I have some more notes from the frontier for you before we get back to our discussion on asset allocation and reserve assets this week…
We ventured up to an historic old inn last weekend. It’s an establishment in Hot Springs, Virginia that’s run by the Homestead Resort, which was founded in 1766 – ten years before America declared independence.
Captain Thomas Bullitt built the original 18-room wooden inn after receiving a land grant for his military service in the French and Indian War. He figured it could accommodate the visitors who came to the area to bathe in the mineral springs for which the town was named. Thomas Jefferson even visited the original Homestead inn towards the end of his life.
Located deep within the Allegheny mountain range, this area was truly the frontier in those days. Nobody knew what existed to the west of the mountains.
In many ways I feel like Hot Springs is still the frontier. The town sports a population of 540 people, and it’s located 30 minutes from the nearest highway and 40 minutes from the nearest Walmart. As such, the crisp mountain air remains untainted by modern America’s rat race.
Here’s a shot of the inn from our visit:
There’s something magnificent about the old inn laid against the Alleghany mountains under a crisp blue sky. We had lunch there… and we were their only table. Such is life on the frontier.
Getting back to finance…
We left off last week talking about Harry Browne’s Permanent Portfolio and the concept of asset allocation.
As a reminder, asset allocation is about spreading your money – your capital – across several different asset classes according to a personalized model. The purpose here is true asset diversification.
A robust asset portfolio will consist of:
• Reserve Assets
• Strategically warehoused cash
• Capital-efficient stocks
• Cash flow investments
• Alternative investments
We’ll dedicate a separate entry to each of these, starting with reserve assets today.
Reserve assets consist of gold and Bitcoin, and they should be the cornerstone of every asset allocation model because they are critical for wealth preservation. Short-term price fluctuations aside, these assets will protect and grow our purchasing power over time.
Gold – the True Monetary Metal
The investment case for gold is simple. Gold is the world’s one true monetary metal. It’s been used has a store of value for millennia.
As much as the Keynesian economists tried to disparage it throughout the 20th and early 21st centuries, gold represents generational wealth. It is recognized all over the world. And there’s a functioning gold market in every major country on Earth.
What’s more, nearly every major central bank in the world still holds gold. And the numbers show that many central banks have been buying gold hand-over-first in recent years.
Once upon a time the central banks used gold to back their paper currencies. They don’t do that any longer… so why do they still have the gold? Why didn’t they sell it?
Clearly the central banks believe that their gold investment will come in handy one day. And I think that day is fast approaching… because we are seeing a significant shift in global gold inventories right now.
Nearly 500 tonnes of gold have moved from vaults at the London Bullion Market Association (LBMA) to private vaults at the Commodity Exchange (COMEX) in New York over the last several months.
And get this – 80 of those tonnes have reportedly moved from London to New York since April 2nd – pushing the COMEX’s gold stock to a record high of 1,347 tonnes. This shows us very clearly that some big players in the US are repatriating their gold amid the global uncertainty.
The bottom line is that some big moves are afoot. It looks like some major American financial institutions are making sure that they have plenty of gold in their home vaults.
We should do the same.
Bitcoin – the Hardest Money the World’s Ever Seen
I like to describe Bitcoin as both a payment network and a currency wrapped into one. Bitcoin (with a capital B) is the network, and bitcoin (with a lowercase b) is the currency.
Perhaps this doesn’t sound too important on the surface… but it’s truly revolutionary.
To my knowledge there has never in history been a payment network that also supplied its own independent currency. Instead, we’ve always needed a separate payment system through which to transact using currency. And that means we’ve always had to trust a third-party intermediary with our monetary transactions.
Bitcoin eliminates the intermediary and enables direct payments from one person to another. To me, that means it enables perfect monetary freedom. This is where much of Bitcoin’s value comes from.
What we’re talking about here is a phenomenon called the network effect…
It’s a fundamental principle of technology that functional networks grow in both utility and value as more people use them. This is especially true of Bitcoin.
We can think of it this way – if only 100 people used Bitcoin, the network wouldn’t be worth much. Thus, there would be little incentive for people to adopt the technology and use the network… which means the value of each bitcoin would be low.
But millions of people use Bitcoin today. We typically see $20-30 billion worth of transactions flow through Bitcoin’s network each day. And now an immense amount of infrastructure has been built around the technology – improving both its utility and its security.
That’s why Bitcoin is now a $1.5 trillion asset. And each bitcoin is worth roughly $85,000 as I pen this entry.
In the early days, we saw Bitcoin as a legitimate competitor to the fiat monetary system. We envisioned a world in which everything ran on bitcoins – eliminating central banks and unbacked paper money entirely.
We saw that as the ideal because the Bitcoin network is not owned or controlled by any corporation, government, individual, or group of individuals. Instead, it’s governed entirely by open-source computer code. And we know exactly what the code says. That’s the beauty of this.
Thus, we know exactly how many bitcoins are in circulation at any given time. Right now that number is 19.84 million bitcoins.
This level of transparency puts everybody on an even playing field. There are no insiders in the world of Bitcoin as a currency.
We also know that there will only be 21 million bitcoins ever created. And we know that the very last bitcoin will be mined in the year 2140.
That makes Bitcoin an incredibly scarce asset. It’s similar to gold in this regard… except far more scarce. Bitcoin is the hardest money the world has ever seen, to use lingo from Austrian economic circles.
Think about this – there are roughly 346 million people living in the United States today. If every one of those people decided that they wanted to buy Bitcoin, there would be enough bitcoins in circulation for each person to own about .057 bitcoins. That’s it.
But Bitcoin is a global asset and there are roughly 8.1 billion people in the world. If everybody alive wanted to allocate to Bitcoin, there are enough bitcoins in circulation for everyone to own .0024 bitcoins.
This dynamic guarantees that Bitcoin’s price will go up as more people become interested in it. That’s just basic supply/demand economics.
Now consider this – the legacy financial system is moving fast to incorporate Bitcoin as a global reserve asset as we speak.
As such, we are going to see central banks, financial institutions, insurance companies, and pension funds allocating to Bitcoin very soon. And these institutions are going to buy billions of dollars’ worth of bitcoins – removing a substantial amount of the liquid supply from daily trading.
This isn’t what we envisioned for Bitcoin in the early days. We didn’t expect it to become institutionalized—that’s not what we signed up for initially.
But Bitcoin’s institutionalization doesn’t change the fact that it still provides us with perfect monetary freedom as individuals. As long as we hold our bitcoins in self-custody, we can always send any amount of money to anyone, anywhere in the world, at any time, for any reason.
And the fact is that Bitcoin’s price is going to go to unbelievable levels as the legacy system adopts it as a reserve asset. I expect its market capitalization (market cap) to at least rival gold’s… and likely surpass it.
If that were to happen, Bitcoin’s market cap would have to increase by at least 14x from here. Given that there are 19.84 million bitcoins currently in circulation, each bitcoin would then have a dollar value of $1,058,468.
As crazy as that may sound – Bitcoin to $1 million is where we are likely headed in the next few years. That’s why I think it’s wise to allocate to Bitcoin consistently regardless of the price.
In summary, both gold and Bitcoin should serve as the cornerstone of our personal finances.
These are the world’s two most robust reserve assets – we should view them accordingly.
The key here is that we don’t buy gold and Bitcoin hoping to sell them for more dollars later. No—we buy gold and Bitcoin because we want to own reserve assets for generational wealth preservation.
-Joe Withrow
P.S. Our Finance for Freedom short course provides a detailed walkthrough on how to build out a robust asset allocation model with specific guidance for how to invest in each asset class. If you’re interested, you can find it at: https://financeforfreedomcourse.com