For over a millennia gold has been a store of value and a source of savings in tough times. Civilizations all over the world dating back thousands of years stored it and sometimes even kept all of their wealth in gold. That’s certainly the case in some of the biggest countries of the world today including China, India and Turkey to name a few.
A frequent practice in India is gold loans, whereby a loan is backed by an individual’s jewellery holdings, or physical gold assets, to get them through hard times. Such is the unfortunate case right now with the current state of the pandemic in India. Gold serves this purpose because it has proven to be a valuable commodity for thousands of year, and lenders can trust it as adequate collateral.
Now there’s a new kid in town with laser eyes. Aiming to be an alternative currency and store of wealth, Bitcoin has made a splash in the last several years. Using a new concept called the block chain, Bitcoin aims to be a decentralized currency with only a limited number of coins in circulation. Bitcoin is ingenious and has been incredibly successful: going from around a price of approximately $4 USD (yes $4 USD!) 10 years ago to over $60,000 USD in early April and seeing increased attention throughout the world. There are many cryptocurrencies around today, many developed with various uses in mind, and some, like Dogecoin, with no uses at all in mind (it was started as a joke). But Bitcoin, throughout its short history, has focused on its status as wealth storage, even shunning factions of the crypto world that wanted to turn it into more of a transactional currency. So, is Bitcoin a modern and shiny new digital gold?
Not so fast.
As the hackers of the Colonial Pipeline have recently discovered – sometimes holding on to your Bitcoin is not a given. If you bury gold bars in your backyard, only you know where they are, but Bitcoin’s public decentralized ledger, part of the appeal, means there may be ways to track who owns what, when.
But that is a story for another time: what we’ll discuss further is comparing gold and Bitcoin as a financial asset.
When you compare gold and Bitcoin’s performance over the past five years – and Bitcoin proponents will keep reminding everyone of this fact – Bitcoin substantially outperforms gold. It’s not even close.
Source: Bloomberg, as at June 30, 2021
Bitcoin Return vs. Gold Return
Source: Bloomberg, as at June 30, 2021
But now look at the volatility over the past five years:
Source: Bloomberg, as at June 30, 2021
The above chart suggests that bitcoin is, on average, five times more volatile than gold. And Bitcoin’s volatility of volatility is extremely high as well. So, is bitcoin just a volatile digital gold? If that’s the case, it’s not as useful as a safe store for wealth.
There are other ways we can interpret this, so let’s look at the drawdowns of gold, bitcoin, and bonds:
Source: Bloomberg, as at June 30, 2021
In the past five years we’ve seen average drawdown of 15-20 percent on gold. While bonds, as represented by the US Aggregate Float Adjusted Bond Index, saw drawdowns between 6 percent and 7 percent in the past five years. Bitcoin, on the other hand, saw major drawdown of 80 percent and 70 percent in the past five years. What if you needed your money at the end of 2018? It would be worth a lot less than what it was at the high. Bitcoin appears to act a lot more like a stock than a store of wealth – you would need to have a longer-time horizon to get through the volatility. In that sense, it feels like Bitcoin is much riskier.
Bitcoin Price in USD
Speaking of stores of wealth, what about bonds?
In most of the western world, savers have historically used bonds, not gold, as a store of wealth. This has worked well in the past 40 years demonstrating low volatility and small drawdowns.
Bonds have the added advantage that they pay an interest rate coupon which savers have relied on for retirement years.
Here’s the problem: the U.S. federal funds rate has been close to zero for the better part of the last 10 years, which is why investors have been turning to gold and Bitcoin. The fear is that the government will no longer pay them a yield despite an increasing cost of living, and therefore, will not protect the value of their money. As the consumer purchase index (CPI) rises and rates stay at zero, they may be right. Unfortunately, as governments deal with higher and higher debt loads, they may not have a choice.
So can we somehow combine a low-volatility asset that protects value and still earns a yield?
We’ve established that Bitcoin is likely too volatile for risk-averse savers – and from a volatility and drawdown perspective, could be viewed as even riskier than stocks. Gold is a good store of value with lower volatility than stocks, but offers no yield.
This is where a covered-call strategy may be able to help – both by reducing volatility and earning a yield in the process. As a reminder, a covered-call strategy involves the investor selling a call option on an underlying asset and receiving a premium for this call. The call option gives the buyer the right, but not the obligation, to buy an asset for a set price, called the strike price. Investors may have seen covered call strategies on stocks, but they can in fact be used for any asset class that has tradeable options. Gold can be particularly appealing for such a strategy since it doesn’t have a yield of its own.
By writing 33 percent of at-the-money call options on a portfolio of gold ETFs, HGY – the Horizons Gold Yield ETF – aims to do just that. It earns an annualized yield, currently 4.64%, as at June 30, 2021 while maintaining two-thirds of the portfolio unwritten to capture any upside in the price of gold.
A covered call strategy may not make sense to an investor who believes that gold is going up quickly, since the strategy does give up some upside, but for investors looking for a yield and the safety of gold, HGY may be an option rather than any “digital gold”.
HGY Performance
Source: Bloomberg, as at June 30, 2020.
*HGY Inception Date: December 17, 2010.
The indicated rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The rates of return above are not indicative of future returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated.
Learn more about HGY: https://horizonsetfs.com/ETF/HGY
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