The Bitcoin-Gold Barbell Strategy

Hedging with scarce monetary assets

Notable gold bugs such as Peter Schiff think Bitcoin’s a scam. A ponzi scheme.

Many Bitcoiners, in turn, think gold is a “boomer metal” that returns 3% a year.

I think the assets make an excellent pairing. A barbell hedge for the inflation to come.

A barbell strategy has two parts. One is safe, and the other has more upside.

The classic 60/40 portfolio of stocks and bonds is basically a BB, and it has provided excellent and consistent returns for decades.

But the vaunted 60/40 portfolio looks horrid going forward. 

Owning a 40% allocation to bonds at highly negative yields, when inflation is raging, simply doesn’t seem right. Currently bonds are losing about 5% a year in real value just through inflation, and that may get a lot worse soon.

US stocks remain expensive, with the Nasdaq 100 trading at an average 31x earnings, and the S&P trading at 24x. In this environment, with spending likely to drop big, these indexes could be vulnerable to big drops.

The world needs a hedge. 

De-Dollarization?

We will see dramatic shifts in the global financial system over the next year. The US and EU unleashed draconian sanctions on Russian banks in response to the invasion. This seizure of central bank reserves set off a monetary shockwave. 

The moment has been dubbed Bretton Woods III by Credit Suisse analyst Zoltan Pozsar. I strongly recommend reading the entire report.

Currently Russia is still selling hundreds of millions of euros worth of oil to Europe per day. Most of their energy exports are (were?) priced in dollars. 

That is beginning to change. India just made their first oil purchase from Russia in rupees. We must consider the possibility that this is a Minsky moment for the dollar.

What will China do? So far they appear to be implicitly backing Russia’s move. China may stand to benefit the most from this financial war. Russia will likely turn to Chinese and domestic tech and banking. The countries’ economic alliance will grow stronger, for a while. 

Eventually China’s yuan will likely play a much larger role in international trade. China is already in advanced talks with Saudi Arabia to use yuan for its massive oil buys, which make up 25% of KSA’s total exports.

There are even rumors that China and Russia are building a gold-backed international trade system. A return to the gold standard, in some form, is quite likely. But any such system would take significant time to roll out.

Will countries with “not great” relationships with the US accelerate their de-dollarization due to Washington’s move to seize Russian CB assets? It seems awfully likely. After all, they must consider that they could be next with sanctions.

Gold is Indispensable

Gold catches a lot of flak from Bitcoiners for its poor performance. But take a look at gold’s annual rate of return from 2002 through 2021, via Statista.

Gold began 2002 trading at $310/oz. It’s almost $2,000 today. Pretty good. And I think our macro situation is about to set the stage for gold and silver mania. Precious metals have been out of favor, for so long, that they could come back with a vengeance. 

Inflation was already hot before the conflict in Ukraine began, and now it’s going to get worse. This should be a strong catalyst for precious metals for years to come, unfortunately.

Gold is a dumbly obvious choice in this environment. And surprisingly, it hasn’t run much yet. Gold is currently sitting just under $2k/oz, a critical psychological level that it hasn’t yet been able to hold. I’ve seen predictions of it going down to $1,700 due to market turmoil. But over 5 years I’d be shocked if we don’t hit $5,000+. These are going to be interesting times, monetarily and financially.

Silver looks great at around $25/oz, and in 5 years I could definitely see it at $100+, depending on how bad inflation gets. Miners also look attractive, although they will face steep energy costs.

My favorite option is physical bullion. Stuff you can store at a trusted vault, or securely elsewhere. If you’re buying in a stock account, don’t buy GLD. Buy Sprott’s PHYS instead. They do regular audits and are transparent about their holdings, unlike GLD.

A 10% allocation to physical gold and silver seems reasonable in this environment. I can certainly see a case for 25%, as Bill Bonner advises. 

Most investors have negligible exposure to precious metals. Institutional investors are particularly neglectful of the sector. That is likely to change.

Gold is arguably the safest asset, and it still offers substantial upside. An indispensable hedge today.

The Perfect Pairing

Bitcoin makes a nice asset pairing with gold. It shares certain traits, as both are scarce and monetary. But BTC is electronically transferable, and offers a more aggressive risk/reward equation. Bitcoin has the potential for much higher returns than gold, but it also has much larger drawdowns.

Today Bitcoin has a total market cap of around $800 billion compared to gold’s roughly $8 trillion. It has the potential to become a much bigger part of the financial world over coming years. If inflation continues to worsen, BTC should become increasingly attractive, despite its volatility. 

Yes, Bitcoin goes down sometimes, but if your currency is going down every day, at least Bitcoin offers substantial upside. And volatility has steadily decreased over time. The stuff we see today is nothing like the swings in the early cycles.

Make sure you educate yourself on how to securely store your BTC on a hardware wallet. As they say, “not your keys, not your coins”. After what we saw in Canada with the government ordering freezing of crypto assets, self-custody is critical.

If you’re just getting started with Bitcoin, it should probably only make up a small percent of your portfolio. Anywhere from 1-5% seems to be a common starting point, depending on your risk tolerance.

Don’t try to trade in and out. You will almost certainly lose your stack if you do. Avoid leverage (margin), and just hold good old-fashioned BTC long-term. Besides the difficulty of trading, there are tax issues to be considered. Every time you buy or sell, that’s a taxable event. 

Gold and BTC are just two tools to prepare for this financial war. We’ll be covering this topic in-depth for the foreseeable future. We’re all going to need a plan to navigate this coming period. It will take time to play out, but things are moving quickly.

Look for a piece soon on how investing in private startups can also act as an inflation hedge.

Adam