The Capitalist Investor - Episode 35

Some people think we should convert all of our cash to gold and hide in a bunker for the rest of our lives. Others think we should invest all of our money into Bitcoin because they believe it will grow from $9,000 to $1 million. While both of these scenarios seem ridiculous, it’s important to talk about how they both fit into your investment strategy. In this episode of The Capitalist Investor, Derek and I explain WHY we think you should own them as part of your overall investment portfolio and what percentages it might make sense to own.

Outline of This Episode

  • [0:35] Gold, Bitcoin, and Crypto: good investments?
  • [5:23] Gold is effective as a deflation hedge
  • [7:42] The different ways you can purchase gold
  • [11:25] Why you need to offload your losers
  • [13:28] The proper allocation of gold in your portfolio
  • [17:53] Should you add Bitcoin to your investment mix?

How geopolitical risks factor into decision-making

Geopolitical risk is a risk that is associated with war, acts of terrorism, and tension between states or countries that impact peaceful international relationships. We give a forecast presentation to clients every year. During this presentation, we carve out a small portion of the presentation to cover geopolitical risks.

Typically, they’re a non-issue. These risks are out there, but the chances of them happening are slim to none. If a risk were to become reality, we explain how the market will react: It goes down, then it recovers. Similar to what happened with COVID. Why does this matter? Gold can be purchased as a calamity defense. And owning gold as an inflation hedge and a calamity defense is a good idea.

The impact of deflation

The Fed just increased its balance sheet from $4 trillion to $7 trillion. We will likely see inflation. But the worst-case scenario is if we begin to see deflation at a global level. Deflation is simply when prices go down. When demand is destroyed, people make a decision not to buy something and put off unnecessary—and sometimes even necessary—purchases. Why? Because people are scared. Deflation happens when people are so afraid to spend their money that they hoard their cash and don’t want to spend anything. Deflation is far more dangerous than inflation. Keep listening as we explain why.

The proper allocation of Gold in your portfolio

Gold is something people invest in exponentially when they’re scared. But it’s always a good investment to have in your portfolio. There are a few ways you can purchase gold: You can purchase physical gold bars or gold coins. You can also invest in the GLD ETF. Lastly, you can purchase stock in a gold mining organization.

We don’t necessarily believe that everyone needs to have physical gold on them. You can buy some to survive a few weeks if you need to. If you purchase into a gold mining operation, your returns could be amplified, positively OR negatively. You’re buying a company on top of the gold prices. A lot of gold mining stocks are doing well this year but they come with more inherent risks. We would rather just own the pure commodity.

So what is the right allocation of gold in your overall investment portfolio? The right allocation is somewhere between 1–10%, based on your level of fear. Most of our clients are in the 3–5% range. Gold can increase in value while the market is still going up—especially in inflationary markets. Make sure the ultimate balance makes sense for you personally. What are some other reasons you should consider buying gold? Keep listening to find out!

Should you invest in Bitcoin?

Bitcoin is arguably a speculative stock. Most people buy it because they’re afraid of missing out. I own it because if it hit $1 million tomorrow I’d be pretty upset. But if it went to zero tomorrow, it wouldn’t change my life. When it goes up, people feel like they have to buy in—and then the price goes up more. But there are a lot of question marks, unknowns, as well as wild price fluctuations with Bitcoin. For people close to retirement age, it may not be smart to have it in your portfolio—maybe 1%. But it needs to be based on your own personal risk.

Why could Bitcoin become more popular? Because Bitcoin eliminates the middle man (AKA the need for a bank) which lowers cost. If you buy a house there are a lot of middlemen to make the transaction authentic and real. With Bitcoin there is no transaction fee. Websites have begun offering it as a payment method and will actually discount the price of your purchase because it eliminates the credit card fees they’re charged. It is a minimal or zero cost way of executing a transaction.

Bitcoin will go up in value when its adoption increases and people begin using it as currency. That’s where the future lies—but only if businesses adopt it and embrace it. The bottom line is this: Bitcoin is still a speculative investment. You could allocate 1–3% of your portfolio to it, but only if you’re not counting on that money. You have to ask what amount would you be comfortable investing at if it went to zero tomorrow?

To hear our full discussion on the merits of gold, what Bitcoin really is, and our investment strategies for both—listen to the whole episode!

Resources & People Mentioned

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Show Notes by

Keep Listening to The Capitalist Investor:
Episode 1:
Capitalism vs Socialism
Episode 17:
The Psychological Impact Of This Recession, Ep #17
Episode 33:
Talking With the Man Who Killed Bin Laden, Rob O’Neill, Ep #33
Episode 49:
Even in 2020, There’s Much to Be Thankful for, Ep #49
Episode 65:
Warren Buffett Trades, Ep #65
Episode 81:
Meme Stock Mania, EP #81
Episode 3:
Impact of a Bernie Sanders Presidency
Episode 18:
Reducing Fear is the Key to the Rebound, Ep #18