A Fin24 reader who is anxious about not making proper retirement provisions asks an expert whether investing in gold or bitcoin could ensure a comfortable retirement. She writes:
My husband is 50 years old and we are anxious about our retirement.
We have not made adequate retirement provisions and are looking to invest a bit of money to ensure a comfortable retirement. We need at least R25 000 per month to maintain our standard of living after retirement.
Would you say investing in bitcoin now would be a good idea? Gold perhaps?
Brett Mackay, investment consultant and group RA manager at 10X Investments, responds:
You have provided us with limited information about your financial circumstances. Still, we estimate that you would require savings upwards of R7 million (in today’s money terms) to achieve your income goal (growing with inflation thereafter) at age 65.
Conventionally, most people who save for retirement do so over an extended period by investing their money in a diversified portfolio, comprising mainly shares, bonds, and cash. In the context of such a portfolio, there is undoubtedly a place for gold, so much so that even Regulation 28 of the Pension Funds Act permits an allocation of up to 10%.
But the reason to invest in gold is not that it produces superior returns over time, because it doesn’t. The long-term after-inflation return from gold is only around 1% pa, which is on par with cash. Gold won’t turbo-charge your retirement saving unless you get lucky with your market timing.
Instead, holding gold is helpful for its diversification benefits, as a hedge against accelerating inflation, currency failure, a weak dollar, and geopolitical uncertainty. Gold is trusted for this purpose because it has a long track record of holding its value and is universally accepted as a means to store and transfer wealth. Its physical qualities underpin gold’s appeal: it is visually attractive, scarce, easily stored, does not rust, and readily convertible into coins and jewellery.
Many people regard bitcoin (and other cryptocurrencies) as a digital alternative to gold, with some similar qualities but much more commercial functionality. Only time will tell whether it becomes broadly accepted and whether the regulators will play along.
Twelve years on from when bitcoins were first mined, there is a growing belief, also within the asset management community, that bitcoin’s value is not going back to zero and that a small portfolio allocation (between 1% and 5%) is worthwhile.
We would view a more significant allocation, matching that of gold or more, as problematic, though, especially in a goal-driven pursuit such as retirement investing. Although gold, like bitcoin, does not have intrinsic value, it does have a reference value to other goods established over many centuries. Bitcoin does not.
Even if bitcoin endures, it will take years to establish that reference value. Until then, its price will remain highly volatile, as underlined by its extreme price moves over the last three years, from below $4 000 to above $60 000, which makes it ill-suited as a store of wealth for now.
Some bitcoin evangelists prophesy that the price will exceed $1 million within the next ten years. If correct, this would be the ideal shortcut to achieve your retirement goal within your limited time frame. But if the price turns the other way from here, it could be money, and your retirement, down the drain.
We believe it is worthwhile to have a small allocation to bitcoin in your retirement portfolio, partly for diversification purposes but mainly as an option for an unknown future. But we strongly recommend that you don’t stake your entire retirement on this one option paying off.
*Questions may be edited for brevity and clarity.
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