Gold Comes Roaring Back (at Bitcoin’s Expense)
Just 15 months ago, pundits were predicting that bitcoin had matured into its own separate asset class from stocks, bonds, and other traditional investments. At the same time, conventional stores of value like gold simply couldn’t keep up with the price momentum of bitcoin and other cryptocurrencies.
Indeed, Bloomberg Quint published an article in December 2020 entitled, “Bitcoin’s Rally Spurs Wall Street to Question Future of Gold.” It pointed out that many investors had cashed in their gold holdings for bitcoin. Numerous hedge funds and family offices had done the same.
In the last few weeks, though, the momentum has begun to shift, with bitcoin prices down sharply and gold prices soaring. Since bottoming out at $1,791.60 per ounce on January 30, gold closed at $1,903.20 on February 21. That’s a 6.2% move in only three weeks.
Meanwhile, bitcoin prices have been all over the place. After spiking to an intraday high of $67,673.74 on November 8, bitcoin ended 2021 at $46,306.45; a loss exceeding 30% in only a few weeks. Bitcoin prices continued to decline throughout January, until hitting an intraday low of $36,832.73 on February 2. And while bitcoin rallied to an intraday high of $45,661.17 on February 10 but closed at $38,126.31 on February 21.
We confess to not knowing if bitcoin is (or should be) its own asset class, although we’re awed by its price momentum since it first came into existence in 2009. Indeed, bitcoin prices soared 303% in 2020 and nearly 60% in 2021, even after losing almost one-third of its value in the last few weeks of the year.
Other cryptocurrencies performed even better than bitcoin. Ethereum, for instance, a foundational cryptocurrency in the booming decentralized finance (DeFi) industry, appreciated 469% in 2020 and 399% in 2021.
We also must acknowledge that the near-term performance of gold hasn’t come anywhere close to that point. For instance, gold prices actually fell nearly 4% in 2021.
However, gold’s price volatility has been nowhere near as extreme as bitcoin’s. For instance, if you bought gold at its all-time high of $2,032.16 in August 2020, the value of your investment would be down only about 6.4%. On the other hand, if you bought bitcoin at its all-time high, you’d be out by 43.6%.
Furthermore, we must concede that we don’t know why in recent weeks gold has outperformed bitcoin. It could be, as in late 2020, that hedge funds and family offices are again rotating assets, but this time from bitcoin into gold. The fact that Russia has 190,000 troops poised to invade Ukraine certainly could be a factor. As well, with inflation rocketing skywards at an official rate exceeding 7%, gold could be coming back into fashion. (Unofficially, as we’ve pointed out, the real inflation rate is at least double the Consumer Price Index.)
Still, while it’s no longer fashionable to say it, unlike bitcoin or any other cryptocurrency, gold has a 5,000-year track record of protecting wealth. What’s more, cryptocurrencies, being a digital asset, are uniquely vulnerable to anything that could knock the internet or the electrical power grid offline. And that could occur in a matter of minutes in a cyberattack, solar flare, or weather-related blackout.
Undoubtedly, cryptocurrencies represent a revolutionary development in money, especially those like bitcoin that can be traded with no central authority or middleman. And their price performance has been too impressive to ignore.
The problem is that we don’t know which cryptocurrency (if any) will turn out to provide a long-term store of value. Nearly 10,000 of them now exist, according to Coinmarketcap.com. And unlike gold, anyone with the requisite math skills can create a cryptocurrency in their spare time. Indeed, platforms now exist where you can simply fill out a web form to create one.
Thus, we think of cryptocurrencies the same way we think of tech stocks. Sure, they can go through the roof the way tech stocks did in the 1990s. And they can crash just as fast. But the idea that they will always go up is probably unrealistic and can’t be predicted with any kind of certainty.
We continue to believe that gold, along with the Permanent Portfolio strategy, should be the underpinning of your investment strategy to protect funds you simply can’t afford to lose. Cryptocurrency investments should be viewed as more speculative holdings whose values can erode instantaneously.