Investing Analysis - Gold and Crypto

This article is the continuation of the Dividend Investing Analysis series. We'll go over another type of assets that also deserve a place in our portfolio, specially now that recent central banking policies have added a significant amount of risk on fiat currencies.

Investing in precious metals and cryptocurrencies

Precious metals or cryptocurrencies are picking up quite a bit of attention recently due to the recent (and possibly coming) policies enacted by central banks, and that imply that fiat currencies like the Euro and USD will lose value over the next years due to inflationary pressures. Some of the assets better positioned to leverage on that risk are particularly those assets that aren't controlled by the banking system: certain commodities like metals and cryptocurrencies.

That's why I've researched a bit on both topics and thought I'd share some basics for everybody to benefit from. Yet, I am of the opinion that commodities in general are really a leverage or insurance (against fiat money devaluation/inflation) instead of actual investments, as they don't produce wealth. As such, personally I wouldn't allocate more than 5-10% of a portfolio to low volatility assets (gold type) or 1-2% to high volatility ones (cryptocurrencies).

Investing in gold, silver, platinum and palladium

Gold has been all over the news in the past weeks because it broke over the $2.000 threshold for around a week. At the time of the writing it's around $1.940 or 1.640€. The starting point to consider investing in gold (or any other precious metal) is getting your numbers right so a website quite useful is Bullion by Post. In here you can pick the commodity, your base currency and the time window you want in order to get the proper price you would be buying at if so was your plan, with a caveat: that's the market price, not the real price you'll get if you purchase physical gold in a store or a distributor.

Actually, when you begin to think about including gold in your portfolio several questions arise:

• Do I purchase physical gold or I just look for exposure via derivatives such as ETFs or CFDs?

• If I decide to purchase derivatives, how safe are they? What happens if the broker goes broke?

• If , on the other hand, I rather buy physical gold, how and where do I store it?

And probably some other related questions. Here are my two cents: the more you go on the derivatives side the more risk you're taking without actually noticing, and the more distanced from the real price of the underlying asset. In such dilemma I'd always chose to purchase the actual asset if possible—so physical gold.

To that point, here's an interesting video from George Gammon around this particular topic:

https://www.youtube.com/watch?v=bqoQ9DxMrw0

So, if you prefer the ease of going the ETF or CFD/futures route then you're all set, you can just log into your brokerage account and purchase any of these products. On the other hand if you'd rather own the physical asset one question remains: how do I buy and store it?

The most obvious answer is to go to a distributor (there are many online such as ), buy bullion or coin, and take it with yourself to a security vault or to your own home. If you've got such a safe deposit then you're good, but if you're about to take it home that could be really risky, even if you've got your own safe.

There's another downside to purchasing physical gold in this way: the cost of distribution plus the dealer's fee takes up over 10% of the value, example taken below from real time distributor in Spain:

At the time of this writing they offer for sale at 1.744€ per ounce and they buy at 1.488€ per ounce. The difference (256€, 17%) is the spread and that's how the market maker earns its profits.

There's a third option to buy precious metals though, also in physical form. Suppliers like Auvesta for example offer both market service and storage for all the assets you buy through them. You are legally the owner of every piece you purchase (you own the asset, not a paper) and if you so desire you can have your assets sent over to a location of your preference. An option like this is undoubtedly more convenient and more liquid, although you're obviously relaying on the trust and the custodian. My opinion is if you plan to have a reasonable amount it may make sense to split your allocation between this online type of service and storing it by yourself.

Investing in cryptocurrencies

Cryptocurrencies are thought to be the future of money by its supporters and pure speculation by its detractors. I understand both sides of the argument and honestly can't lean to any more than the other. Hence, if you've got stomach for the higher risk I think allocating a small amount (<1-2%) of a long term portfolio may make sense.

Same as it happens with precious metals you can expose your portfolio to any cryptocurrency by means of derivatives. If that's your approach then there's nothing new to add here.

However, if you'd rather physically (digitally) own your crypto assets you probably want to look for a similar alternative to store them by yourself. To that end, first you want to open an account in any of the major cryptocurrency exchanges, such as Coinbase for example. Then, you can keep your assets either online (as example Coinbase offers online wallet service too) or you could store the keys in an external wallet. This way you'll avoid the risk of any online storage service to get hacked, although you'll have to be careful with your local storage device as you'll lose everything if you lose it or break it.

To this end there are many wallets (free and premium) available that can keep your keys in a smartphone, a laptop/pc or even on an external drive. You've got to remember though that if you lose it or it breaks, you may be losing these keys—unless you're able to recover them. One of the free wallets I would suggest looking into is Exodus. In case someone's interested in pursuing such approach, here's a guide on how to transfer your keys from the Coinbase exchange to Exodus wallet.

Hope this helps everybody to have a better understanding of what role these assets take within our portfolio and what are some of the most efficient alternatives to invest on them.

AMC

Disclosure: I am no financial adviser nor an investing professional, and this article reflects my own opinions. I have no business relationship with any of the websites mentioned here nor I receive any compensation from them.