Gold prices extended their year-to-date gains in August after the early month sell-off. The asset class has been outperforming assets such as Japanese equities and global technology stocks, which led declines following a softer US jobs report, but quickly recovered in the subsequent weeks when better economic data restored investor confidence.
Renewed risk appetite has yet to pare back the rally in gold.
The yellow metal continues to trade near its all-time highs amid ongoing geopolitical uncertainty and a tightly fought US election, underscoring demand for the traditional safe-haven asset. Besides investors, major central banks have also accumulated physical bars at record levels to mitigate against foreign exchange uncertainties, supporting gold’s value.
While gold maintains its shine, digital assets have struggled amid renewed risk sentiment. Traders are bracing for another catalyst as central banks cut interest rates, which is normally a boon for alternative assets as opportunity costs fall. However, digital assets haven't returned to heights seen in a rally in late July when former US President and Republican presidential candidate Donald Trump floated a proposal for a sovereign Bitcoin Reserve.
The appeal for safe-haven investments stems from a low, or near-zero correlation to traditional assets amid market headwinds. However, cryptocurrency’s correlation with risky assets tend to rise during volatile periods, according to Inki Cho, a financial market strategist at Exness, an online multi-asset broker, speaking to FinanceAsia.
This contradicts what investors strive to achieve. “For Bitcoin (or any asset) to be considered a safe-haven entity, it must demonstrate its stability during high volatility and resilience during downturns,” Cho says, adding that cryptocurrencies could exacerbate losses when market sentiment is fragile.
Re-shifting, not removing, portfolio risk
Crypto's comparison to physical gold arises from common investment traits, including the absence of dividend payments and its concept of finite supply. However, as the market braces for volatility ahead, the behavioural differences will become more obvious, according to experts like Alex Bechtel, head of digital products strategy at DWS, answering questions from FA.
Bechtel characterises cryptocurrencies, such as Bitcoin and Ether, as risk-on assets, but emphasises that too much focus is placed on daily price movements rather than the industry’s developments.
The safe-haven story needs to have a transmission mechanism, and that comes with time, Bechtel explains. “Bitcoin has been around for less than two decades, while gold has been used as a store of value for thousands of years. As Bitcoin matures and becomes more widely accepted, volatility should fall, then taking on a role akin to gold.”
Digital currency developments remain ongoing. Back in May, the US Security and Exchange Commission (SEC) approved rule changes for spot Ether ETFs after spot Bitcoin ETFs were permitted back in January. Crypto ETFs have allowed investors to take direct ownership of the virtual assets via publicly traded funds rather than managing a digital wallet.
In the interim, it is not about reducing risk but re-shifting the components of it. Bechtel suggests that Bitcoin and Ethereum can play a role in the asset allocation process for well-diversified investors, arguing that a small exposure in Bitcoin could improve a fund’s Sharpe Ratio, a metric that evaluates a portfolio’s return for taking on additional volatility when holding a riskier asset.
In the upcoming months, there is a likelihood that investors will shift their attention towards those indicators as the market adjusts to a new phase of lower interest rates. The US yield curve is no longer inverted, turning positive for the first time since 2022, as investors determine how much the Federal Reserve will lower interest rates against softening growth expectations.
Unlike dividend-paying assets, physical gold's allure lies in its ability to retain its purchasing power, one that crypto advocates believe digital currencies will one day share. Effective regulation to mitigate against possible fraud and market manipulation are vital steps towards maturing Bitcoin into a safe-haven asset, as investors become more comfortable with decentralised currencies, Exness’ Cho says.
DWS’ Bechtel added that Bitcoin’s volatility has been trending lower but admits gold may continue to be the preferred safe-haven choice. In 2023, the People’s Bank of China was Asia’s largest central bank buying gold, followed by Japan and India.
Against a backdrop of investors trying to diversify amid a lacklustre performance in other classes, gold may continue to shine against digital assets counterpart, observed Bechtel .
