Krishan Gopaul, a senior analyst at the World Gold Council, writes about how cryptocurrencies such as bitcoin have made it a tumultuous year for gold.
The rapid ascent of cryptocurrencies, particularly bitcoin, has been another topic which has drawn the attention of investors over the past year. Cryptocurrencies have emerged as a useful high beta asset, bringing both the potential of huge returns, and the risk of huge volatility.
In the last year, some have tried to draw comparisons between gold and cryptocurrencies due to their limited supply and perceived role as alternatives to fiat currencies. Nevertheless, we – and a material proportion of the investment community – see the two as fundamentally different asset types and have different roles to play in risk-adjusted portfolios.
Cryptocurrencies are a relatively new asset. At present, demand is predominantly driven by price speculation, and as a result, the price volatility is high. On the other hand, gold has a track record of preserving wealth over thousands of years and has been proven to help improve risk-adjusted returns. Therefore, investors holding cryptos should consider the complementary role gold could play to hedge against this volatility in their portfolio.
All of the above have combined to make it a tumultuous year for the gold industry. However, it has been a year which has stress tested many of the benefits of the asset class and, as a result, burnished its reputation.
Looking ahead, we see reasons to be optimistic about gold. Our analysis has shown that gold’s performance is determined by the interaction of drivers from four key categories: economic expansion, risk and uncertainty, opportunity cost, and momentum.
Bearing this in mind, we feel the investment demand for gold should remain well supported. In particular, many investors will have a need for hedges in the face of rising inflationary pressures and lower interest rates; and many of today’s risks will not immediately abate. For these reasons we do not see the shine coming off gold soon.
Krishan Gopaul is senior analyst for Europe, Middle East, and Africa at the World Gold Council.
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