Are Bitcoin and Gold the Safe Haven Assets of 2021?
Updated: Jan 4, 2021
Investment management consultant MATTHEW FEARGRIEVE considers whether conditions are set for Bitcoin and Gold to enter into a lasting symbiotic relationship to attract flight capital and increased mainstream investment in 2021.
Readers of this blog will be familiar with the impressive rise over 2020 of that bellwether of market stability, gold. The price of gold broke through a record high of US$2,000 per ounce in August as investors rushed into the precious metal and other safe haven assets amid concerns about Sino-US tensions, a spike in virus infections around the world and a lack of political progress in Washington on a Fed stimulus package bill.
A weak dollar in the middle of the year, with the greenback being down against most other currencies, was a key catalyst for the metal's advance, which was also boosted by its attractiveness as a haven in times of turmoil with China-US relations souring daily.
Meantime in August, Bitcoin hit a peak of its own, pushing through US$12,000 against the US Dollar for the first time in 2020 and its best effort since the previous high of 2018.
Fast forward to November. Following months of healthy rallies across equity markets - fuelled by trillions of dollars in government and central bank support - traders were beginning to step back as they weighed the long-term economic impact of the Covid-19 pandemic. Markets were buoyed by vaccine hopes and Biden's victory in the US presidential elections. As investor hopes swelled for a market recovery, gold correspondingly dipped to its lowest price since April. Gold has lost about 10% from its all-time high in August.
This was in stark contrast to Bitcoin, which hit an all-time record high of US$19,510 in mid-November, before being pushed through a jaw-dropping US$23,000 in December by hedge funds and institutional allocators. Some commentators are forecasting US$70,000 to US$90,000 as a "realistic target" for Bitcoin by Christmas 2022.
Increased public appetite for Gold and Bitcoin
Notwithstanding these market fluctuations both assets have had a good year. The Black Swan of Covid-19 has seen high-value flight capital boosting the price of both gold and Bitcoin. And their value dips do not appear to have diminished the enthusiasm of retail investors. In October, UK branches of US wholesaler Costco, known for its "pile-’em-high, sell-’em-cheap" philosophy, offered bars of the precious metal for up to £24,500 apiece. Watchdogs at the Financial Conduct Authority in the UK were busy warning retail investors of the danger in investing in unregulated assets such as physical gold.
And readers of this blog will remember my surprise at seeing an advertisement on the London Underground in December, declaring "When you see an Advert on the Tube for Bitcoin, you know it's time to buy". As I opined earlier, the problem I have with this advertisement is that small investors need to be aware that the big guys always hype a product that they want to shift at inflated prices to the retail public. (So, personally, I am naturally conservative when its comes to Bitcoin). And the investing public also needs to be aware that gold is an investment product whose value can move up and down quite markedly, just like stocks and shares.
Hedge funds and institutional investors pile into Bitcoin
Bitcoin hit an all-time high this week as more and more hedge funds and mainstream institutional investors piled in. In a remarkable week during which it rose almost 30 per cent, the world's best known cryptocurrency jumped to a record high of US$23,770, representing a parabolic surge of 222% since the start of the year.
This mega price hike caused me more than a little surprise. Having previously blogged my view in November that Bitcoin's rally was over, I had to concede this month that, unlike 2017, this time things are different. This time, the cryptocurrency's climb has not been sustained as it was in 2017 by speculation and interest from casual investors. Rather, the surge is attributable to interest from institutional investors, who increasingly see Bitcoin as equivalent to gold at a time when central banks continue to pump billions into economies across the world.
There are fears that recent large-scale monetary easing will result in traditional currencies losing their value and a spike in inflation, and Bitcoin is seen as a way to protect the value of their investments. As, of course, gold has always been in times of market stress and inflation.
Ruffer invests in Gold and Bitcoin
Ruffer, a UK-based investment management company with more than £20bn in assets under management, strategically straddles both gold and Bitcoin opportunities. Whilst Paul Kennedy manages the £1bn LF Ruffer Gold Fund, which was already doing well before covid and has since had a great 2020, the company has allocated some US$675m (£550m) to Bitcoin, in one of the biggest signals of growing demand among mainstream managers, in a move designed to diversify Ruffer’s portfolios into gold and inflation-linked bonds and to hedge some of the perceived risks in a fragile monetary system and distorted financial markets.
A manager at Ruffer says: "Many institutions are using Bitcoin to cover tail risk of currency debasement and inflationary pressure, triggered by the recent large-scale monetary expansion".
He could have been talking about the perfect economic conditions for gold. So can gold and Bitcoin be harmonious bedfellows as safe have assets in 2021 and beyond?
What is the situation with gold right now?
The recent dip in the per-ounce price of gold reflects the increased optimism that the introduction of vaccines have had in Q4, together with the change of US President, with markets reacting favourably to the incoming Biden administration.
Gold prices therefore seems likely to take a breather while the roll-out of vaccines and lockdowns are eased. There is however still support for gold prices. The dollar is weak right now and that tends to boost gold prices as it becomes cheaper to foreign-currency buyers. Additionally, interest rates remain very low and inflation, while ticking higher, still sits below historically normal levels. This reduces the opportunity cost of holding gold.
Gold and Bitcoin: 2021 and beyond
Demand for Bitcoin is continuing to outstrip supply and institutional investors continue to seek exposure to the cryptocurrency as a hedge against inflation. If this trend continues over 2021, then Bitcoin's price sustainability seems assured. Such an economic environment will be conducive to gold prices, also. So can gold and Bitcoin co-exist harmoniously as safe haven assets?
In a previous blog, we noted that Bitcoin's position relative to gold as the traditional bellwether of market volatility has become increasingly more interesting as the pandemic has progressed. Notwithstanding the (seemingly inherent) volatility of crypto, some institutional investors were early on showing signs of treating it as a bedfellow of, or alternative to, gold as a safe-haven asset, according to a report by JPMorgan, a trend that was seemingly not been discouraged by the 50% slump in Bitcoin's value in March. It will be interesting to see what impact the recent price surge will have on this school of thinking, but the stage seems set for Bitcoin to enjoy an added dimension as "safe haven asset".
Enter Goldman Sachs, who have reassured their clients that Bitcoin does not pose an existential threat to gold, (Bloomberg reports 18 Dec): "We do not see evidence that Bitcoin’s rally is cannibalizing gold’s bull market and believe the two can coexist". Goldman did, however, admit that Bitcoin’s ongoing rally could steal some demand from gold investors: "Gold's recent underperformance versus real rates and the dollar has left some investors concerned that Bitcoin is replacing gold as the inflation hedge of choice. While there is some substitution occurring, we do not see Bitcoin’s rising popularity as an existential threat to gold’s status as the currency of last resort".
This, from Goldman Sachs, is clearly significant. The traditional move in markets as tumultuous as 2020's would be to hedge against stock volatility with gold. This has proven an effective method in the past, but Bitcoin has ushered in a new era of digital currencies. As the leading cryptocurrency, Bitcoin has many of properties of a currency, but with some unique features that can make it a viable haven.
How does Bitcoin stack up against Gold?
Let's compare the salient characteristics of gold and Bitcoin.
Security. It is difficult to steal gold, to pass off fake gold or to otherwise corrupt the metal. Bitcoin enjoys similar in-built defences, due to an encrypted, decentralized system and complex algos. That said, several years after the Mt. Gox incident, some investors are sill wary about the soundness of the cryptocurrency's operational underpinning.
Value. Gold has historically been used in many applications, from luxury items like jewellery to specialized applications in dentistry, electronics, and more. In addition to ushering in a new focus on blockchain technology, Bitcoin itself has tremendous baseline value as well. Billions of people around the world lack access to banking infrastructure and traditional means of finance like credit. With Bitcoin, these individuals can send value across the globe for close to no fee. Bitcoin's true potential as a means of banking for those without access to traditional banks has perhaps yet to be fully developed.
Liquidity. Both gold and Bitcoin have very liquid markets where fiat money can be exchanged for them.
Volatility. One major concern for investors looking toward Bitcoin as a safe haven asset is its volatility. We need only look to the price history of Bitcoin since 2017 for evidence. Clearly, the parabolic surge in Bitcoin prices in Q3 and Q4 2020 have allayed the concerns of many institutional and retail investors; but many investors, big and small alike, will be wondering if a 2017-style slump is lurking around the corner, particularly if mainstream asset values stabilise in line with the hoped-for economic recovery beginning in 2021.
Bitcoin has historically proven itself to be subject to market whims and news. Particularly as the cryptocurrency boom swept up a number of digital currencies into record-high prices around the end of 2017, news from the digital currency sphere could prompt investors to make quick decisions, sending the price of Bitcoin upward or downward quickly. This volatility is not inherent to gold, making it arguably a safer, safe-haven asset.
In recent years, a number of alternative cryptocurrencies have launched which aim to provide more stability than Bitcoin, some linked with the U.S. dollar in much the same way that gold was prior to the 1970s. A challenge that may lie ahead for Bitcoin, as a first-mover, is the attractiveness that these competing cryptocurrencies may enjoy as a product of Bitcoin's rise, particularly for investors looking for a safe haven asset with lower intrinsic volatility.
You can read my personal finance blog about buying and selling Bitcoin and gold in 2021 here.
Matthew Feargrieve is an investment management consultant. You can read his blog here and see his Twitter feed here.