollar.
It is also important to note that while the above ground supply of gold is growing, the supply of gold in the west is declining at least relative to China and India. The supply of gold might even be declining in the west on an absolute basis although I don’t know that for sure.
Even without a dollar crisis I think gold will still trend upwards over the years and it could go up several hundred dollars even without a dollar crisis simply based on technicals and trading.
Timing, however, is very challenging and it’s not a skill in which I am particularly adroit.
So I buy and hold and dollar cost average. For example if gold bounced off the lower leg of the triangle and I was under-allocated in gold I would consider buying more. At this time I already own too much gold so I haven’t been adding significantly to my holdings.
Despite gold continuing in the ascending triangle there have been some interesting price phenomena of late that merit comment.
Intraday Gold High of $1369 on 11 April
Gold hasn’t reached $1369 since August of 2016. Admittedly gold was not able hold that level last week and closed at $1356. This is still a large spike upwards. Because the fundamentals of gold are so strong I think that one of these days gold will make a new multi-year high and perhaps even hold it if it can confirm the breakout with a $50-100 move above $1377. At that point $1377 would very likely flip and represent a support level.
The $1362-$1377 has been the range of resistance for the past 2.5 years but I don’t think it will hold forever.
Lows are not reaching the Longer Term Trendline
The lows have not fully dropped down to the trendline drawn from the 3 December 2015 low of $1045 to the next highest low (after a high) which was made on $1124 on 15 December 2016.
The lowest gold traded at between the 2017 and 2018 highs was $1238, and it did not reach the December 2015-December 2016 dashed blue support trendline
So while gold hasn’t been able to make it back to the 2016 muti-year high (although it has gotten within $20 five times) the lows keep getting higher.
One interpretation is that gold isn’t actually in an ascending triangle and that the December 2015-December 2016 trendline isn’t useful.
Another way to look at this price action is that gold is in an ascending triangle and the fact that the lows are getting shallower is a bullish trend.
A third is that this rally off of the 15 December 2016 low has been slower and less strong and gold will go down to hit the trendline, and may even break through, which would admittedly be bearish. It’s true that the move up nearly 32% from $1045 to $1377 only took about 6 months. It took almost 8 months to go up 21% from $1124 up to $1362.
This is where charting becomes more of an art than a science.
Compression of Gold’s Trading Range
The trading range of gold is compressed, even more-so than I would expect for an ascending triangle. Again, the highs haven’t been quite as high, but the lows are much higher as well. With a few outliers gold has been trading in a fairly narrow, upward range since the start of 2017.
With just a few outliers gold has traded in a fairly narrow range since the beginning of 2017
As I’ve said above the lows have not fully retraced the December 2015-December 2016 trendline. Yet another interpretation of this is that gold is in a very weak and slow rally. That the highs in 2017 and 2018 don’t count because they didn’t make it fully to $1377 and we’ll retrace the December 2015-December 2016 support trendline.
However I don’t think this is the case when you factor in market sentiment.
Gold Climbing a Wall of Worry
While gold has been trending up since the turn of the century, it had been a losing investment for many years in the wake of the all time highs that were made in September of 2011 in the wake of the 2008-2009 financial crisis. Gold was in a bear market for 3 years in a row from 2013 to 2015. Except for a few months, anyone who bought in 2011 or 2012 and held through to today is still underwater.
Gold has been a winner since the turn of the century
The narrative touted by Barrack Obama and now Donald Trump has been that everything is great and everything is improving. Sitting presidents always talk up the economy while they are in office because they want to get re-elected or if in their second term ensure they have a positive legacy.
Obama and Trump (at least until February 2018) have simply been after to refer to a chart of the S&P 500 as proof the economy is doing great.
So, most investors think they have no reason to own gold, since everything is great, and they don’t want to miss out on the stock market, which has been going up quite a bit until recently.
At the same time, 3 years of a gold bear market has shaken out the weak hands. There aren’t very many people who still own gold at this point who are going to sell now. If they held onto their gold as it fell from $1900 down to $1045 I don’t see why they would sell at $1150, $1250, or $1350.
So while there aren’t enough buyers stepping in to bid gold up over the 2016 high there also aren’t enough sellers for gold to drop significantly. That explains why gold can’t make new highs and why the lows continue to rise.
That is how I interpret the gold price chart.
If I’m right this also means is that when sentiment does change, when more people realize that stocks aren’t going to keep going up and that the economy isn’t great, they will move towards gold, but there won’t be many sellers, at least not at these prices. I could easily see gold going up $300 to $1600-1700 just from a technical perspective.
I do think Gold trading up to the $2000-$3000 would require a full on dollar crisis.
I don’t know when such a dollar crisis will take place. In my opinion given the debt, the lack of manufacturing, and the increase the growth the debt combined with rising interest rates that will increase the amount the US has to pay in interest on the debt are all fantastic reasons for a currency crisis to have already occurred.
Gold Market Ascending Triangle Timing
If gold is in an ascending triangle, as I believe it is, gold will break out of this pattern up or down within the next two years. Perhaps as soon as early 2019 depending on how you draw the support line. In either case I would want to see a strong move $50-100 above the $1377 resistance level to confirm trend was bullish or $50-100 below the support level as confirmation the trend was bearish.
While in the minority as gold bull I’m certainly not the only person with these views. Peter Schiff talked about the gold market trading range narrowing in a recent podcast (about 17 minutes in) and a 1 March article this year from Commodity Trading Mantra draws conclusions similar to my own.
Whatever vestigial link between US dollars and gold ended after Bretton Woods was terminated on 15 August 1971. The classic gold standard was abolished long before in 1933 when the despotic executive order of United States President Franklin D. Roosevelt that made it illegal for citizens in the land of the free to own gold.
There are periodic calls to return to a gold standard as a way to reign in government spending. The return to a pre-1933 gold standard would be a huge step in the right direction.
A true gold standard uses gold as money. A true gold standard in the US would redefine dollars as a quantity of gold. A true gold standard is NOT saying that gold is worth $35 per ounce as was the case in Bretton Woods.
This is explained in fantastic detail by Mises Institute Senior Fellow Joseph T. Salerno in his lecture Gold Standards: True and False.
A Return to the Gold Standard in the US?
It sounds click-baity to me too, but Jim Rickards is predicting $10,000 gold as the result of a currency reboot. The link above is to a sales page (which I get zero benefit from and considered not linking to) that explains in his own words why Rickards thinks Trump will return the US to a “gold standard”.
James G. Rickards is a New York Times bestselling author who appears on networks like RT, CNBC and Bloomberg. He’s testified in front of congress, he’s done some consulting on currency for the CIA and Pentagon. So there are some reasons to listen to what he says and at least evaluate his rationale and his arguments.
If I can quickly summarize his argument it’s that the US is deeply in debt, debt has crushed the middle class, a gold standard is one of the keys to “Making America Great Again” and so President Trump going to move the US back onto a gold standard. Rickards also claims he has some inside information that gives him additional reason to believe a return to such a gold standard is likely.
I agree the US is deeply in debt. I also agree the economy is broken and stacked against the middle class in favor of the super-wealthy. I also agree that a return to a classic gold standard similar to what existed pre-1933 would help America.
There is also some evidence that Trump is receptive to the gold standard.
Would Trump Support a Gold Standard?
Trump hasstated to GQ: “Bringing back the gold standard would be very hard to do, but boy would it be wonderful. We’d have a standard on which to base our money.” In the same montage of questions he also stated that Justin Bieber shouldn’t be deported and that he’s not a fan of Man Buns.
Trump has also tweeted this:
Remember the golden rule of negotiating: He who has the gold makes the rules.
As far as I can tell Donald Trump is not a systematic thinker. He doesn’t have a set of principles with which he evaluates problems and situations. I think Trump’s “philosophy” is basically “I’m a smart guy with good business sense. So I’m going to use my gut and my experience to make ad hoc judgments about what to do.”
Although he probably wouldn’t use the term ad hoc.
So could Trump be in favor of a gold standard? Who knows? Even if he was in some way at some point in the past who knows what he would decide today. Just look at his 180 turn on the war in Afghanistan as one example of his fickleness.
Where does Rickards get $10,000?
Rickards uses a fairly basic calculation based on what he thinks the world money supply will be, how much gold there is and a 40% backing to get $10,000 gold.
Rickards writes that the US government would keep the price at this level by simply conducting some “open market operations” in gold:
The Federal Reserve will be a gold buyer if the price hits $9,950 per ounce or less and a gold seller if the price hits $10,050 per ounce or higher
And this is really the rub. Such a price peg is not a return to a true gold standard. It would not change the US government’s fiat monetary system in any meaningful way.
Dollar to Gold Price Pegs are not a True Gold Standard
The plan Rickards describes is essentially the same as a bill that was proposed in 2013. Mises Institute fellow Joseph T. Salerno explains how such a fake gold standard would not help at all. A true gold standard defines dollars (or other currency) as a certain weight of gold. For example, the definition of a dollar used to be 1/20th of an ounce of gold (roughly). A $20 bill was not the money per se but a claim to one ounce of gold.
The “gold standard” Rickards speaks of is simply fixing the price of gold in dollars.
I Would Like Gold at $10,000
All else equal I would like gold at $10,000. Sure, if I wanted to add to my holdings it would be cost prohibitive, but since I already own some gold a price increase to $10,000 via Federal Reserve open market operations would be of benefit to me.
However, if the dollar collapsed and a loaf of bread costs $10,000 I’m probably not better off. After all no sane person would want to be a millionaire in Zimbabwean dollars in 2008.
This fake gold standard Rickards is predicting certainly wouldn’t help the US economy at large. As I mentioned above, it would not be any significant change to the fiat monetary system. A price peg of gold in terms of dollars is NOT a gold standard. If anything I think it would be horrible optics for the US government and shake the world’s confidence in the dollar. It would effectively be a revaluation down of the dollar, at least relative to gold, and the Fed’s balance would very likely have to massively expand in order to bid gold up to $10,000.
A Return to the Gold Standard Seems Unlikely
A return of the United States to a true gold standard seems very unlikely. A fake gold standard as described by Rickards is more likely than a return to a true gold standard–but still a long shot. I do believe gold is a fantastic long term investment but I also believe it will take the market waking up to the problems of the global financial system and not an act of government.
I favor gold over Bitcoin as a long-term store of value. I do think that blockchain technology is here to stay for a long time. However, I question the long-term viability of Bitcoin.
But before I get into that I want to say that if someone loves Bitcoin and hates gold they are free to own Bitcoin and no one will force them to own a single gram of gold! The opposite is also true. You can also own some combination of both!
For me, I’ve chosen to own much more Gold than Bitcoin but I still own both.
I do think having a very small percentage of my assets in crypto currency is appropriate for me but I’m leery of having too much of my net worth in cryptocurrency.
So with that in mind I present gold versus Bitcoin. This is a comparison between the two as I think of it. What you value or find important will likely be different.
That is the great thing about free markets: there doesn’t have to be one answer that is forced on everyone.
What I like about Bitcoin
International Value Transfer
I think BTC beats everything else out there for international value transfer. I’ve done international wire transfers and domestic wire transfers in traditional government fiat currency and Bitcoin is faster, easier and cheaper than anything else I’ve used.
Bitcoin has Advantages over Fiat Money
Dollars (and other fiat money) are constantly being devalued and destroyed via fractional reserve banking and central bank debt monetization and money “printing”. The total number of Bitcoins that will ever exist is set by how the bitcoin algorithm is coded.
What I don’t like about Bitcoin
It is Centrally Controlled
A disillusioned insider I came in contact with has swayed me to the opinion that Bitcoin is not decentralised. The decisions about Bitcoin are made by the Bitcoin Foundation and a few of the larger miners.
Bitcoin evangelists will tout Bitcoin as being decentralised. I’m open to new arguments and evidence supporting that Bitcoin is in fact decentralised but as of now I see Bitcoin as being centrally controlled.
It’s Direct-Use Value is Very Low
Some people argue that there is direct-use value in Bitcoin. It can be used as an experiment, political statement, etc. Others argue that Bitcoin has no direct-use value.
Even if Bitcoin is valued for direct use I think that value is very low. Dollars have some direct use value as well, for example kindling, tacky wallpaper, etc, but it is a fraction of the value dollars currently command in trade.
The reason I think this is a problem is because the direct-use value (aka non-monetary use value which is also sometimes called “intrinsic value”) provides a floor.
Government fiat currencies and Bitcoin have little (or zero) direct-use. So when these mediums of exchange fall out of favor, they can go to zero or near zero.
Bitcoin Could be Replaced by a Better Cryptocurrency
Bitcoin has some issues in my opinion. Bitcoin could be improved to overcome those issues, but it is also possible one of the myriad of alternative coins (called “altcoins”) could become more popular than Bitcoin and eventually replace what is currently the most established and largest cryptocurrency.
Delay in Confirmations
Virtually all vendors require a certain number of confirmations after Bitcoin is sent before it is confirmed and is considered successfully sent. This is to avoid the problem of double-spending.
Bitcoin takes about 10 minutes per confirmation. In the world of the internet, 10 minutes is a long time. Some vendors require 2 or 3 confirmations, which would take between 20-30 minutes. That is a really long time.
There are probably other reasons that haven’t even been invented yet that could make some new Bettercoin™ a superior choice to Bitcoin.
So while the number of Bitcoins is fixed the number of competing altcoins is not fixed.
Competing altcoins can serve to devalue Bitcoin. I like it when companies compete for my business to lower price but if I owned $1,000 worth of Bitcoin and then BetterCoin™ comes out and everyone switches to it, my $1,000 worth of Bitcoin could drop to a small fraction of a dollar in value.
The United States Commodities Futures Trading Commission (CFTC) declared Bitcoin is a commodity
Which means it’s taxable as a commodity.
Just because the government decrees that something is the case doesn’t mean that it is true.
Various elements of the US government can say that dollars are a store of value but that doesn’t mean they are.
I can disagree with the CFTC intellectually. But I obviously can’t ignore what the government says if I don’t want to get fined or go to jail.
Like most Americans I’m afraid of the Internal Revenue Service (IRS) so compliance with all appropriate tax laws is very important to me.
That means that every time I transact in Bitcoin I have to keep track of my cost basis and pay any appropriate capital gains.
Security
Mt. Gox, Bitfinex, and countless other exchanges have been hacked. You have to be kinda savvy to secure your Bitcoins. Plus, if you go the cold storage route you lose may of the benefits of Bitcoin as a medium of exchange.
What I don’t like about Gold
Gold isn’t used as Money or a Medium of Exchange
Few if any retailers will accept gold as payment for goods and services. One must first convert the gold into money and then spend the money.
Gold is not considered a currency and like Bitcoin does not get favorable tax treatment.
It could be Confiscated
The United States government has made gold bullion ownership illegal in the past and could do so again. Therefore any gold held in the US is susceptible to confiscation. I think it is unlikely this will happen again because not very many people own gold bullion, as compared to years past, but this is a possibility.
You Can’t use it to Buy Stuff Online
I can’t get onto Overstock.com and use physical gold in my possession to buy goods or services. What that would look like would be to mail in a shipment of gold, Overstock would wait until the gold arrives, and then ship out what I ordered.
I think the Paper Gold Markets are Manipulated
I think governments have a vested interest in keeping the price of gold down. I think the gold futures markets are manipulated down. While I think that this manipulation is not sustainable and eventually the price of gold will reflect supply and demand fundamentals, it is annoying in the short term. On the flip side, gold manipulation does provide a lot of great buying opportunities.
What I like about Gold
It’s Been Valued for 3,000 years
Despite all the changes since 1,000 B.C. gold is still valued by billions of people.
It has Significant Direct-Use Value
Gold is used in electronics, jewelry, dentistry, satellites, and decoration. Even though gold is not used as money or a medium of exchange today it is still valued by billions of people.
How many people would want US dollars if they weren’t used as money?
Gold is a Natural Element that Satisfies the Classical Requirements of Money
Gold is one of the least reactive chemical elements. Gold that has been lost on the ocean floor for hundreds of years is still in the same shape it was when the ship went down.
Gold is durable, portable, scare, divisible and uniform. Gold can act as a unit of account, a medium of exchange and a store of value.
Gold is Scarce
A new element that has all the properties of gold is unlikely to be discovered or created.
New gold can only be created in a nuclear reaction and gold can only be pulled out of the ground with significant effort and time.
Mining gold-rich asteroids would also be tremendously expensive and dangerous.
Gold can be used with Payment Technologies
Much of the below thought is from or inspired by Roy Sebag. Mr. Sebag makes a distinction between money technologies and payment technologies.
Money Technologies
Dollars and Euros are debt-based, fiat money technologies or assets that can act as a store of value (albeit poor stores). Gold is an asset that can act as a store of value. Bitcoins are an asset that can act as a store of value.
Payment Technologies
Credit card networks, Paypal, Apple Pay, Bitcoin, and Ether are examples of payment technologies. These are networks and systems that allow ownership of assets to be transferred.
Buying things online with a credit or debit card, Goldmoney, Paypal, or Bitcoin is simply ownership transfer of an asset via a payment technology.
In the case of credit cards, the credit card network is the payment technology and dollars are the money “technology” or asset being transferred.
In the case of Bitcoin, the Bitcoin blockchain is the payment technology which also has an integrated and inseparable unit of account, also called Bitcoins.
Gold can be used separately from a payment system (physically exchanged), or it could be used in conjunction with another payment system.
Goldmoney is one such service that combines physical gold ownership storage and transfer with the payment technology potential of internet based transactions.
Gold remains a fantastic store of value. I think the best of both worlds in money would be a gold-backed currency or electronic ownership transfer of Gold held at a trusted third party.
In Conclusion
Bitcoin has a very low (if any) direct-use value. That fact combined with the potential for Bitcoin to be supplanted by a superior payment technology makes me skeptical of Bitcoin as a long-term store of value.
I like gold because it has a 3,000 year history of being valued across cultures. It’s scarce and I think it’s extremely unlikely that another element will come along that will be able to replace the desired and historically valued properties of gold.
Not only that, but you can still make payments and spend gold in a way that takes advantage of the electronic payment systems that are so useful today.
Ultimately investors and consumers will make their own decisions. Gold and Bitcoin are competitors but they could also continue to exist side by side for some time.
That is just how gold and Bitcoin compare in my view. Which one do you prefer? Let me know in the comments section below!
Just about four years ago I wrote the first article on HowIGrowMyWealth.com “Inflation Destroys Dollars“. I wrote about how what I do to protect against price inflation and dollar devaluation. Specifically value investing and precious metals. So in retrospect, how did those investments do?
As a control we’ll add the U.S. Dollar Index ($DXY, shown in green), which compares the dollar’s strength against a basket of other currencies. To represents “stocks” I’d added the S&P 500 Index (SPX) (shown in black).
I’m using the Vanguard Large Cap Value ETF (VTV) as a proxy for value stocks (shown in red). You can see how my current and past individual value stock picks have done here. Gold futures are in yellow and silver futures in gray.
As you can see the S&P 500 has been the place to be. To be fair gold isn’t too far behind. Gold was in fact keeping pace with and surpassing S&P 500 this past April. So while gold has been a good hedge and having exposure to stocks has continue to be important.
Value stocks have lagged the S&P 500, particularly in the aftermath of the December 2018 selloff.
Silver is only slightly outpacing the dollar index, up just 7.15%. Silver has had a few failed breakout attempts, but continues to underperform. The gold/silver ratio that some precious metal bugs talk about would suggest that silver is a better value right now.
Costs continue to rise each year as the dollar loses value. But as measured by the DXY the dollar has kept its value against other currencies.
As I wrote back in November of 2016 in “I Own Too Much Gold“, you don’t want to own too much gold as a percentage of your net worth. The performance of the S&P 500 is a good reason why. If gold ever were to take off a 10-25% allocation would be more than sufficient.
We certainly haven’t see broad hyperinflation yet in the US, but my rent, food and medical costs continue to rise each year in excess of the government measured CPI. As I have for the past four years, gold and precious metals remains an important (albeit minority) portion of one’s portfolio.
If you are just starting to buy precious metals emphasizing silver over gold (while still buying both) could be a good approach.
My first article on this website was over 5 years ago, Inflation Destroys Dollars. I certainly did not have any idea that the price inflation would be triggered by the government’s response to the COVID-19 pandemic. I certainly didn’t anticipate the lockdowns and supply chain disruptions back in 2016.
I know the fiscal and monetary policy pursued by the United States and virtually all the world: money printing, onerous regulations, taxes and spending, would eventually result in significant price inflation. Government response to COVID-19 has made the situation worse and pulled the day of reckoning forward but it certainly isn’t the largest factor.
Timing is always a challenge and I was quite early.
Price inflation is here and it is happening fast enough where people notice it and are actually talking about it. Depending on who you trust and how you measure it, prices are rising at a rate of 6-10% per year now. I think what is interesting is that the government’s own numbers (the CPI-U) shows inflation at 6%. This is far beyond the 2% the Federal Reserve has been calling for.
In Inflation Destroys Dollars I write about how gold and silver are an inflation hedge. On 16 May 2016 when I wrote that article, gold was trading at $1,252 per ounce. As I write this it is currently up to $1,864.61, an increase of 48.9%. That is an annualized return of roughly 7.5%.
On 16 May 2016 Silver was trading at $17.14. It is now trading at $25.29. That is a 47.5% increase for an annualized return of approximately 7.3%.
So, if you think that inflation has been somewhere between 4% and 8% over the past five and a half year, gold and silver have on just kept up with inflation during this timeframe. Not bad but also not great. Gold and silver remain the boring reliable hedge and that is a good thing.
Value Stocks as an Inflation Hedge
Value stocks are another asset class I mentioned in Inflation Destroys Dollars. I didn’t mention specific funds. I have made some of my own individual value stock picks with some fantastic picks, but also some not so good picks.
Vanguard’s Selected Value fund (VASVX) is a mid-cap fund that could serve as a proxy for “value stocks”. It was trading at $26.41 on 16 May 2016. It is currently at $33.39. This is a return of 26.4% and an annualized return of 4.3%. Not stellar as I would not say this has kept up with inflation.
The Vanguard Value Index is a large cap value fund (VVIAX). It started this period at $32.49 and is up to $56.68. This is a return of about 74.5% and an annualized return of 10.65%.
A final example to look at, Vanguard’s Mid-Cap Index Admiral Shares Fund (VIMAX) started in this timeframe at $150.33 and is now at $320.62. That is a total percent return of 113% and an annualized return of 14.7%. Much better.
Compare those to the Vanguard 500 (VFIAX), which started this timeframe at $184.53 and is now at $432.9. The total return of this fund was 134.6% an an annualized return of 16.77%.
So while value stock fund did beat the rate of inflation and are a good hedge, they didn’t outperform your vanilla S&P 500 index fund.
Bitcoin as an Inflation Hedge
Compared to gold and silver, Cryptocurrencies, particularly Bitcoin has had all the action.
On 16 May of 2016 a Bitcoin was trading at about $454. Today Bitcoin is trading at $64,346. That is an astounding increase of 14,073% or an annualized return of about 146%.
Clearly Bitcoin has outperformed Stocks, Gold and Silver during this timeframe in an astounding way.
I own Bitcoin and I’m not anti-bitcoin. But I’m also not a Bitcoin maximalist. I think it is possible and perhaps even likely that Bitcoin will be replaced with a superior cryptocurrency that has some combination of faster transactions, higher transaction throughput, anonymity and or additional features. In my view Bitcoin in its current state is too slow and transactions are too costly for it to work as a medium of exchange for day to day transactions. These views are very unpopular with Bitcoin maximalists that ignore or downplay Bitcoin’s weaknesses.
However, Bitcoin has provided an incredible return and far outpaces inflation.
The 14,073% return is not just a result of inflation, although it is increasingly being viewed as a safe haven alternative investment.
Bitcoin has had several great tailwinds 1) It is an emergent asset class 2) It is trendy and popular and gets media attention 3) It is viewed as a Federal Reserve / dollar debasement hedge in place of gold.
Inflation Hedges
Protecting one’s wealth and purchasing power from inflation is important. Just keeping up with inflation is not ideal either, if the assets are not tax advantages, the government will tax the “gains”, and so purchasing power is eroded.
Let’s look at a simplified example. Say you frequently buy a widget or pay a service that costs $100 per year. Say the price goes up 5% per year due to monetary inflation. You also have a $100 investment that also goes up 5% per year. You’re still not keeping up with inflation because of taxes. If your $100 investment goes up 5% to $105, the government is going to want some taxes on that $5 gain. Say you’re on the hook for 15% capital gains taxes, the government is going to take their share and leave you with a $4.25 gain.
So you now have to come up with another $0.75 to pay for the item or service. Scale this up to include all of your expenses for the year and you see that you need to not only keep up with inflation, but exceed inflation so you have the money to pay the taxes on the gains.
In order to keep up with inflation your investment would need to be in a tax advantaged account that would lower or eliminate the tax burden owed or (again assuming a 15% gains tax) you’d need the investment to go up by about 5.9%.
This also shows how insidious inflation is. Not only is money worth less, but the government taxes the gains, even if there was no gain in terms of purchasing power.
One other thing to keep in mind, in the United States at least, realized gold and silver gains are taxed at the generally higher income tax rate rather than capital gains tax rate.
Are Gold and Silver Great Inflation Hedges Anymore
Gold and silver might not be very good inflation hedges anymore. If I owned gold or silver I wouldn’t sell unless I needed to rebalance my portfolio. I would expect these assets to at least keep pace with inflation, but unless the demand for gold and silver increases in excess of new supply, I don’t think gold and silver will beat inflation in the way needed in order to truly hedge for inflation when accounting for taxes. While it has produced a positive return in excess of inflation, it certainly hasn’t been a fantastic play over the last five and half years since I started HowIGrowMyWealth.com.
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Even if Bitcoin is valued for direct use I think that value is very low. Dollars have some direct use value as well, for example kindling, tacky wallpaper, etc, but it is a fraction of the value dollars currently command in trade.
