Societe Generale with the note. BTC is a ponzi scheme and should always be sold. Sell gold because US real interest rates are about to bottom as inflation falls:
The recent rise in equity indices and commodity prices indicates great progress in putting the COVID-19 crisis behind us. Meanwhile, the vaccine rollout is fuelling expectations that the V-shaped recovery has further to run even beyond the currently strong base-effect-inflated, phase. With more optimistic views on future demand emerging, deflation fears have faded fast,but inflation expectations have surged, with US 10y breakevens at 2.5%, an eight-year high. So,a favourable mix for risky assets, but much less so for fixed-income long maturities.
But if the background is so favourable, why the negative performances in gold and Bitcoin? Both assets are off their respective peaks. Gold is down 16.8% since hitting $2,039/t oz on 11/08/20, although it has admittedly regained 8.4% recently. And at $36,780 on19/05/21, Bitcoin has lost 42.1% since it peaked on 13/04/2. Such negative performances follow much longer periods of positive performance in both cases.
Outshining…Bitcoin has clearly ‘outshone’ gold both to the upside and now also to the downside. But with such a gap in volatility and amplitude, does it make sense to compare the two assets at all? We agreed that investors perceive both as offering protection (or at least alternatives) against official central bank money, the value of which is being undermined by unprecedented monetary and fiscal stimulus. But without a yield of their own, the only potential reward to investors in Bitcoin and gold is from their positive price movement, which is essentially the only thing they have in common, apart from their ability to trigger rush buying.
The role of Bitcoin remains highly contested…It comes as no surprise that the place of Bitcoin in any investment portfolio remains highly contested, precisely because of its erratic price movements. After the latest leg down (and notwithstanding the 74% rise since 8 September 2020 when inflation fears re-emerged) investor enthusiasm must surely have cooled. And under which allocation heading should Bitcoin be classified anyway?
◼ Not a currency. Despite Elon Musk’s teasing, Bitcoin still can’t be used to buy a Tesla.
◼ Not a commodity. The energy transition is increasing demand for rare metals, but not for energy-slurping data centres per see.
◼ Not cash.Bitcoin will not increase your portfolio’s liquidity ratio or help settle your taxes.
So maybe Bitcoin needs to be classified under a new “virtual asset” category of its own, alongside other crypto currencies such as Ethereum and other token assets?
But then the Fed, PBoC and other central banks tend not to appreciate competition from fiat currencies that undermine their monopoly. Regulation may be the biggest threat ahead for Bitcoin…. where as gold’s place in an investment portfolio is much better understood.
While we do not anticipate vast gains, we do assign gold a 5% direct weight in our Multi AssetPortfolio (MAP) to serve as a portfolio stabiliser. In the event of rising inflation, gold can partially offset capital losses on bonds. Also, in the event of runaway inflation (not our expectation) or a return to deflation (not our scenario either, but arguably still central banks’ biggest fear), gold has a protective role in partially offsetting losses on equities.
History shows that over time the price of gold closely tracks real bond yields (Chart3). Also, the price ratio of copper (the most cyclical metal) to gold (the most defensive) has proved a neat model for anticipating higher US Treasury yields (Chart 4,SGe 2.2%1Q22). Interestingly, gold has risen recently,gaining 8.4% since 9 March 2021.
Given the still high equity weighting in our MAP at 59%, combined with the increasingly loudly articulated and ‘terrifying’ T-word (whisper it-tapering), a portfolio stabiliser in the form of gold makes especially good sense to us. In short, investors do not need to be big believers in a commodities super-cycle; we tend to remain sceptical as a part from opportunities that might arise from base effects and the fleeting impact of replenishing inventories, there is little reason for investors to take much interest in precious metals.
