Gold is Dead? Should You Opt for Gold (Over Crypto) in Your Portfolio?

22, 2021

6 min read

This story originally appeared on MarketBeat

When meme coins surged earlier this year (remember Dogecoin mania?) it might’ve been easy to dump everything you owned — stocks, bonds, gold — for crypto. Then digital currencies took a nosedive again. 

Young retail investors might deem actual coins — including precious metals — all but dead. But you might not want to abandon traditional investments, including precious metals, for potentially fickle cryptocurrencies. 

Bitcoin, relatively free of centralized control, came into the world following the 2008 financial crisis. Mining, a process powered by computers worldwide, creates bitcoin. Bitcoin transactions are recorded on a blockchain, a distributed ledger that cannot fail. Government doesn’t control bitcoin (unlike banks) and that’s why devotees (mostly late Gen Xers or early Millennials) flock to it.

But all ideals aside, should you invest in gold? Or is it dead? Let’s take a look at the reasons you might want to opt for one coin over another.

Reason 1: The cryptocurrency rollercoaster: Enough said.

Look no further than Elon Musk’s exerting influence on cryptocurrency, especially meme coins. When Musk put so much attention on dogecoin (namely through Twitter) in May, the Shiba Inu-influenced coin’s price shot up. Then it tanked.

Cryptocurrency/Musk followers have lost money, and as HODLer enthusiasts still move toward bitcoin, ethereum and other prominent coins like cardano and XRP, small investors might not know the difference and get scalded by meme coins.

The $1.5 trillion cryptocurrency market seems to jump or dive based on how Elon Musk tweets, which could arguably go against Bitcoin’s original centralized ideas.

Gold and other precious metals can offer a steadiness in the face of something virtually anything but steady. For hundreds of years, people have bought gold as a way of diversifying risk from holding gold bars through the use of futures contracts and derivatives. 

Measured against highly volatile cryptocurrencies, gold offers more stability. 

Reason 2: The hedging factor puts a feather in gold’s cap. 

Investors have traditionally bought gold as a hedge against some type of risk, including inflation. Over the course of time, this could work, as long as you act like a HODLer and hold it for a time, potentially spanning several decades. Over shorter time periods, gold may not hold up as an inflation hedge. 

However, many experts cite that gold doesn’t hold up against the returns of the stock market and the more secure government bonds have proven to pay higher rates when inflation rises. Treasury TIPS also come with built-in inflation protection. However, gold does offer an option if you want a hedge against risk but it just might not be the best option available to you. Cryptocurrency, on the other hand, is a far cry from a hedge. 

The 1970s present a prime example of rising gold prices in the midst of rising inflation, though it hasn’t produced those kinds of returns since.

Reason 3: Overregulation may come.

Government legislation may eventually arrive to regulate cryptocurrencies and initial coin offerings (ICOs). However, right now, financial organizations have difficulty trying to figure out how to classify the digital asset. For example, the Securities and Exchange Commission (SEC) classifies cryptocurrencies as securities. The IRS considers cryptocurrency to be a  commodity. Once all of this is untangled, the federal government may decide on a comprehensive strategy for regulation. Overregulating the crypto market frustrate investors if crypto laws become restrictive. In addition, regulation may compel fintech innovators to build elsewhere.

Above all else, cryptocurrency faces how regulatory bodies will treat it, whether some governments will allow it, how it will be taxed and more.

Reason 4: You can invest in more than just gold bars.

Naturally, holding gold in its physical form doesn’t necessarily appeal. Storing gold at home carries a large risk and storing it can add up in cost over time. Beyond gold bullion and coins (which obviously offers less of a storage problem than gold bars), you can invest in a few different options, including gold exchange-traded funds (ETFs) and mutual funds, gold futures and options and gold mining options. 

  • Gold ETFs and mutual funds: You can purchase gold-based exchange-traded funds (ETFs) just like stocks, through any brokerage or IRA. You’ll pay less for these passive funds due to historically low expense ratios compared to mutual funds. However, you may want to opt for actively managed mutual funds due to their diversification, ease of ownership and low initial minimum investment. 
  • Gold futures and options: You can buy or sell gold on a particular date in the future using futures contracts. You can find low margin requirements and low commissions, depending on the type of investment you choose. Options give you an option to buy the futures contract within a certain time frame at a preset price. Futures offer a cheaper way to buy or sell gold over options.
  • Gold mining companies: Investing in gold mining companies may offer a great option for investors who have time to research all the specifics of a particular company.

Reason 5: Intangible vs. tangible assets

Bitcoin doesn’t have value unless investors believe it has value. On the other hand, gold has a real tangible quality that companies use in things they make, including electronics, jewelry and even medicine. 

Diversification for the Win

So, should you abandon all your cryptocurrency ventures and sail for tangible assets like gold? Not necessarily. You may want to stock up on both! 

Diversification is key no matter which route you take — whether you add a dose of cryptocurrency to your portfolio or you choose to add gold. Adding both Bitcoin to gold ETFs or physical bullion to a healthy mix of stocks and bonds can offer great add-ins to your portfolio. 

You may want to rely on precious metals during an economic downturn or poor economic performance, whereas you might want to steer clear of cryptocurrency during a down market.

Only you can consider your specific risk tolerance and make decisions based on these seemingly two polar opposite investment types.

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