Journey to Generational Wealth Post #2 — Bitcoin & Gold Miners — The Life CFO
I have an ambitious goal to accumulate enough wealth for our family to have the freedom to choose how and where we spend our time. I am documenting this Journey to Generational Wealth here so that I can look back and reflect on the progress I make, to hold myself accountable, and to share what I am learning along the way.
Each weekly post follows the same format — I will discuss what I learned this week through my reading or consuming content through Real Vision, Hedgeye, or any of the various podcasts that I listen to.
After that, I will share my investment results for the week and my thoughts on each asset class or investment. In addition, I will provide information about my current wealth building strategy, asset allocation, position sizing and the types of securities I invest in.
What Happened This Week — November 8, 2020
A big rebound across the board this week for all asset classes. Every losing asset class last week more than made up losses on a down dollar. Everything other than bitcoin has been very closely tied to the dollar for the last few weeks (bitcoin has been going up no matter what the dollar does).
I added to positions by buying gold, gold miners (GDX), and bitcoin in my retirement account through GBTC. I am still very overweight cash and fixed income and underweight equities in my portfolio, so my portfolio gains were less than that of the overall market, but the same is true on losing weeks.
VIX and VXN did break down significantly this week, but are still elevated above the level where I feel safe being aggressively long. Therefore I continue to wait to jump into QQQ or XLK.
What I Learned This Week
I listened to one podcast and one Real Vision video this week that discussed gold miners. Gold has increased significantly, up about 25% in price year-to-date. The price of gold increasing has no impact on the cost of mining for gold miners. In multiple interviews, I took note that the cost to mine is about $1,000 per ounce. With gold at $1,952, that is a profit margin of nearly 50%! Cost of capital is one of gold miner’s most significant costs — with real interest rates low and the price of gold set to continue its increase — gold miners is a sector that I want to build into a max 6% position.
Here is the George Gammon Rebel Capitalist podcast I listened to with Doug Casey which discussed gold miners — it was a brief discussion but validated what I heard elsewhere:
If you are a Real Vision subscriber, here is the link to the Real Vision interview I listened to which discussed gold and gold miners:
Wealth Accumulation — Investment Results Weekly Update
I am tracking investment returns from November 1, 2020 moving forward.
My total portfolio gain this week was 2.51% . Holding a larger cash position than I would typically have means my returns (and losses) will generally be less than the market each week.
I made a couple of moves this week:
- Purchased Gold Miner’s (GDX) while it was on sale on Tuesday and Wednesday.
- Sold some of my TLT position on the big up-day Wednesday
- Bought Gold on sale on Wednesday.
- Purchased Bitcoin early in the week in my retirement account (through GBTC).
- Bought Live Cattle (COW) when it was down early in the week
- Sold some of my silver position on Friday to get overall position back down to just under 4% — silver was also near the top end of its risk range on Friday.
I continue to hold a lot of cash due to volatility spikes and dollar strength that we experienced for a few weeks until this week. I was cautious entering into positions as I was looking for VIX and VXN to breakdown a bit further than where they currently sit.
Equities
I am continuing to look for buying opportunities in emerging markets since volatility is still very elevated in the U.S. KBA, CHIQ, and EEM are 3 ETFs I have been looking at for buying opportunities.
Gold Miners (GDX) is an ETF I am watching closely and working to build that to a max position. I am near 3% now. With the increase in gold prices and decrease in interest rates over the past 6 months, gold miners are primed to have some very strong results over the next few quarters.
Volatility broke down this week, but I’d like to see VXN break down below 30 before I really begin building a position in XLK and QQQ.
Fixed Income
Corporate credit is not a great place to be in Quad 3, so I am pretty much limiting myself to treasuries at this time. I am buying TIPS when opportunity presents itself. I have moderate positions in SHY and TLT.
Gold
Gold and gold volatility have held steady over the past couple of weeks. I brought my gold position down to roughly 8% in September and am working to build that back up when gold presents buying opportunities.
Bitcoin
Bitcoin has been ripping upward in the last couple of weeks. I find it mentally difficult to buy GBTC due to the high premium associated with it, and GBTC has outpaced actual bitcoin in percentage gains (increasing that premium) over the past few weeks. I do not trade the bitcoin I have through Coinbase, but will trade GBTC (in my retirement accounts to avoid tax issues) when the premium gets out of whack in either direction.
Commodities
I only have two commodity positions as of this week. Live cattle (COW) which I began building a position in this week, and silver (PSLV) which I am keeping near a max position, but will trade around depending on the Hedgeye risk range.
My Wealth Building Strategy
Having recently established a solid personal finance foundation to build upon, I am now building my “freedom fund” to establish wealth. The freedom fund is an investment portfolio that I have a goal to turn into a portfolio of income generating assets (dividend paying stocks, real-estate, fixed income, annuities, etc.) and reserve assets (gold, bitcoin, etc.). A key goal in my wealth building strategy is to own assets that will work for me. I will also plan to reserve a small portion of capital for higher risk investments.
My freedom fund includes employer sponsored retirement accounts, traditional and Roth IRAs (excluding a portion of Roth IRA that I consider to be my emergency fund), individual brokerage accounts and a Coinbase account. I do not include my kids college savings accounts (529 plans) or my health savings account investments.
My short-term goal is to grow this capital through investing to the point where I can begin to use a portion of it to make larger purchases of assets that will generate income (real-estate, businesses, etc.). I am a Hedgeye subscriber and use their mathematically-based process to inform my investment decisions. Find out more about Hedgeye here: www.hedgeye.com
Asset Allocation
My current portfolio is positioned for “Quad 3” which is an economic environment of slowing growth and rising inflation. In this Quad, certain equity sectors tend to perform well along with inflation protected securities, gold, bitcoin, and other commodities. I weight my portfolio heavier to gold, commodities and bitcoin in this Quad than in any other. My target Quad 3 asset allocation is as follows:
Position Sizing
I size my positions based upon risk. No individual equity position ever exceeds 6%, no single fixed income position ever exceeds 10%, and no individual commodity ever exceeds 4%. These max position sizes are recommended by Keith McCullough at Hedgeye Risk Management, and are key to preserving wealth.
I view bitcoin as a reserve asset (I’ve become convinced of this view by Raoul Pal) which is different than Hedgeye (Hedgeye views it as a commodity). Bitcoin typically performs well in Quad 3 environments, and since I am currently in growth mode I am ok with taking on a bit more risk by allocating more capital than I would otherwise to this asset class. Keith McCullough also limits his gold position to 12%. I keep a 10% core gold position in all other Quads, and with Quad 3 being very favorable for gold I increase that to 15%.
Trading Strategy
I tend not to short stocks or sectors very much, but will short things from time to time by purchasing options (at the money puts) dated anywhere form 45–90 days out. As a Hedgeye subscriber I do follow their process by doing some trading around my target asset allocations based on the risk ranges, signals, and volatility premiums/discounts. I only do the short-term trades around positions in my retirement accounts to limit the tax implications of the short-term trades. This does not stop me from getting out of positions in my taxable accounts if the intermediate to long-term outlook of an investment changes.
Depending on where I am purchasing a security in its risk range and what asset class I am investing in, I will make purchases of anywhere from 25 basis points to 200 basis points of my total capital at a time. For example, if an equity is in the middle of its Hedgeye risk range and I am making a purchase, I will make purchases of an amount equal to 25 basis points of my portfolio at a time. However, if a significant buying opportunity presents in gold at the low end of its risk range, I may go up to 200 basis points for a purchase, subject to my max position sizing limit (i.e. I won’t go over 15% total allocation to gold in Quad 3).
Investments
While I do invest in individual company stocks, I mainly utilize ETFs to invest across asset classes. These are typically the ETFs that Hedgeye follows. For equities I use sector ETFs like XLK, XLRE, XLU, GDX. Some of the individual equities I am currently investing in include NTR and WY. I invest in fixed income through ETFs like TIPS, TLT, LQD, SHY, IEF. For commodities I use ETFs like DBA. For gold and silver I use the Sprott Trust products PHYS & PSLV because of the inherent tax advantages (which are not relevant in a tax-advantaged retirement account). I do not yet have enough capital outside of my retirement accounts to purchase physical gold and silver. For bitcoin, I buy on Coinbase and through my retirement accounts I buy GBTC.
Do Your Own Research
I feel obligated to let you know that I am not a registered investment advisor. Nothing above should be taken as investment advice. Please do your own research before investing.
The Life CFO Blog
At The Life CFO, I share my personal financial management framework, the tools I use to manage my finances, and what I have learned through reading the best books and listening to the smartest minds in personal finance and investing. I am a trained CPA and have always been passionate about learning as much as possible about finance and investing. See more posts here.
Originally published at https://thelifecfo.com on November 8, 2020.
