Favourable commentary of Gold as a safe-haven in today's Aus (discussion also in the AFR)
Gold beats bitcoin hands down as defensive asset
A battle for the hearts and minds of worried investors between gold and bitcoin looks to be over before it starts as gold hits its highest level since June last year.A lift in gold prices – testing $US1900 an ounce, its highest level since June – has been triggered by Russia’s threats to invade Ukraine. But a wider move reflects it traditional role as a hedge against rising inflation.
Meanwhile, bitcoin’s claims to being digital gold look to be undermined by the substantial fall in its price – it is down by a third over 12 months to trade just below the $US40,000 mark.
Behind those diverging charts is an accumulating body of evidence that gold is no longer facing competition from cryptocurrencies as an alternative for investorsRather bitcoin and its cryptocurrency cousins are evolving as what the International Monetary Fund describes as risk assets. As an IMF report recently suggested: “Stronger correlations suggest that bitcoin has been acting as a risky asset. Its correlation with stocks has turned higher than that between stocks and other assets such as gold, investment grade bonds, and major currencies, pointing to limited risk diversification benefits in contrast to what was initially perceived.”
In other words, cryptocurrencies will rise and fall with the sharemarket. This is not what gold offers investors – it does the opposite, and can lift when markets sell off during times of crisis.Though the patterns are far from perfect, the historical record is compelling – gold has outperformed consistently when inflation rises throughout recent history.
Moreover, gold prices have gained through almost every major financial crisis back to dotcom crash two decades ago.For Australian investors a key window into gold moves has become activity within gold-based exchange traded funds. The best known pure-play fund is the ETF Securities Physical Gold fund where trading inflows are running ahead of 2021 on a year-to-date basis. The fund is also showing positive returns over every time period: 4 per cent over a month, 15 per cent over a year. Kanish Chugh, head of distribution at ETF Securities, says: “Our view is that bitcoin has merits as an investment. It’s a growth alternative. However, it is unlikely to function as a substitute for gold. Bitcoin is much riskier than gold and rarely regarded as a safe-haven. Gold is clearly a defensive alternative.”
Following the IMF’s effective dismissal of bitcoin as a gold alternative, some of the world’s biggest investment banks have chimed in with similar observations.As Katie Stockton from US research house Fairlead Strategies puts it: “We should categorise bitcoin and altcoins as risk assets rather than safe havens.”Still, bitcoin’s failure to challenge gold on its first major crisis test since the Covid-19 pandemic – when it showed its first clear signs of being correlated to the sharemarket – does not mean it can’t act as a store of value, according to Goldman Sachs.It recently noted the cryptocurrency has an estimated 20 per cent share of what it calls the “store of value” market.Meanwhile, Russia remains a key player in the gold market after it doubled its reserves in the wake of its own financial crisis in 1998.
The IMF says Russia is the seventh-biggest holder of gold in the world (China is first).And whatever it may be doing in bitcoin, Russia keeps buying gold – a report on activity among central banks for the third quarter of 2021 shows Russia had the fifth-biggest increase in gold over the period picking up six tonnes, just in time for the lift in prices.
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