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.
Chia (XCH) is a new cryptocurrency released this year. Rather than using raw computing power to add blocks via proof of work like Bitcoin, a process which is very energy intensive, Chia seeks a green(er) approach by utilizing hard drive space in what they call proof of space and time.
XCH started off with great price strength peaking at over $1,685 per coin on May 14th. This is somewhat arbitrary without the market cap information, which is difficult to independently verify. However, the Chia farming reward of 2 XCH meant the possibility to farm $3,370 per block added. The network difficulty accelerated upwards as people bought hard drives and created plots to farm.
Enter the summer slump in which Bitcoin fell from $63,000 on April 13 down under $30,000. Other cryptocurrencies fell as well, including Chia.
With the drop in the price of XCH down below $200, network difficulty growth has slowed noticeably. Which you can see in the chart above. Difficulty has actually fallen over the past couple of days although I do anticipate the difficulty growth will resume albeit slowly unless and until the price of XCH rises. This slowing in difficulty growth combined with pools, presents an opportunity to acquire some Chia. Another important factor is the reduction in the price of hard drives–the cost per Terabyte (TB) has dipped below $15.
Of course one has to have plots in order to farm Chia. Once a plot is created it can be used to farm for an extended period of time, possibly indefinitely. Plotting on a hard disk drive (HDD) is slow. An SSD or NVME drive is important, combined with a fast processor and memory. This is the side of Chia that isn’t as green, as a lot of energy is required to produce plots.
Another option is to buy plots. I’ve seen plots for sale at a cost of $200 for 110 plots or $1.80 per plot. You also have to pay to ship the drives to and from the company doing the plotting, which we’ll say is $40 total with insurance. Let’s also assume you already have a computer to farm on (an old computer with a quad core 1.5 Ghz processor with 2GB memory would meet the minimum requirements. I’m not adding in the cost of an internet connection, electricity or the cost of the farming computer. I assume most people considering this already have a basic computer with an internet connection. Let’s say we have a 12 TB HDD for $250, we buy 110 plots at a cost of $240. So all in, we have a cost of $490.
If network difficulty were to remain static (which it won’t) at current prices this setup would result in $16 per month. So you’d break even in about 2.3 years. I do expect network difficulty to continue to grow, and as difficulty grows the amount of Chia earned will be reduced. This means that in reality it will take more than 2.5 years to recoup that initial $490 invested. So Chia farming probably isn’t worth it if you’re starting from scratch. If you do “believe” that Chia will take off as a greener alternative to Bitcoin, simply buying Chia directly on an exchange is probably the best bet.
Now, if you already have some HDDs and a fast computer you can plot on, and if it is something you’re interested in learning and spending some time on, it might be worth it to try to farm Chia. This would pay off in particular if the price of Chia rebounds to it’s May highs.
But, starting with little to no hardware, I don’t think it makes sense to farm Chia, you’re better off just buying XCH.
Of course the above takes into account the monetary gain. If you’re just in it for the money. Personally I think the Chia Network is an interesting project and one I find enjoyable to observe and be a part of through farming.
If you follow the markets at all you know that Bitcoin and other cryptocurrencies have been crashing. Depending on the exchange Bitcoin was trading up to around $19,500 in December of 2017 and is now trading down to around $7,500–a crash of around 60%.
There have actually been 2 crashes that have been worse. In just a few days in April of 2013 Bitcoin went from $259.34 down to $45 in an 83% drop. Between November of 2013 and January of 2015 Bitcoin fell from $1,163 down to $152.40 in an 87% drop.
Bitcoin fell as low as 70% when it went from $19,666.00 on 17 December 2017 down to $5,920.00 on 6 February 2018. We have to wait and see if this is part of that crash or if $5,920.00 is the low preceding a new high.
The point is that cryptocurrencies are volatile and they have sold off like this before.
If you already own some crypto, I would stay the course. If you are thinking about speculating on cryptocurrencies, now could be a good time to buy in. Just don’t get caught up in the mania and consider How to Actually Prevent Your Bitcoin Financial Armageddon.
Cryptocurrencies are all the rage and gold remains time tested. Over the last few years cryptocurrencies like Bitcoin have been extremely volatile (mainly to the upside) while gold has been fairly stable and moved mostly sideways. Growing and protecting my wealth through alternative investments has been my focus for the last four years so I watch both the precious metals and cryptocurrency markets with great interest.
Bitcoin has risen exponentially in 2017. Clearly buying Bitcoin at $900 and riding it up to $20,000 was a fantastic trade in which the initial capital would have appreciated over 2,000% in less than a year.
How anyone besides a time traveller would have known to do that other than faith or luck is beyond me. I still think there are problems with cryptocurrencies. Even though there are several aspects of cryptocurrencies that I do like and a number of tokens and coins I choose to own.
Gold on the other hand has been slow and boring. As I wrote about in April this year, 2016 looks like it was the start of a new bull market in gold. Prior to 2016 gold had steadily declined since it’s $1,900 highs in 2010.
Since 2016 gold has steadily risen in price
A Place for Gold
I believe that now as much as any time in history gold (and silver) remains an important part of a diversified portfolio.
Dorian Nakamoto was accused by Newsweek of being Bitcoin founder Satoshi Nakamoto
I don’t know how high Bitcoin will go. However, in 50 years I believe that Bitcoin will be worth less than a few dollars and gold will have at a minimum retained it’s value in terms of purchasing power if not appreciated beyond that.
I think it’s entirely possible that some other cryptocurrency will be commonly used as a medium of exchange fifty years from now but it won’t be Bitcoin.
I could be wrong about that so I do own some Bitcoin but I’m not willing to take out a mortgage in order to buy Bitcoin on margin, as some people are doing.
Litecoin founder Charlie Lee announced 20 December 2017 he sold all his Litecoin
If you want to speculate and trade I think Bitcoin and other cryptos are great for that.
I buy Bitcoin on Coinbase and move it to other exchanges to diversify into my “Group of Six” and it has worked out well so far.
If you have some money you can afford to lose then trade and speculate away.
However, I think that gold remains the gold standard in wealth preservation.
23 year old Ethereum Founder Vitalik Buterin
I don’t think there is any substitute for buying physical gold and silver from a reputable dealer.
Physical bullion you have in your possession is the ultimate way of removing yourself from an out of control wall-street/banking system. I don’t want to go down the path of radical Cartesian skepticism but with precious metals you aren’t betting on the Janet Yellens and Jamie Dimons of the world having everything under control and are looking out for the little guy.
With gold you don’t have to worry about Satoshi Nakamoto, Charlie Lee or Vitalik Buterin making a bad decision and tanking cryptocurrencies.
Geopolitical Risks Remain
The risks haven’t gone anywhere. The stock market continues to climb but this is one of the longest periods in the history of the stock market without a correction. Meanwhile the fundamentals are not strong.
Debt at the governmental, municipal and personal level continue to grow with no end in sight.
Central banks throughout the world have printed trillions in fiat currency. One of the most important alternative investments to hedge against these risks are precious metals. Blockchain technology, while revolutionary and disruptive to the status quo do not replace gold and silver as the ultimate insurance policy against central bank insanity.
The stock market is overvalued, gold markets could very well be manipulated, bonds are a bug in search of a windshield and central banks have done little more than give lip service to unwinding their balance sheet.
So I turn to alternative investments.
Some of those alternatives are value stocksprecious metals but I’m always looking for additional alternative investments.
One such alternative investment (really more of a speculation) is cryptocurrencies. While I remain somewhat skeptical of cryptocurrencies, particularly bitcoin, they continue to go up in price. Early adoptors of cryptocurrencies like Bitcoin have made millions. While I think trying to make millions in cryptocurrencies is incredibly risky, I do think having some money in cryptocurrencies isn’t the worst idea ever.
To that end I do own some of the cryptocurrencies that I think are more promising. I’ll be sharing which cryptocurrencies I own exclusively with my Newsletter Subscribers.
There are specifically six cryptocurrencies that I’ve chosen to own. I only purchase what I can afford to lose. Given the extreme volatility of cryptocurrencies and the difficulty in valuing them I can’t emphasize enough how risky it is to own cryptocurrencies.
But for those willing to take the risk a cryptocurrency going to zero for the potential of large return, cryptocurrencies are a great way to speculate. I’ve put together a summary of the group of six cryptocurrencies I own.
I’ll be sending it out to my newsletter subscribers this Wednesday the 6th.
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