It’s no surprise that investors are looking for a safe haven at the start of 2019.
As the year rolled in, it brought with it fears of a global economic slowdown. Markets and commodities have begun to feel the weight of the U.S-China trade fallout, the tightening of the Federal Reserve belt, the oil supply glut and an end to the ECB’s quantitative easing measures.
The debate is now whether to invest in cryptocurrencies or gold as a safe haven, with demand for riskier assets declining on the back of weakening liquidity in the market.
The case for gold
Gold hit a seven-month high earlier this week as investors braced for upcoming tech earnings in addition to geopolitical and economic storms. In December 2018, gold peaked at a two-year high welcoming chart-based buying interest after drop in the U.S. 10-year bond yields and major currency fluctuations. The continued unwinding of decades-long central banks’ stimulus packages are expected to take their toll and create a surge in gold investments.
“We expect to see continued demand for gold as investors once again seek tail-end protection against increased volatility and uncertainty across asset classes. Hedge funds only turned long gold in early December after having traded it from the short side for six months. This pickup in demand together with a continued accumulation from long-term investors through exchange-traded funds should provide enough support for gold to break higher towards the key area of resistance between $1,360 and $1,375 per ounce where consecutive highs were set between 2016 and 2018,” said Ole Hanson, Head of Commodity Strategy, Saxo Bank.
Currently, February futures are up $5.6 per ounce at $1,308.6. This shows that traders and investors are still nervous about mixed European, Asian and North American markets.
The charges filed against Chinese tech company Huwaei, which some view as a fallout of the U.S.-China trade war, coupled with the uncertain geopolitical situation in Venezuela are adding to investor worries.
The U.S. Federal Reserve, which has been dancing between a hawkish and a dovish stance, and the UK Parliament’s lack of Brexit clarity have all contributed to raised investments in gold as a safe haven.
Cryptocurrency melts under pressure
While on one hand, renewed uncertainty in global stocks increased demand for gold, on the other hand, cryptocurrencies demonstrated vulnerabilities.
In the fourth quarter of 2018, “as global stock markets experienced their worst quarter since 2009, cryptocurrencies had a prime opportunity to demonstrate qualities associated with havens like gold. However, cryptocurrencies, such as bitcoin, behaved like risky assets and fell while gold rallied,” according to a report by UK-based World Gold Council.
Bitcoin, the global leader in cryptocurrency has been trading below $4,000 in 2019, which is a massive drop from its historic high of $20,000 in 2017. The cryptocurrency’s weakening liquidity has also had a snowball effect on the value of other cryptocurrencies as a store of value. This was confirmed in KPMG’s November 2018 report, which clearly stated that Bitcoin was not a store of value.
In conversation with Bloomberg, John Normand, the head of JP Morgan’s cross-asset management said that gold was a better hedge than Bitcoin since July 2010. Despite the cryptocurrency reaching surprising highs in 2017, gold has proved to be a safe haven six times during the S&P too 10-worst months, while Bitcoin posted positive returns only thrice.
Traders and cryptocurrency enthusiasts, however, believe that Bitcoin is not a viable hedge yet and needs to witness more cycles before it can be compared or correlated with gold. If a uniform legal framework is built for cryptocurrencies by global regulators, investors could become more open to adding it to their portfolios.