What's the Deal with Gold & Crypto
By: Philip "Flip" O'Toole
Jerry Seinfeld made famous the phrase “what’s the deal with” (insert topic here). For example, “what’s the deal with airline food? I am looking for a dog to slip it to and the guy sitting next to me is asking for thirds”. If I were a Stand-up Comic Financial Advisor, I may ask the audience right now “what’s the deal with Gold and Cryptocurrency”?
We are always suspicious when a plethora of clients and prospects are all bringing up the same speculative investments at the same time. Whether it be dot-com stocks in 1999 and 2000, residential real estate in Florida and Arizona in 2007 and 2008 or Gold and Cryptocurrency today. We become more suspicious when those that are trumpeting the investments seem to have a loose understanding of the potential benefits and risks.
The best way to explain our outlook on Gold and Crypto is to paraphrase Albert Einstein who once said something to the effect of “if you cannot explain it to a 6-year-old then you do not understand it yourself.” Moreover, Warren Buffett once said “if you don’t understand it, you shouldn’t invest in it”. And so, for us these two quotes underscore the dilemma with Gold and Cryptocurrencies.
We have listened to any number of so-called experts attempt to explain the value of investing in Gold and Cryptocurrency over the years. Our sense is the folks that are pushing these investments do not really understand it themselves.
At a recent lunch with some very successful and experienced Financial Advisors, the consensus seemed to be that Gold and Cryptocurrency are “stores of value” and should be used as a hedge against a global financial catastrophe such as a complete devaluation of the reserve currency, in this case the US Dollar. If we buy that premise, then our follow up question is “how much Gold and/or Cryptocurrency should clients hold in their portfolios?” The consensus was 5% or less. So, we must ask, what is the point?
One of my favorite Economists, Sam Wardwell once said “the only thing in life that we truly own is that which we can carry, on the dead run, in the middle of the night”. This seems to be the vision that motivates clients to want to own gold and/or crypto. They envision a Mad Max-like Dystopian future where global debt finally crashes the reserve currency, and all dollar-denominated assets become worthless. The only “currency” that survives that morbid future and maintains or grows its value is Gold and Crypto. Why? Because it will be the only thing one truly owns during this apocalypse. Our question then is how the heck is 5% of your portfolio in gold or crypto going to help? I guess one could argue that 5% is better than 0%.
Perhaps we are wrong about gold and crypto. Perhaps it will be the best performing asset class over the next block of time. Perhaps it will even provide compelling returns and be negatively correlated and provide and nice compliment to investing in great businesses. But at TOJ Private Wealth, we choose to believe in abundance, not scarcity. We choose to believe in human innovation. We choose to believe in investing in great businesses that will ride this perpetual wave of innovation to even greater global wealth, higher living standards, all while reducing poverty to levels never seen in the history of mankind. And if we are wrong? At least we will be able to explain to 6-year-olds what happened.