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Boomtime for alternative monetary assets

The US Treasury and the Federal Reserve have responded aggressively to the economic costs of shutdowns, resulting in a massive expansion of the money supply and concern over the future stability of the US dollar. So far, inflation has remained low, but investors have been bidding up the prices of alternative monetary assets including gold, silver, and Bitcoin. Precious metals mining stocks have also been rising in anticipation of improved profit margins, which are also bolstered by low fuel costs. Whether we see rising inflation or not has little bearing on the direction of these markets in the coming months, as trends have a logic all their own.

When approaching assets like these, it is especially important to have a systematic approach for when to be in the market. Precious metals and cryptocurrencies have no claims on business growth and no yield – actually often a slightly negative yield due to the cost of safe-keeping – and the mining business is subject to a cyclical boom-bust cycle. Unlike other investments that can continually compound, it is hard to expect these assets to have a long-term return much in excess of inflation. Their attraction is instead the potential for phenomenal appreciation precisely when little else appears safe.

For historical context, we can see how gold spiked upwards as inflation reached double digits in 1979, languished as inflation receded, then rallied on concerns over bailouts and quantitative easing around the time of the global financial crisis. When viewed in terms of purchasing power (the green line is the gold price adjusted for inflation), the long-term return has overall been poor.

The current uptrend reflects the scale and speed of recent Federal Reserve actions and especially the increasing political control over money creation as seen with the PPP program and direct stimulus payments to citizens. Unprecedented peacetime budget gaps may even make currency devaluation attractive to some as a way to handle the mounting debt, which could be serviced with cheaper dollars.

However this episode plays out, retaining these gains in precious metals and Bitcoin is paramount, as crises don’t last forever. A quantitative discipline allows us to allocate a meaningful amount of capital to such markets, with the assurance that when things quiet down we won’t be stuck holding the bag.

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