Investors should explore both digital currencies and gold as both assets can be incorporated into a diversified portfolio.
In the recent webcast, Gold and Crypto: There’s Room in Your Portfolio For Both, Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors, touched upon headline news that is predicting cryptocurrency assets like Bitcoin will completely replace gold as a safe haven asset. However, there is room in a portfolio for both.
Cryptocurrencies like Ethereum and Bitcoin have enjoyed a spectacular year, with ETH up 1,294% since the start of 2020 and Bitcoin up 624% as well. The recent gains come after cryptocurrencies lost momentum and pared losses from two years of sideways trading over 2018 and 2019.
Meanwhile, we have witnessed increased interest in crypto in recent months, which has also corresponded with a pullback in interest for gold-backed ETFs. Nevertheless, 2020 was still a banner year for gold, with prices surging back toward record highs.
Holmes highlighted the ongoing volatility in the crypto space, especially when compared to traditional safe havens like gold. For example, Bitcoin has exhibited a +/-13% 10-day standard deviation for one year ended 2020, compared to gold’s +/-3% 10-day standard deviation. Gold has also been a long-term performer, generating positive returns on an average annual basis 80% of the past 15 years.
Nevertheless, Mike McGlone, Senior Commodity Strategist, Bloomberg Intelligence, argued that Bitcoin appears on track to becoming a globally accepted decentralized reserve, store-of-value asset that is easily transportable and transactionable, has 24/7 price discovery, is relatively scarce, and is nobody’s liability or project. Looking ahead, as the Bitcoin market diminishes in supply with the next so-called halving coming up, McGlone believes that Bitcoin volatility could begin to match gold volatility.
As an alternative way to gain exposure to the growth of cryptocurrencies, Darcy Daubaras, Chief Financial Officer, HIVE Blockchain Technologies, highlighted 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. GOAU is distinct for its emphasis on royalty companies,” Holmes said.
Among gold plays, royalty companies may stand out. 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 watch the webcast here on demand.