Investors continue to hunt for strategies to diversify and hedge against current risks in the stock and bond markets. Two asset classes that appear to be “back in favor” in 2023 and have gained traction are gold and digital assets. While these two assets may seem vastly different, they share some similarities and differences that investors need to know.
In this blog post, we'll explore the basics of gold and digital assets, including their historical performance, types of investments available, and some key considerations for investors looking to add them to their portfolios. Whether you're just starting or a seasoned investor, this guide will provide the fundamental knowledge you need to make informed investment decisions in these asset classes.
Gold - A Timeless Asset
Gold has been a valuable and highly sought-after metal for thousands of years. Gold has played a significant role in economics, romance, and religion. Today, gold remains a popular investment option.
Gold has historically been considered a “safe-haven” asset, typically added to a portfolio to hedge risk and perform during economic uncertainty. It's often seen as a hedge against inflation, currency devaluation, and geopolitical risks. It's a tangible asset that can be stored and held independently of financial institutions, albeit more difficult in larger quantities.
Physical gold can be difficult and expensive to transact. The most popular way for investors to gain exposure to gold today is through owning an exchange-traded fund (ETF) or mutual fund that has direct ownership of either the physical commodity or companies in the mining industry, which are easily and inexpensively held and traded in a retail investment account.
It's important to note that investing in gold does come with some potential drawbacks. For example, gold does not generate any income or dividends, and its price can be volatile over short periods and even under-whelming over longer periods.
And regarding its performance as a hedge against inflations, over the past 50 years, the price of gold has increased annually by 3.1%, which when adjusted for inflation over that same time period, is a return of -0.01%. During that same time period, the S&P 500 is up 8.0%, and the 10-year Treasury note returned 2.4%, both adjusted for inflation (kiplinger.com, 2/7/23).
Also, keep in mind that most ETFs do not actually own gold, but shares in a trust. Investing in an ETF offers increased liquidity. But it may not offer a perfect correlation to the spot price of gold.
You can also gain indirect exposure to gold by investing in miners stocks. They tend to be more correlated to the direction of the economy and can significantly outperform or underperform the price of gold.
Digital Assets: The Rise of Cryptocurrencies
In recent years, digital assets such as cryptocurrencies and non-fungible tokens have become increasingly popular. Unlike gold, digital assets are entirely digital and decentralized, although some are structured to be “backed” by a physical asset or commodity.
The most well-known digital asset is Bitcoin, which was created in 2009. But there are numerous other cryptocurrencies with unique features and characteristics. And despite the use of the term, “currency,” which is defined by being stable to promote exchange and store of value, cryptocurrencies have proven to be anything but stable.
Similar to other risk-asset investments, and unlike an ideal currency, digital assets have the potential for high returns. As other asset classes have increased in value, in general, investors continue to seek new opportunities at good values with the upside of growth.
However, this potential comes with a high level of risk and volatility, due to the forces of market supply and demand dynamics. Most cryptocurrencies have a finite amount, similar to a commodity or stock, so when demand and supply fluctuate so does the value. For instantaneous and momentary transactions, the volatility is not a problem. However, for transactions that require negotiations, long-term contracts, and payment plans, the necessity to hedge can become complicated and expensive.
Investing in digital assets also comes with other unique challenges and considerations. It is difficult for investors to assess the legitimacy and security of digital asset investments. Additionally, digital assets can be difficult to store and manage, and their value can be impacted by hacking and theft. And maybe most importantly, stability is jeopardized by an ever-changing regulatory environment, where industry leaders, traditional banks, and politicians continue to debate the role of digital assets moving forward and how to build a regulatory structure to help manage the digital asset markets and associated risks.
Despite these challenges, many investors believe that digital assets have the potential to play a significant role in the future of finance.
Key Considerations for Investors
There are several key considerations that investors should keep in mind when it comes to investing in gold and digital assets:
● Investment goals and risk tolerance:
Every investor has their own specific short-term and long-term investment goals and tolerance for risk. Investors should consider this carefully when deciding whether to invest assets with short-term objectives in gold or digital assets.
● Unique risks and challenges:
Investors should consider any investment's unique risks and challenges, and develop a plan or even hedge those risks before investing.
● Logistics of investing:
Investors should carefully consider the logistics of investing. For gold, this may include the costs and logistics of purchasing and storing physical gold. For digital assets this may include storing and managing digital assets securely. The fall-out from the FTX implosion is a perfect example of what can go wrong in a new industry with a developing regulatory environment. Investor deposits and assets at FTX are currently frozen on the platform, and values, as well as the probability of recovery, are unknown.
● Role within investment portfolio:
Investors should consider the role of each asset in their investment portfolio. Gold and digital assets offer diversification benefits but should be considered alongside other risk assets such as stocks, bonds, and real estate.
Investors can make informed decisions about allocating their investment portfolios for long-term success by considering these key factors.
Getting Started with Investing in Gold and Digital Assets
If you're interested in investing in gold or digital assets, there are a few key steps you can take to get started.
For gold, the first step is to determine what type of gold investment is right for you. Some investors prefer to purchase physical gold, such as gold coins or bars, while gold exchange-traded funds are popular with others.
You'll need to choose a digital asset exchange or broker for digital assets. Many options are available, so it's important to research each platform's fees, security features, and reputation before choosing one.
No matter what assets you choose, a long-term investment strategy is crucial. This includes setting clear investment goals, diversifying your portfolio, and regularly monitoring and adjusting your investments.
It's also important to consider the risks of investing in these assets. Gold and digital assets can experience significant price fluctuations, each with unique risks. Taking a disciplined, informed approach can help you reap the rewards of investing.
At Eiger Wealth Management, portfolio diversification is a guiding principle as we offer a range of investment solutions to help our clients achieve their financial goals. Whether you're interested in investing in gold, digital assets, or other alternative asset classes, our experienced team can help you build a customized investment strategy tailored to your unique needs and goals.
The information contained on this site may not reflect current developments; does not constitute investment, tax, or legal advice; and should not be relied upon for such purposes. There is no guarantee that any forecasts made will come to pass. We make no representation about the accuracy of the information or its appropriateness for any given situation. This information is not an offering. Past performance does not guarantee future results.