Bitcoin and gold are wildly different currencies that both present one interesting question: what happens when we mine all of it?

Many people are surprised when they learn that there is a finite amount of Bitcoin. Given that it is entirely digital, it seems more coins could always be generated. In truth, there are exactly 21 million Bitcoins available. Today, approximately 18,647,356 Bitcoins have been mined with about 2,352,643 waiting to be “unearthed.”

A Bitcoin is mined by an individual who solves complex mathematical problems with the help of a computer, or network of computers. In doing so they are able to add “blocks” – a group of approved transactions – to a chain consisting of many other blocks. The work of a miner is competitive because the individual who successfully solves the math problem is rewarded 6.25 Bitcoins. Originally, the reward was an astounding 50 Bitcoins. However, the Bitcoin system contains a rule that the reward will be halved every 210,000 blocks. The average amount of Bitcoins mined per day is about 900. Most analysts agree that the last Bitcoin will be mined in 2140. This means that approximately 12% of all Bitcoins that will ever exist remain to be mined.

How does this compare to gold? Estimating the remaining stores of below-ground gold is more difficult and involves less certainty. However, most research suggest that roughly 54,000 tons of gold still sit in the ground which represents about 21% of all gold on the planet. Analysts forecast that the remaining stores of gold beneath the surface would be fully depleted by 2035 in a 2015 report from Goldman Sachs.

These two timelines raise another question: what is the long-term value of each? Here, Bitcoin begins to look surprisingly limited despite it’s advanced technological underpinnings. The popularity of Bitcoin may, in time, erode its value given that the fervor around blockchain technology has spawned more than 4,000 other cryptocurrencies including Ethereum, Litecoin, and Cardano. Some of these alternatives have pulled investors away from Bitcoin in recent years because they are less expensive alternatives that provide the possibility for a similar growth trajectory.   

Other contrasts should be considered by the long-term investor choosing between Bitcoin and gold. For example, gold will always have a demand in the jewelry market. Gold will always have some form of practical application in technologies like computing. More importantly, gold has long been a global currency. While Bitcoin may be catching up, it has a long way to go before it equals the legitimacy of gold in every nation.

Finally, investors must consider the issue of concentration. The US Treasury is the largest single entity holder of gold. However their stores total just 4% of all above-ground stock. Meanwhile, 95% of all available Bitcoins rest in the hands of 2% of all Bitcoin holders. This figure suggests that much of the power behind Bitcoin resides with a small, elite group.

Both assets represent value. However, upon closer examination the recent hype propelling Bitcoins meteoric rise suggests that long-term investors should consider the factors that present risk that may get lost within the excitement.  

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Too often gold’s value is relegated to a simplistic analysis of supply and demand. This approach to understanding the strategic value of a gold investment ignores several other important aspects of the precious metal. For this reason, the World Gold Council recently released a comprehensive report exploring the four factors that together represent the unique strategy of investing in gold. Here, we offer a summary of those four concepts and an explanation of why they matter.   

Returns that Outperform

Gold can improve the risk-adjusted return of a portfolio. Since 1971 the average annual return of gold has been almost 11%, placing it on equal footing with equities while also outperforming bonds. When examined over a period of 10, or even 20 years, gold has also outperformed other asset categories including emerging market bonds, EAFE equities, REITs, and hedge funds. This significant performance has enabled gold to outpace inflation by rising faster than increases to the consumer price indices (CPI). Moreover, gold has often safeguarded investors against inflation as evidenced by its average annual price increase of 15% during periods when inflation increased higher than 3%. This metric is especially relevant to investors today as concerns about inflation continue to rise. For example, publications like The Economist warn that factors like a 180% surge in shipping container costs are a harbinger of inflation.

Diversification that Works

In an increasingly globalized world, the diversification offered by index equity funds is diminishing. Additionally, diversification is becoming elusive as the returns of these funds is increasingly driven by fewer companies. Consider that a decade ago the five biggest US stocks represented 10% of the S&P 500. Today, the five largest stocks account for almost 25% of the same index. As a result, a handful of companies drive the movement of a basket of stocks meant to diversify a portfolio. For this reason the real diversification gold offers is critical in periods of falling equity performance. The metal increased in price by 21% between December of 2007 and February of 2009 when the global financial crisis wreaked havoc on investor holdings. As the World Gold Council shows, “gold has been more negatively correlated with equities in extreme market selloffs than commodities and US treasuries.”

Liquidity that Simplifies

Recent investor outcry has illustrated the importance of liquidity. In the early months of 2021 several prominent brokerage companies halted trading of several popular equities. The firms claimed this was necessary to prevent a collapse in their over-heated clearing houses. In contrast, gold offers more liquidity than the Dow Jones Industrial Average, US corporate bonds, and US 1-3 year treasuries, based on a measurement of one-year trading volumes in US dollars. This feature is important to investors who want the peace of mind that comes from knowing that there is a fluid market which will accommodate their trades at any time. Without liquidity an investor is not in control of their holdings because they do not always have the option to buy and sell. Part of gold’s liquidity comes from its lower volatility relative to US equities, EAFE equities, REITs, and more.

Long-Term Growth

The World Gold Council analyzed the average US pension fund portfolio over a five, ten, and twenty year period. Their conclusion: the average portfolio would have earned a higher risk-adjusted return with lower drawdowns if gold comprised 2.5%, 5%, or 10% of the total holdings. Additionally, their research showed that “the higher the risk in the portfolio – whether in terms of volatility, illiquidity or concentration of assets – the larger the required allocation to gold, within the range in consideration, to offset that risk.” This finding makes intuitive sense because so much of the value proposition of gold is differentiated from the value drivers influencing equities and fixed income investments. Simply put, gold is valuable for reasons that are wholly different from the value of a stock or bond.    

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In the world of professional sports, after years of stellar performance commentators might say a talented athletic star has peaked. From there, it’s a slow gradual decline.

Sure, the professional athlete might show a few flashes of the previous greatness – but overall the trend points down. The previous raw talent, incredible moves and confident success of the aging athlete is diminishing – right before your eyes. Perhaps the athlete will retire from sports gracefully – or maybe he will stay in the game to the bitter end – and eventually only become a shell of his former talents and skills.

In the world of finance, a comparison is being made to the U.S. dollar and even our country as a whole. Perhaps, you’ve even heard some people compare the United States right now to the fall of the Roman Empire – suggesting America has peaked in its greatness – and our country is now in decline.

That’s debatable of course – and the outcome is still yet to be determined.

But, there’s no debating that the value of our U.S. dollar has taken a beating.

In 2020, the U.S. dollar lost 10% of its value.

In simple terms – that means your $1.00 bill is now worth 90 cents. Or, your $500,000 investment portfolio now only has the purchasing power of $450,000.

Part of the problem is that many officials running our country fail to acknowledge the policies that are driving this trend – which continue to devalue your hard earned dollars.

Policymakers are on the brink of passing another big government aid package – a $1.9 trillion emergency stimulus bill.

How will our government pay for that? Not out of its coffers – our government doesn’t have an extra $1.9 trillion sitting around in an official account to spend. The U.S. Treasury will issue new U.S. bonds and T-bills to pay for that. That’s right – our government will take on new debt to pay for this big aid package. Yes, it’s just like putting it on a credit card.

What does this mean for the U.S. dollar and gold ahead?

There are “very big signals that the proverbial kitchen sink is about to be thrown at an effort to prop up a fragile economy, an effort that may have short-term impact but in the long term will cause further pain and ultimately will be negative for the U.S. dollar and positive for gold,” Bryan Slusarchuk, chief executive officer of Fosterville South Exploration Ltd. told Bloomberg.

As our government continues to print new money – just like the aging athlete – commentators are warning the U.S. dollar decline is underway.

• ING analysts predicted the U.S. dollar could lose up to 10% of its value in 2021 – against most major currencies. That’s on top of last year’s 10% decline.
• Analysts at Goldman Sachs agree, writing in a report that they forecast “the trade-weighted U.S. dollar falls another 9 per cent over the next 12 months”.

Has America peaked?  That’s debatable, of course.  America has long thrived because of our people – our hard working, entrepreneurial and determined spirit – we are a nation of innovators and we’d never give up on our beloved country.

Yet, the writing on the wall for the U.S. dollar is clear.

As an investor, you need to protect your wealth from government policies that steal your future purchasing power.

You don’t need to watch the aging athlete in decline – and watch your future financial security slip away because of it. There are simple steps you can take now to protect your financial future – like increasing your allocation to precious metals – which are recognized as hard currency around the world and can never be devalued by any government printing press.

Blanchard can help you diversify your assets out of a declining asset like the U.S. Dollar and into tangible assets. If you’d like to discuss your unique financial situation and long-term goals – and learn more about how increased diversification into precious metals can help protect your money – call a Blanchard portfolio manager today for a personalized portfolio review.

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Say Goodbye to Retirement Account Deductions

There are potentially sweeping tax law reforms coming.

These adjustments will primarily impact high-income Americans. There is a short window of time where you can prepare for the coming changes. Notably, you can use increased allocations in gold bullion and rare coins to protect and preserve your family’s wealth.

A significant change will be the elimination of the retirement account deduction.

If you currently enjoy deducting up to $26,000 to your 401 (k) if you are 50 or older, say goodbye to that sweet deduction.

Under the proposed Biden tax plan that deduction would disappear – and be replaced with a tax credit.

The Biden plan reduces tax benefits for high-income workers and increases benefits for low and middle income workers.

Corporate Tax Rates Would Climb

• Under current law, corporations pay a 21% tax rate
• The Biden tax proposal would increase the corporate tax rate to 28%. (That’s still below the pre-2017 Tax Cut and Jobs Act level of a 35% corporate tax rate.)

Taken together with the changes we discussed in part one – these are significant proposed changes to tax law. Fortunately, there are actions you can take to minimize the impact to your income and wealth.

Gold: An Excellent Vehicle for Private Wealth Preservation

As we’ve discussed, now is the time to take action and re-position some holdings to get in front of these proposed tax changes.

Gold bullion and rare coins have long been touted by trust attorneys as an efficient and discreet method of transferring wealth from one generation to another.

This bears repeating:

With the proposed estate tax level falling from $11.7 million to $3.5 million – that means many more families will be forced to pay the 45% tax rate on a larger amount of your estate. That significantly reduces the wealth you can give to your heirs – as the government will take a much larger portion of your family’s money.

Current Action in the Gold Market

Call it the calm before the storm. After hitting a new all-time record high last year, gold market action turned consolidative recently.

It’s easy to say:  “Buy low, sell high.” Yet so many investors do the exact opposite. Many investors wait to buy until a market is near its all-time highs! That’s buying high, not buying low.

• Gold still remains in the midst of a long-term, historic uptrend.
• In fact, the price of gold climbed 53% from January 2019 through January 2021. That’s right. In just two years, gold climbed 53%!

For long-term market up-trends – current activity is normal behavior. Markets go up, they correct and consolidation, then they go up more. 

The secret to long-term investing success? Buy on a pullback in an uptrend.

The recent drifting action in the gold price is just that – it offers long-term precious metals buyers an excellent buying opportunity.

Goldman Sachs, Citigroup, and UBS all forecast additional gains for gold and silver prices in 2021, which creates an ideal buying situation now.

If you are worried about losing money to new taxes – take action now to protect your wealth and income and you’ll also be able to generate new profit from buying gold at a time when the price is low.

If you or your family could be impacted by the proposed shift in these tax laws, don’t wait. Contact a Blanchard portfolio manager for a confidential portfolio review – and to learn strategies to maximize your wealth transfer.

Current action in the gold market offers a perfect long-term buying opportunity before these tax proposals become reality.

You can’t control what tax legislation passes in Congress.

You can control how you prepare and position your financial picture to limit the impact of new taxes. 

We are here to help.

If you missed it, take a look at part one of this series here.

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In recent months speculative investments have commanded the headlines. Bitcoin, GameStop, EV manufacturers, and SPACs have all garnered interest from investors. Many of these investments present the opportunity for high returns, but with considerable risk and volatility. As the fervor surrounding these investments has grown, investors seem to have forgotten older, more traditional investments like commodities. Today, they are starting to remember.

Some are beginning to forecast a commodities super cycle which is a long-term period of rising demand for a diverse group of commodities. Analysts like those at JPMorgan believe there are several catalysts for this super cycle. The first is renewed activity in infrastructure. Construction is likely to resume as more countries emerge from the pandemic. Moreover, Biden has made clear his plans to initiate an aggressive infrastructure plan. As a result, demand for metals used in these projects is expected to rise.

Second, the EV boom has resulted in surging demand for an array of commodities needed in the production of batteries. Lithium, nickel, and cobalt are just a few examples of the resources that will be needed to realize the renewable energy goals of the future. EV production is a powerful part of the commodity super cycle thesis because demand for these vehicles is high across the globe. In 2010 there were approximately 17,000 electric cars on the road globally. As of 2019 there were 7.2 million electric cars on the street according to the IEA.

The implications of a commodity super cycle are massive. In the last 100 years we have seen four commodity super cycles. Many of these cycles persist for several years. The last cycle reached its peak in 2008 after more than a decade of expansion.

Today, factors like lower borrowing costs, increasing inflation, a weakening US dollar, and even environmental policies are setting the stage for surging commodity prices.

The possibility of a super cycle has major implications for several kinds of investors because it would mean rising prices for oil, livestock, agriculture products, and of course base metals including gold and silver.

The question most investors have now is if the boom will be real. For researchers at Goldman Sachs things are looking very real indeed. “Looking at the 2020s, we believe that similar structural forces to those which drove commodities in the 2000s could be at play,” they explain. They have gone even further to project 30% growth for commodities as a whole in 2021.

While the popular, speculative investments of the moment are enticing few of them offer the long-term growth prospects present in a commodity super cycle. If the projections and forecasts come to fruition then commodity investors could benefit from price appreciation over a period of years rather than months. As with any high-return investment a commodity super cycle play requires a proactive approach in which assets are purchased early in the timeline so compounding can occur over the years.  

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In recent months retail investors have learned that the cost of winning is higher than it has ever been. The battle between hedge funds and retail investors has taken a toll on both sides costing billions and leaving many exhausted. By the end of the week each group was left distraught.

The fervor around GameStop offers many lessons. The most important of these lessons is this: things are not what they seem. Savvy investors who discovered this once undervalued stock have learned that there are far more forces at work in the market than previously realized. That is, the hedge funds have more weapons in their arsenal and more allies by their side than ever before. As a result, the latest chapter of the GameStop saga has the retail investors on unsure footing and the hedge funds battling catastrophic losses.  

This story underscores the fact that the equities market is more complex than many ordinary investors realize. Fundamentals, once the key criteria for successful stock selection, have fallen out of favor as more investors seek momentum plays or opportunities to ride a wave of broad based investor optimism. Investing is a game that has only become more complex as the cast of characters grows to include social media, pundits, mainstream media, short sellers, and opportunistic hedge funds.

This tangle might explain why seasoned investors so often seek the relative stability of precious metals. Gold and silver offer a grounding force in a portfolio because they are often free from the kind of manipulation seen in equities and bonds.

Consider the example of counterparty risk. This is the risk that a person involved in a transaction may fail to deliver on their end of the agreement. Counterparty risk becomes a problem for bond investors when an issuer defaults and is unable to meet their obligations. Equity investors can also suffer from counterparty risk when the managers of the company fail to act in the best interest of the investors.

Gold is free from counterparty risk because it is an asset that does not require a group of people or board of directors to satisfy debt payments or to generate profits. The threat of counterparty risk to investors seems to be escalating today because managers of public companies face the distractions of dealing with competing groups of investors seeking ways to force share prices down or drive share prices up.

All of these new voices have become a roaring crowd that makes it more difficult for investors to single out the information needed to make a smart long-term decision. In contrast the value of precious metals are not tied to the ethos of a flashy CEO. They are not tied to the esoteric and sometimes underhanded strategies of monolithic hedge funds. As a universal asset recognized throughout the globe gold and silver have a value that is measured and understood by all nations rather than the whims of a marketplace characterized by a battle between retail investors and professional traders.

Simple solutions are best.   

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