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Where to Put Your Money Now

Making sense of tangible – gold – and intangible – Bitcoin – investments


Most asset classes in the world today are considered expensive. Stocks, bonds and real estate have had tremendous appreciation since the depths of the financial crisis. As a result, some investors are looking at alternative investments like gold or the trendy virtual currency, Bitcoin.


While diversifying out of more traditional and now overvalued options is tempting, gold and Bitcoin are fraught with issues as asset classes.

Gold certainly hasn't proven to be a winner in terms of price appreciation in recent times. In the last five years, the price of gold has declined from approximately $1,600 an ounce in 2012, to less than $1,300 an ounce today. But more problematic is the fact that the commodity doesn't pay its holders any income. Unlike dividend-paying stocks, rental income-generating real estate or bonds, gold has no underlying or intrinsic value. It isn't backed by any government or company. For all practical purposes, the United States hasn't backed its currency with gold since 1933.

Many investors buy gold as a hedge to inflation, which isn't a great reason to own the precious metal seeing as we haven't experienced any real inflation since the 1980s.

And gold failed to serve as a good hedge against past economic downturns, as evidenced by it gaining just 4 percent in value during the Great Recession in 2008. In reality, if you buy gold as an investment, you must be hoping someone will buy it from you down the road at a higher price, which may or may not happen.

Like gold, Bitcoin also suffers from a lack of underlying value.

For those who are not familiar with  this terme, it has only been around since 2009 and didn't gain a meaningful following until this year when it exploded in price from $985 January 2 to $ 4,672 August 28. Today, Bitcoin still trades just under $4,000.

Bitcoin is a digital currency traded between people as an alternative to other sources of payment like credit cards or dollars. It was invented in 2009 by a fictitious person named Satoshi Nakamoto. The idea was to create a new electronic cash system not backed by any government, but that would lower transaction fees between buyers and sellers – in effect, eliminating the middleman. The unique thing about Bitcoin is there are no physical coins, just records kept on public ledgers. The value is created through a computerized process called mining, and once a bitcoin is created, one can buy or sell it like any other currency. Once you own bitcoin, you can use them like cash or credit cards. If a brick and mortar store accepts them, then you can pay for an item using bitcoin. You can exchange bitcoin for other publicly traded currencies like the dollar, euro or yen.

Instead of keeping bitcoin in your wallet, you rely on a third party to verify that you actually possess this currency. Therein lies the problem, since Bitcoin are stored in the cloud, they are vulnerable to cyberattacks. As we most recently saw with the massive Equifax security breach, who is to say some ingenious hacker can't get into these servers and steal bitcoins.

The other issue is the simple fact that bitcoin doesn't pay any dividends, rental income or interest. Their value, like gold, is based on what someone will eventually pay you for them. In essence, this is a purely speculative buy.

JP Morgan CEO Jamie Dimon recently called Bitcoin a fraud that was in a valuation bubble expected to eventually burst. In fact, the Chinese consider the Bitcoin market so speculative, the government just halted trading it on the largest digital exchange for local customers. Howard Marks of Oaktree Capital, put out the question, if Bitcoin is a currency, would you be willing to sell your house and accept payment in bitcoin?

With the markets a bit stretched, keep an eye out for good companies that are reasonably valued; sometimes this may lead you to companies in out-of-favor sectors, including brick-and-mortar retailers. You want to own names with a meaningful dividend of more than 3 percent, an increasing dividend and strong balance sheets.

Sounds like a better choice than gold and Bitcoin to me.

How about you?

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Fred Taylor

Fred Taylor is president and co-founder of Northstar Investment Advisors, LLC. The firm specializes in managing personalized investment portfolios for individuals, families, and retirees with a focus on income generation. He is a member of the Colorado Forum and also served as an economic advisor to Colorado Governor Bill Ritter from 2008 to 2010.

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