Alternative Investments: gold vs. bitcoin vs. commodities

Many investment advisors and asset managers like to incorporate a 3-5% asset allocation for alternative investments in their long-term strategies. In theory, alternative investments can provide uncorrelated returns compared to bonds and stocks, which can reduce portfolio drawdowns and volatility.

Gold, being a scarce metal, has been used since the beginnings of humanity as a store of value and also as a display of wealth in the form of jewelry. Gold is also known as a safe haven investment in times when increased inflation is anticipated by market participants.

While we see merit in the argument that the rapidly increasing national depth coupled with close to zero, or possibly below zero interest rates in the future has the possibility of creating an unexpected jump in inflation, we do not see gold bullion and gold mining stocks rallying right now (Chart 1).

Chart 1.

Bitcoin (Chart 2) emerged recently as a pseudo competitor for gold. Proponents of bitcoin say that it disrupts gold. While bitcoin has a scarcity value similar to gold, we think that its main current use is for speculation, not for long-term investment. There are also signs of potential regulatory hurdles ahead in the near future.

Chart 2.

In our view, commodities are the most interesting of the alternative asset classes today. Since many of the commodities, such as oil and metals are priced in dollars, the weakening U.S. dollar is creating a tailwind. One of the most interesting Fidelity mutual funds in this space is the Fidelity Commodity Stock Index Fund (FFGCX). The fund invests in stocks of companies engaged in metals, energy, and agriculture industries, and is likely to continue to outperform, in our view (Chart 3).

Chart 3.

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