The precious metals space has been challenged with a new asset class whose popularity, like its price, continues to gain momentum. Of course, we’re talking about cryptocurrencies. The fact that we continue to see cryptocurrencies gain both widespread appeal and price gains have dumbfounded many commentators who struggle to apply any traditional metrics of valuation or rationale to their price. As the hysteria rages on and the initial outlier investment attracts new participants by the day, its worth discussing the misconceived link of bitcoin or other cryptocurrencies taking over the haven appeal of precious metals.
The link to gold and other precious metals is a weak one, and for one reason. Simply, gold prices in US dollars are behaving as expected at present time. The same can not be said for cryptocurrencies. As many in the media or proponents of the new investment space have tried to portray that cryptos like bitcoin are taking the place of gold, they are missing a key distinction. Gold and precious metals are assets whose prices are predominantly driven by the sentiment and comfort level of the stability of the global economy and certain financial markets. It also historically exhibits an inverse relationship to the worlds reserve currency. The US dollar index is down 8.1% year to date, and gold is up 9.5%.
As we end 2017 and we begin to receive outlook and commentary for 2018, there seems to be a common place theme. A coordinated global economy will continue to gain momentum in 2018. This will lead western central banks to continue to raise interest rates. The US Federal Reserve just this past week anticipates three rate hikes in 2018, and at this point in the economic cycle raising rates in coordination with stronger growth, its not anticipated to hinder the economy just yet and is not anticipated nor stunt the equity markets. Add into the mix an expected US corporate tax cut, and we have an environment supportive of the worlds reserve currency, the US dollar. Unfortunately, that scenario doesn’t scream higher gold prices.
Alternatively, the only thing driving the price of cryptocurrencies currently is an onslaught of demand fueled by individuals looking for a quick return. Furthermore, this isn’t an attack on the idea of digital currencies and the role or potential they could play in a fast evolving and technology driven global economy, but the price stability and role as a safe harbour for capital is misguided and misrepresented. For a currency to evolve or for utility to be created from this popularized asset, it must exhibit some stability, which it has failed to do. Additionally, an asset that appreciates this quickly purely on increased demand is vulnerable to the same move to the downside.
We are not calling for an end to the rally in cryptocurrencies, or even suggesting that those who have participated in it are ill-informed. Its commendable to the numerous initial investors that were in front of this trend and profited massively from being ahead of the curve. That said, an asset that appreciate 17 times year to date in Canadian dollars, and that figure will be different depending on when this is read, highlights more of a craze driven rally than safe-haven. To circle back to precious metals, in these exuberant equity markets an uncorrelated proven safe-haven like gold continues to serve a key role in any diversified portfolio. But to the question of gold or bitcoin, that’s up to the investor, but there’s no reason its one or the other given they’re distinctly different in nature.