Transcript
Mark Valek, partner at Incrementum and a leading expert on integrating Bitcoin and gold into investment portfolios, joins the podcast to share how to build a sound money portfolio using principles from the Austrian School of Economics.
Mark also discusses why he and his investing partner, Ronnie Stoeferle, recently joined the board of Monetary Metals and their vision for the future of monetary alternatives in investment portfolios.
Follow Monetary Metals on X: @Monetary_Metals
Follow Mark Valek on X: @MarkValek
Additional Resources
Earn Interest on Gold and Silver
Austrian School for Investors book
How to Earn Passive Income in Gold and Silver
In Gold we Trust 2024 – Full version
Ronnie Stoeferle: Why I Invested in Monetary Metals
Monetary Metals Welcomes Ronald-Peter Stöferle and Mark Valek to Advisory Board
Transcript
Ben Nadelstein:
Welcome to the Gold Exchange podcast, where we untangle market and policy complexity using timeless economic principles. For show notes and archives, go to goldexchangepodcast. Com. Welcome back to the Gold Exchange podcast. My name is Ben Nadelstein of Monetary Metals. I am joined today by Mark Valek, partner at Incrementum, and in my opinion, the world’s foremost expert on combining gold and Bitcoin into a portfolio. We’re going to learn a lot about that today. Mark, welcome to the show.
Mark Valek:
Hey, Ben. Thanks for having me on.
Ben Nadelstein:
Mark, I’m pretty excited, as you can obviously see. I’m a pretty young guy, and so Bitcoin is in the news, obviously. For young people, that’s their asset of choice for a lot of them. Gold is seen as more boomer. Older people own gold. So you’re one of the first people to pioneer owning both gold and Bitcoin in the same portfolio. So first off, how did you come to this idea and where did you start your investing journey before you heard of both gold and Bitcoin?
Mark Valek:
Right. Well, I started off as a fund manager in Vienna, and I had actually, even though I was educated in Vienna, no clue about the Austrian School of Economics, unfortunately, when I finished my traditional education. I learned that shortly after, actually, I started as fund manager. I was really fascinated by that because I realized that actually, traditionally, people don’t really look at the monetary system when they do investing projects or Classically investors just look at cash flow, dividend cash flow models and so on, and never think about the monetary system so much. But I was of the opinion that it probably is very fundamental also to investing. And I thought that is actually no real investment philosophy. I didn’t know of any investors who actually really took into account the monetary system. And That’s what motivated myself and also my partner, Roni Stefferle, to start up our own boutique, Incrementum, 11 years ago already, where we actually focus on creating investment strategies which do take into account the monetary system. That’s a little bit my background, and that’s what I do very passionately today.
Ben Nadelstein:
Mark, you’ve described yourself not only as an Austrian in terms of your physical origin, but also an Austrian in terms of your economic philosophy. For someone who has no idea other than the country of Austria, what is the Austrian School of Economics? If you’re an investor today, why should you care about the Austrian School versus maybe Chicago School or the other options when learning about economics?
Mark Valek:
The Austrian School of Economics is a tradition which obviously had its origin in Vienna, Austria, somewhat almost 150 years ago, founded by Karl Menger. I think some of the thesis of Austrian economics were basically are still around also in the classical mainstream mainstream economic streams today. But generally, it has been pretty much forgotten or has survived as a little bit of exotic Yeah, or of spring, or our own school of thought. I think the most important difference between mainstream economics, which typically would include Chicago School, as you mentioned, especially Keynesian economics, which is probably the most widely spread school of thought in the mainstream, is that it puts really the individual first. It really thinks about human action as the basis of economics because we are humans, obviously, and how humans act, that really should determine the thought process when it comes to economics. So when it When it comes to investing, again, I think one of the biggest advantages is when one has an idea about Austrian economics is making one’s conscience that how this monetary system actually works. Mainstream economics typically take for granted that we have a central bank, take for granted that we have a monetary monopoly, and it has been like that for many centuries, in fact.
But it wouldn’t actually have to be like that. Also, historically, if one looks at monetary history, typically money actually is a product of a social conscience. So society typically decides what good is the best money. And then typically the state comes in and monopolize the money and corrupts money and uses money for its interest by inflating money supply. And this has all effects also on investing. And I think this is one of the main, practically, advantages of having an idea about the Austrian school. But then also, I think one needs to be aware of the limits when applying Austrian Austrian School to investing. I think that can be one part of the toolbox, but it’s not like a for everything. Just because you know Austrian School, you won’t automatically become a great investor. So What we did 10 years ago, I think, was we wrote a book which is called Austrian School for Investors: Investing between Inflation and Deflation, which already, I think, lays out a little bit. These two factors can have quite significant impact on investment portfolios. And we also try to lay out the advantages, the potential advantages of school knowledge when it comes to investing, but also its limitations.
Perhaps an interesting read for whom wants to know more about that.
Ben Nadelstein:
We’ll absolutely have that in the description of the video. So Makc, you and your partner, Roni, recently joined the Board of Monetary Metals. What got you interested in the company Monetary Metals, and what initially got you interested, really, in bridging the gap between traditional finance, which most people are aware of, versus things like emerging monetary alternatives, whether that’s gold or even Bitcoin?
Mark Valek:
Well, in fact, I think it has been almost 15 years ago when I met Keith Wiener, the founder of Monetary Metals, in a course about Austrian economics. So I know that he’s very into Austrian economics as well. There was this personal connection, but also then when When the company was founded, I was looking at what you guys are doing and found it very interesting. I think it’s quite a good match because it fits into my mindset very well. I hope I can be somewhat helpful in that role and looking forward to talking to you in this position.
Ben Nadelstein:
Mark, one of the things that you’re unique for discussing and thinking about making portfolios is this idea of a synthesis between physical assets like gold and digital assets like Bitcoin and constructing what you often call a sound money portfolio. So you’ve got gold, which is usually considered an alternative form of money, and now you’ve got Bitcoin, which is this emerging cryptocurrency. First of all, you’re one of the first people to try this as a synthesis. Have you seen the performance of the strategy working so far? Obviously, Bitcoin is at an all-time high, gold as well this year, hitting all-time highs. So clearly, both of these assets have been shining. But talk about actually combining them together. What have you seen in terms of performance?
Mark Valek:
Right. So I mean, generally, in my experience, when it comes to Bitcoin, it’s a pretty emotionally discussed asset, especially also perhaps among the gold space. So you have people that love it, you have people that hate it. But you also have in in my experience, a growing group in between, which are more pragmatic, especially when it comes to their portfolio investments. And I think one has to distinguish the discussion a little bit about Bitcoin as potential monetary system and Bitcoin as an investment or as part of your investment portfolio. And I think one can have discussion which could be the better money, Bitcoin or gold, for instance. And that’s where actually I focus more on what to do as investor, how to potentially implement Bitcoin into a portfolio. And since we’re Ronan, I found Bitcoin pretty early as we write the In Gold, We Trust report every year, which is, as you know, an extensive coverage and holistic report, not only about gold, but about global monetary system. The in the recent years, also including share politics more and more since it has become more important. By doing the research in this space, we actually found Bitcoin pretty early on.
Also from an economic side, I’d say, understood it pretty rapidly, not so much perhaps the technical ins and outs, but we knew what what the idea, the general idea behind Bitcoin was. But it was so small, actually, back then that it was even difficult to imagine that it had any chance to be able to pull that off. And still, I mean, Bitcoin has come a long way, especially in terms of market cap, obviously, and in terms of adaptation. But we’re still very far away from really having any official monetary role with Bitcoin. But if one comes to the conclusion that there is a chance that Bitcoin may just stick around and There is a chance that actually digitalised assets will be established. And I think by now, chances are that it’s pretty high, that it’s not going away. I think as soon as one comes to that conclusion and one thinks about implementing a part of Bitcoin, for that matter, into one’s portfolio, it makes sense to think about how to do that best. And we thought it made probably sense to combine it with gold investments. There are similarities between bitcoins and gold, but there are also fundamental differences.
So So the advantages and disadvantages on both sides, in my opinion. And we came to the conclusion that it makes sense to solve the biggest problem for the traditional investor regarding Bitcoin, which is the high volatility by combining these two somewhat similar asset classes in one portfolio in a way that manages the volatility, A, so makes it more, I’d say, it gives the investor better usability, if you want to put it that way, as a building block in the portfolio. And by that, and that’s the big advantage, taking actually advantage of Bitcoin’s high volatility. So what we do specifically is we combine. We’ve got two strategies, but in the more conservative strategy, we combine 25 % Bitcoin allocation strategic Bitcoin allocation with 75 % gold allocation. With this portfolio combination, you get a building block, which is similar to an equity mandate, perhaps to emerging markets, a dynamic equity mandate, I’d say. This volatility, I think, generally, people are, traditional investors, are better able to handle. That’s, as I said, one big advantage. By rebalancing these assets, you can actually take advantage, as I said, from the volatility because you systematically take profits into strength whenever Bitcoin rises to a certain level, we take profits, go back to the strategic allocation.
When it goes too far below our strategic allocation, we take some of the gold and go back to rebalance into Bitcoin. By that, we always antipsychically, even though we don’t know where there is a top, where there is a bottom, but we will systematically buy low and sell high.
Ben Nadelstein:
I think this strategy is really smart. And one of the One of the things that I like about you and what you guys do is you say, Listen, we can have these more theoretical debates about the monetary system and gold and Bitcoin. Would there be deflation on this system or that system? Those are fun, and maybe we could have a beer and talk about those But if you just strip away the names of these assets, you don’t write gold on it, you don’t write Bitcoin, you don’t write bonds, you don’t write stocks, you don’t write emerging markets, you just look at the returns and the volatility and the numbers. Then a pragmatic view approaches which says, Hey, this asset is volatile or this asset is less volatile, and the returns on this asset look like this. What you can do is come up with strategies to pair those for certain desired investment outcomes. For example, okay, this has a lot of volatility, but high return optionality. This one has a lower return optionality, but lower volatility. When you pair those, you come up with interesting strategies. Can you tell us quickly about harnessing Bitcoin’s volatility?
Because a lot of people say, I don’t want to invest in Bitcoin. It is so volatile. It can drop 30% in one day, and then a week later, it’s up like 500%. Why would I ever want to invest in that? If I’m a grandma, I can’t take 30% drawdowns. Come on, Mark, that’s ridiculous. But you’ve said, Wait a minute. Let’s use that volatility for our advantage. One of the things you come up with is options writing. Maybe tell us a bit about harnessing Bitcoin’s volatility.
Mark Valek:
The first step, what we do is a I alluded to that already is a classical rebalancing strategy, and that’s a pretty easy strategy. Theoretically, everybody can do it by themselves. One has to define some rebalancing algorithm. I think a little bit in practice, the problem may potentially be that oftentimes people think about doing it, but when it comes to the rebalancing, perhaps they won’t do it. Why? Because when should one actually rebalance in times of euphoria, typically when, for instance, the Bitcoin price is going ballistic. During this period, you’ve got great news flow regarding Bitcoin, everything looks positive. I’m not sure. It’s easier said than done in practice, but one can do it. If one does it systematically, it’s actually pretty simple. But then on top of that, and I think that’s actually as an investor, what we really like is one can use the volatility from the derivatives markets via options. In our In this case, we have defined an event-based rebalancing. When, for instance, when we reach 40% Bitcoin exposure, we rebalance back to 25%. When we approach this level, for instance, which is currently, again, the case, then we can start writing all options at the levels where we can pretty much estimate roughly where the rebalancing is going to happen.
We don’t know it exactly because it also depends on the price of gold. But most of the rebalancing price levels is determined by Bitcoin’s volatility. We can roughly say at what price levels we are going to have to rebalance, and we can write all options at these strikes, so at as price levels. That gives us this big advantage that we can receive premiums by writing call options, basically giving us cash flow. The The same we can do on the lower boundary. If Bitcoin is underperforming and we are starting to rebalance, we’re going to rebalance at 10% exposure, we can start writing put options, which which then basically, again, allows us to collect premium. I think that’s actually really an interesting feature of this approach because the one thing what every investor criticizes about gold, and to some extent also Bitcoin, but not so much in that case, is that it has no yield. It doesn’t pay any interest, doesn’t pay any different. And that’s also where you guys come in, where your business model also comes in and helps investors out potentially to solve this problem. But this is perhaps a little bit different approach to enhance goals performance with some yield by combining it with Bitcoin and writing options on top of it.
That was, I think, quite It’s been an interesting creation. We’ve been doing this for almost five years now in the first strategy, and it’s going pretty well. We’ve got, actually, that’s, I think, the benchmark which we are looking at is risk-adjusted returns. Obviously, the absolute returns is not a good comparison, but we’ve been beating gold and Bitcoin coins risk-adjusted returns. That’s actually also the case we made, Exante, and so far we’ve been achieving that.
Ben Nadelstein:
Yeah, I find it such a ingenious method, which is, hey, Bitcoin is volatile. That’s the nature of the At least, yeah, again, we can have a theoretical argument. Well, what if everyone’s using Bitcoin at Starbucks? Okay, yeah, maybe it’ll be less volatile, yada, yada, yada. But in the real, real world, in reality, Bitcoin is incredibly volatile, but that doesn’t necessarily have to be a bad thing. You can use that with this rebalancing strategy plus writing options contracts to actually provide you cash flow from Bitcoin’s volatility. It’s a really interesting technique.
Like you mentioned, what we do at Monetary Metals, we provide investors in gold ways to earn a yield on that gold paid in more ounces. Start the year with 100 ounces. You can end the year with, for example, 103 ounces. That’s not through options contracts. That’s not through a dollar based writing contract that’s actually through a gold denominated fixed income return. If you’re interested in that, you can check out monetary-metals.com for more. So, Mark, now, you’re an expert in this field, if you want to call it, alternative assets, sometimes alternative currencies, gold, Bitcoin. I want to ask you, you’re a bit older than I am.
I’m obviously a bit younger than you are. It seems like younger investors are really interested in the crypto space. Older investors not so much. Then on the vice versa, older investors really understand gold. They have it sometimes in their portfolio, they pass it down to their grandchildren, but the grandkids get the gold and they’re like, What do I do with this?
My question is, who do you think is going to acquiesce first? Who do you think is going to to go to the other side of the line, if you will? Do you think that the boomers are going to say, Okay, it’s time to figure out how this heck, this Bitcoin thing works? All right, grandkids, you got to teach me about the digital wallet? Or do you think it’s going to go the other way around, where these people who are very tech savvy understand cryptocurrency understand this new form of technology, go, Maybe there is an actual use case to gold?
Mark Valek:
That is a very interesting question. I definitely can confirm what you said regarding the demographic demarcation line, I don’t know where that exactly goes. Perhaps when it comes to digital natives, that’s obviously the generation where you’re more prone to digital assets and boomers, which are more in the analog sphere. I may be just somewhere in between that. I can’t remember a world without same cell phones and the internet, but But I had it already in my late teenage years. I think I can relate to both worlds. I think what is often, oftentimes, Perhaps over seen, especially when one perhaps follows heated debates in social media or so regarding these two asset causes.
It is, I think, also a function of the amount of wealth you are talking about. When you talk about, say, not significant wealth, not a generational amount of wealth, I think, and that’s typically, obviously, the younger generation which didn’t have time yet to accumulate the wealth. For them, a high-risk asset actually suits pretty in terms of their lifespan and in terms of their investment horizon. When it comes to older people, they don’t want to take too much risks, typically.
Mark Valek:
They want to preserve their wealth if they have a significant amount of it. So I think that’s a factor also. And one can see that when, for instance, and I know cases of that, younger people become crypto crypto millionaires or whatever, they start to get interested in other asset classes. At some point, they typically do start to diversify out of Bitcoin, for instance. You’ve got super maxes who would never sell their Bitcoin, probably, or at least they talk about never selling their Bitcoin.
But again, once it comes to… I always say every Bitcoiner has his price. At some point, you really think about, Okay, this is so much wealth now. Perhaps I should do something else with a part of it, at least. That was, by the way, also a little bit the evolution When I actually had my personal tiny Bitcoin allocation in the beginning and it became significant in my terms for my private portfolio, I really thought, Started to think about, Okay, now this is not gambling money anymore. This is serious money now. What should I do with that? And I started diversifying up into gold. That was actually the spark, the idea of having a strategy which does this systematically.
Mark Valek:
So I think this is perhaps the evolution when it comes to the younger generation. When they come to more wealth, they will think about other assets which aren’t so volatile and vice versa. Well, older generation, in my experience, again, when they start to be a little bit open, it is like the phenomenon of digitalization in general, I think it has become more and more clear to also to the older generation, increasingly with increasing features. I mean, it’s not directly connected, but take ChatGPT, for example. That’s really a digital application which also elderly people perhaps can use if they’re still in the internet and so on, and all the other stuff which is going on.
Also, all the people, I think, realize more and more that the The digital sphere is not going away and becoming more and more important for society. When they come to that conclusion, I think it’s not a huge leap anymore for them to imagine that one also needs some exposure, perhaps to this digitalization in their portfolio. Even though they may not be mentally flexible to go into all the details because it is really an intellectual challenge. But just the realization of the increasing importance of the digital world may lead them again to allocate a part into Bitcoin.
I think that would be a typical journey on both sides.
Ben Nadelstein:
That’s a question for you. When Gold ETFs came out, they changed gold investing. It used to be you have to go down to a physical coin shop or a bullying dealer and buy physical gold. Now you can just go on your Robin hood app or whatever and buy through your brokerage account a gold ETF. So Bitcoin also has an ETF. Obviously, both of these ETFs have influenced the assets, market prices or the market caps. Which do you think has a bigger influence? Do you think the ETF in Bitcoin has unlocked more of that market cap, or do you think the ETF in gold had a bigger influence? Because like you’re mentioning, for a lot of people, understanding what a cold storage wallet is, you might as well juggle chainsaws because it’s just never going to happen. But an ETF, almost everyone can understand that. Almost everyone can go on a brokerage account and say, buy me some of this. Where do you see that ETF status helping more? Gold or Bitcoin?
Mark Valek:
Very good question. You are correct when you say the gold ETF changed a lot. When one looks at the numbers, I think the gold ETFs combined, I don’t know the exact number on the top of my head, but it’s roughly 3,000 tons which are invested in gold ETFs. Compared to the total gold stock of 200,020 tons, roughly, that’s not even 1.5 % or so. So it’s not huge. But one has to relativise this. A lot of big chunk of this total gold stock is not investable gold. It’s somewhere in jewelry, in art, and so on and so forth. It’s not liquid. It can be made liquid if the price is high enough, but it’s not liquid as of today. But just for a matter of comparison, let’s Let’s stick to the 1.5 %, a rough number, which is in gold ETFs. When it comes to Bitcoin, currently close to 20 million bitcoins are around, and Bitcoin ETFs just surpassed the one million coin mark after not even one year in existence, which relates to over five percentage points of Bitcoin’s stock. If you take these two numbers For developers, obviously, Bitcoin ETF was usually successful and arguably has more impact also on the price.
Again, also here, one can perhaps relativize the The total stock because part of the stock has been lost, and even though Bitcoin per se is liquid, but there may be some wallets which aren’t accessible so fast. So we can also make the We meant that not all of the Bitcoin stock is either available or liquid. But again, just stick to these numbers, which we roughly know. Then you can see Bitcoin ETFs have a bigger impact. But I think what is interesting about this question is one part leads to one factor, which I’ve been stressing all along. Because one of the fundamentals fundamental differences between Bitcoin and gold, obviously, is Bitcoin is, quote, unquote, only a monetary metal. And that can be seen as a positive, but that has also a negative. And I think this is when it comes to the volatility side, also the reason why Bitcoin will never be never will evolve to a low volatility asset or definitely will never approach gold’s volatility. Because the fact that gold not only has industrial use cases, but also I call it secondary store of value use cases like jewelry and so on, especially in emerging markets and so on.
You have a lot of counter-cyclically elements in the gold price. I’ll give you a specific example. India, traditionally a huge consumer of gold or holder of gold. If the gold price falls, Indians buy more gold. They always act countercyclically. If it rises too fast, they buy less. They basically buy as much as they can afford. You can determine it by GDP and FX rates and gold rate. This is a very countercyclically element which helps Obviously, dampen the volatility. Also on the supply side, if the gold price rises, people dig into their, I don’t know, into the clotsets and see if they find some golden teeth from whatever. And bring it to the smelter. This in aggregate helps the scrap gold, helps the gold supply if the prices rise as high. Coming back to your ETF question. If one thinks about it like that, Bitcoin is only a monetary metal. For that matter, it makes sense that something like an ETF will be even more dominant in the Bitcoin space, which is great on the upside, obviously, if you have a stampede into this asset class. But, and I’ve been warning people all along, and I expect the higher, basically, this becomes of ETF holders, the higher the potential is for a high drawdown.
Because think of it, who holds ETF? Traditional portfolio CEOs, institutional investors. And we have a debt-based monetary system which is prone to deflationary shocks from time to time. If we should enter a liquidity crisis, This is in the time where perhaps Bitcoin holders already hold, I don’t know, 10 percentage points of the total supply or even more, and they all press at the sell button at the same time because they have to be warned There are no Indians coming to pick up this huge additional supply. So this is, I think, something which one needs to keep in mind.
Ben Nadelstein:
That is a really fascinating point. And And the way I might try to think about that is there is only monetary demand for Bitcoin. Gold has other uses. My dad is a dentist. He will use gold. If it becomes super cheap, he’ll buy some more. If it shoots the moon, as they say, and goes to $5 million an ounce, he’s going to be ripping gold out of my teeth. Hopefully, the gold price doesn’t rise and my teeth remain intact. But Bitcoin doesn’t have that stabilization feature, and it’s a really interesting point that you make. Now I want to touch on this, which is liquidity.
People are talking about, Oh, Bitcoin is incredibly liquid, and gold is also incredibly liquid. But what they forget about the Bitcoin people, because they’re new to this, they might have never seen a deflationary shock in their investment horizon is that in, let’s say, a recession or a depression or a sharp market downturn, gold is actually one of the first assets to get sold off because like you said, it’s incredibly liquid.
If you need to sell, I’ll never sell my gold, I’ll never sell my Bitcoin. If you need to sell because your institution or an individual that has rules-based system on their portfolio, you get called up, Hey, you need to sell something.
You might be selling the most liquid asset you have. It’s not going to be your house, it’s not going to be your grandma’s China. It’s going to be your liquid stocks or your liquid ETFs. If a large percentage of the total Bitcoin is in an ETF format, those are all sold because they’re a highly liquid asset, which is good. They’re sold because of their liquidity. That can have a massive shock on the Bitcoin price because, again, there’s no dentists who are pulling Bitcoin out of teeth.
For Bitcoin holders, that’s something to think about on the downside on the upside as well as on the upside. Let’s talk about that jewelry demand and how it affects price stability in gold. Do you weigh industrial demand differently than you do something like a monetary asset? How How do you try to price Bitcoin? Do you use a fundamental pricing strategy? Do you use sentiment? What are you using to try to price this asset that seemingly only has a monetary demand?
Mark Valek:
Yeah, that’s an extremely difficult question. I mean, one probably needs to have some knowledge, at least. One needs to have the monetary perspective on it comes to the premises that Bitcoin’s price should rise at all. Because why should the price of Bitcoin rise?
Well, okay, the adoption may keep increasing. It has been increasing significantly, which at the end of the day means if it keeps increasing and increasing and more and more people use it as a store of value, perhaps at the end of the day, it will become some a unit of account, which, by the way, then could solve the volatility problem.
When everybody denominates everything theoretically in Bitcoin, volatility is gone. Just as gold’s volatility was gone pre 1971. There was no volatility in gold because gold was the unit of account via the dollar, but it was. And so the argument, just as a side note, the argument that Bitcoin can never become money as such because it’s so volatile, in my view, is false, just to also make that clear. But it’s quite difficult to imagine how we can actually get there, that it becomes a unit of account. But keep that aside for a while.
If one doesn’t have the premise that the monetary status of Bitcoin will increase over time, then it probably doesn’t really make sense to invest a lot of it, or to invest any of your wealth in there. One needs to at least, I think, have a small percentage point attribute small percentage point of probability to this scenario. But it actually doesn’t have to be that big, the percentage which one attributes to this outcome, because if this happens, the outcome is huge.
And then, going back to your initial question, how to evaluate Bitcoin. Well, I’d say you’ve got two main functions, the store of value and potentially unit of account or before that being a currency. So then probably the comparison makes sense with gold, like with the overall market cap of gold. That’s, I think, something a lot of people look at also. Gold market cap is, I think, roughly at $18 trillion currently. So these 220,000 tons of gold If you value them with market price, you get somewhere 17, $18 billion. Bitcoin is, I don’t know, close to a trillion, I’m sorry. And Bitcoin is close to two trillion. So what we look at is we have just percentage points in market cap.
And we touched 10 percentage points last bull market, 2021. We haven’t been approaching… We We are close to 10 % again today, 2 trillion versus close to 20. Close to 2 versus close to 20. So all Bitcoin are currently worth 10 % of gold market cap. So one thought could be how much, when it comes to store of value, how big will be the role of Bitcoin as a store of value vehicle relative to gold? If one… I mean, very extremely bullish scenarios for that, maybe Bitcoin will become worth as much as gold. So a variety. Parity, which currently would imply 10X of the price.
But then you don’t take into account what will the gold market do. We are very bullish on gold as well. We have our long term price target at the end of the decade at $4,800, roughly. If you take that price again, and then you have a market cap of 38 trillion, I think, in the gold space. Then again, you get to much higher numbers. It really depends on the assessment of how big will be the role of Bitcoin as a store of value, I think. Then on top of that, one can perhaps attribute some additional probability if it perhaps becomes even more important in terms of currency.
I think of that as an additional optionality, which personally I don’t price in because I think valuing it compared to gold is good enough and is conservative enough, actually. And if something more than that happens, that’s great for investors, but we don’t have to factor that in today.
Ben Nadelstein:
Another question for you. So obviously, you’ve done a couple of strategies where you pair Bitcoin being volatile with gold being more stable. Have you ever considered silver as a Bitcoin alternative in a portfolio? And what should investors think about if they own gold, if they own silver? Is there really a point in adding Bitcoin to put more volatility into their portfolio, or is the volatility that comes with silver enough?
Mark Valek:
We use silver also in our portfolios also to actually enhance a little bit our premium returns, our income by writing options. And again, in this case, we think about it really strictly as a portfolio manager. What I think the analysis shows is that you can actually add 10 to 20 % silver to your gold portfolio, and you don’t increase your risk significantly, but you can enhance a little bit your returns. But as gold and silver are pretty highly correlated, one really doesn’t have huge amounts of diversification effects. A little bit different is the story when one talks about Bitcoin, gold and silver, because especially Bitcoin versus the precious metals has very low, surprisingly low Correlation, actually.
Currently, actually, it’s been pretty negative. So if one price rises, the other price falls, vice versa, which gives you a lot of diversification and helps to reduce your overall volatility. Which is typically welcomed by investors. So one can use silver in our view to actually optimize your portfolio a little bit more. But when one uses gold already, one can’t go overboard because silver has similar characteristics as gold.
Ben Nadelstein:
So how do you weigh something like inflation or deflation risk when choosing between gold and Bitcoin. Gold has a really storied history. It’s been through inflation, it’s been through deflation, it’s been through depression, it’s been through recession, it’s been through high stock markets, it’s been through low stock markets. Gold has seen everything the humans have done Basically, since forever. Bitcoin, although has had these incredible rallies, it really hasn’t seen all different types of markets. When you’re thinking about risks like inflation or geopolitics, how are you thinking about allocating communicating between gold and Bitcoin? Or do you say, I’m just going to be agnostic completely and let the portfolio do the talk?
Mark Valek:
In our strategy, we’re pretty agnostic. We really have defined these allocations and we sticking to them. But if one wants to think about it, I think, which is also interesting, starting with gold, as you rightly pointed out, the test, the longest track record and so on. It is quite a difficult beast to grasp if it’s gold an inflation hedge or not. I think it depends on various factors. Are you looking at price inflation? Are you looking at monetary inflation?
What type of time horizons are you looking at? I think it’s pretty clear the longer time horizon you look at, the better the inflation gold gets as inflation hedge. This is, I think, often overseen in the conversation when people try to want to play down gold’s role as inflation hedge, if they point to any given year, see, there was no correlation to the price inflation. But then again, if you take the very long term track record, I think it’s quite evident that gold has been a great inflation hedge over the years, over the centuries, actually. But when it comes a little bit to the more shorter term time horizon, which is also interesting, and I think that’s also part of the confusion.
I think it depends what inflation, especially also what deflation we are talking about. For instance, look at the 1930s, Great Depression, where you had the deflation, especially ’29, and ’30, ’32, ’33. As I already mentioned, we’re living in a debt-based currency system, and it was partly debt-based back then also already, when you take into consideration credit Bank credit. If one really has a debt deflation, for instance, a banking crisis, or also take 2008 for that matter, you really have the situation that the monetary supply is contracting, which is, I think, the classical definition of deflation, monetary deflation, which leads to price deflation as a consequence of debt.
At first, if prices perhaps fall slowly only, that’s not a good environment for gold. But if you have this debt deflation taking overhand and everybody talks about, is their money still safe at the bank account? Then counterparty risk becomes a topic. During an environment of quite severe deflation, suddenly, gold perhaps becomes really interesting because now the counterparty factor is relevant. But if you talk about a smooth deflation, which is perhaps during the classical gold standard happening during the gold standard, that’s actually not a bad thing.
It’s actually a very good thing. Prices fall slowly. Then you don’t have this counterparty problem and you don’t have this systemic problem. I think one really has to distinguish these two worlds. Are we talking about an environment of a debt-based currency, or are we talking about the positive deflation which is brought upon due to innovation and value creation?
Ben Nadelstein:
Yeah, it’s a great point. If TV has become cheaper because we have innovation, why that should affect the price of gold is unclear. But if all of a sudden people are selling their stocks because there’s panic in the streets, okay, then you could see why that type of deflation, if you want to call it, is potentially good for the price of gold. Another Another question here.
We used to have these simple financial rules of thumb, 60/40 portfolio or the 4% drawdown rule. How do you see those changing now that we have the currencies like Bitcoin or gold that produces a in the field, do you think that those rules of thumb are still going to be useful going forward for investors, or is it time that we get new rules of thumb?
Mark Valek:
We talked specifically about the 60/40 portfolio in in our latest Income Retrust report, and we actually presented a new interpretation of the new 60/40 portfolio, which we defined as being a combination of productive assets or yield-bearing assets like stocks and bonds, like what’s the classic 60/40 portfolio, in combination combination with hard assets, with gold and Bitcoin, but also commodity.
What we proposed there was having 60% in the traditional productive assets in a combination of equities and somewhat bonds, not so much. 45% equities and 15% bonds make up the 60 portfolio part of the new 60, 40% portfolio. The 40% we div it up into security gold because we like to distinguish security gold, which is really physically and no counterparty risk and so on. Ten percentage points performance gold. It may be something like a monetary metals where you have some yield or it may also be some part of mining stocks and so on. It’s like a little bit of a derivative on the gold price. 10 percentage points in commodities and 5 percentage points in Bitcoin. That as our 60/40 portfolio, where you have really a significant chunk of non-inflatable assets, as we like to call them, relative to income-bearing assets.
Ben Nadelstein:
Mark, you have such It’s been an interesting take on portfolio construction. You really have a unique mind when it comes to thinking about assets, constructing a portfolio, and just the monetary system in general. I want to ask you our second to last question here, which is, what’s something you would like me to ask all of the future guests who come on to the Gold Exchange podcast?
Mark Valek:
Wow. Well, I’ve been seeing a few of your podcasts, which I found very interesting, and you’ve got very interesting guests. I think perhaps challenge them about Bitcoin. Why not? I like to do the same thing with gold investors and with Bitcoin investors. Bitcoin investors are always challenged about gold, right? I think the discussion is good and fruitful to some extent. Challenge them about Bitcoin.
Ben Nadelstein:
A golden exchange. Mark, it has been a wonderful time speaking with you. Where can people find more of your work?
Mark Valek:
Our homepage is incrementum.li. You can find our In Gold, We Trust report on the homepage. We also have some monthly quarterly newsletters, the Gold Compass, Bitcoin Compass, which are chart books, which are actually well received around the world. You can have them free of charge delivered into your email. And looking forward to subscriptions. And on Twitter, Mark Valek, my handle, I can be found there as well.
Ben Nadelstein:
Mark, I’m so excited to have you as part of the advisory board, and it was a great time. We look forward to speaking to you again.
Mark Valek:
Thank you, Ben. It was a pleasure. Have a great day.
