The Fed has shown some mettle over the last year but historically I would not say [Federal Reserve chair] Jay Powell is a profile in courage … one area I’m comfortable is I’m short the US Dollar” –Stanley Druckenmiller
“Bitcoin is a store of inflation and a hedge against value.” -Anon
With central banks’ bloated balance sheets and large swings in some exchange rates, the debate around the dollar has become ferocious. This quick Friday missive will focus on the potential for bitcoin and gold mining stocks’ relative prospects. Summarily, we much prefer the prospects of (select) gold miners compared to the bitcoin miners. Let us explain.
Get our insights direct to your inbox: SUBSCRIBE
In April of last year, Ethan Wu of the Financial Times wrote a terrific piece on the merits of gold, bitcoin, and their respective mining companies. He showed that over various horizons, both crypto and gold mining stocks had provided outsized leverage to the return streams of bitcoin and gold.[1] We had every intention of writing a piece contrasting the poor prospects of bitcoin miners[2] with the solid prospects we saw in gold miners.
Overwhelmed by opportunities, we missed our chance as the bitcoin stocks would promptly go for a quick swan-dive into the proverbial investment pavement. Between April 2022 – December 2022, many of the names we intended to pan fell by -45% or more. This year has brought these companies roaring back to life.
The chart below shows the year-to-date returns of the bitcoin miners, bitcoin, gold miners, and gold.
We believe the outsized returns to bitcoin and its mining stocks may be due to the provocative second quote at the top of this missive. Specifically, they appear to do best when investors expect low rates, surplus liquidity, negligible nominal inflation, speculation, and effective financial repression. The onset of inflation and the Fed’s attempt to fight it appears to have brought bitcoin and its miners low.
KCR withholds any view on bitcoin and happily concedes that the relationship between bitcoin and various financial regimes is anything but established. The tokens themselves may or may not be of value. KCR has no dog in the crypto fights that many seem to obsess about.
In contrast, however, we believe the crypto stocks’ rip higher this year is nonsense. In our view, the performance of these companies is just another sign of the rank speculation that has defined the market’s returns in 2023. Unlike bitcoin itself, these are companies subject to analysis.
The table below shows the basic fundamentals of the bitcoin miners, all US and Canadian gold mining stocks,[3] and KCR’s top 5 gold mining picks within that group. This is not complicated.
The crypto stocks are rank speculations. As a group they continue to incinerate cash and dilute owners, all while offering extraordinarily high betas. How is this not gambling?
In contrast, we present the chart below showing the FCF yield of US & Canadian gold miners. They have rarely looked better. We put the green dot in the chart to annotate where KCR’s gold mining picks sit.
The Dollar Demise: A Quick Reprise on KCR’s Views & Others Far Wise
Knowing our limitations, KCR remains mostly mute on macro forecasts. Yet we are not afraid to lay the unforgiving facts about the world’s reserve currency and its treatment on the table. We produced a chart showing the purchasing power of a dollar since 1792. The collapse in the post-WWII years has been nothing short of horrific.
We have since written Inflation is Taxation without Legislation or Representation and Flush With Cash & the Quick Swing in Sentiment. Both pieces highlighted how ruthless financial repression has been an open policy goal since 2015. Those pieces also put empirical proof to the very uncomfortable fact that dollar destruction post the GFC was worse than in the 1970s. Very few people seem to understand this.
If you are looking to speculate on stocks that mine or traffic in crypto, we wish you luck. KCR will take a hard pass. In contrast, there are profitable stocks that may have operating leverage to the oldest store of value (gold). KCR believes that the US dollar will continue to be debased over time. We are not suggesting these mining stocks are the best hedge against this relentless trend, merely that they appear to be far better fodder for serious investors than crypto stocks.
Immediately below our “Notes of Thanks,” you will find a list of the crypto stocks we have panned and the gold miners we have picked.
A Note of Thanks
We recently read the outstanding Stagflation 2.0: In Gold We Trust by the wonderful folks at incrementum. The piece offers a sweeping review of the history of gold, currency, foreign exchange reserves, and myriad other topics. For those concerned about protecting their purchasing power, we cannot recommend the work strongly enough. KCR will be featuring some of their work in our upcoming piece.
We would also like to highlight the always erudite Michael Liebowitz, who wrote a brief two-part series on why replacing the dollar is no easy task. We find it unfortunately unsurprising that in his thoughtful defense of the dollar standard, Michael does not hesitate to remind us that “the dollar is following the doomed path of other currencies.” We’ll close with a wonderful chart from his missive showing the evolution of reserve currencies since 1250! Wishing everyone a wonderful weekend – stock lists below!
