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Why The Gold Rush Ran Out Of Steam

Why The Gold Rush Ran Out Of Steam

Last year proved to be a gold speculator and investor’s dream after gold prices rallied hard to hit historical highs thanks to a perfect storm of  a global pandemic, massive government stimulus packages, weakening dollar and a stock market bull run that had finally run out of gas. The torrid rally represented the sharpest gain the metal has mustered in more than a decade, with gold prices nearly doubling between August 2018 and August 2020.

Unfortunately, the rally has lately run out of steam, with gold prices pulling back 15% since their all-time high of $2,066 per ounce about eight months ago.

This has come as a major disappointment for gold bulls, with some Wall Street hedge funds having been extremely bullish on gold, with some eyeing prices of $3,000 and even $5,000 per ounce.

The gold downtrend begs the question: Why has gold suddenly fallen out of favor after such a spectacular run? And more importantly, is there a way back for the yellow metal?

Vaccine optimism

A big reason why the gold bears have been gaining an upperhand is due to growing optimism that the global Covid-19 vaccine rollout will help many economies return to a semblance of normalcy sooner than expected.

For instance, in its April update of the World Economic Outlook, the IMF upgraded its forecast for global GDP growth for 2021 and 2022 to +6% and +4.4%, respectively, thanks mainly to the country's the countrys’ swift vaccine rollout and hefty stimulus packages. That is a big turnaround from a contraction of 3.3% in 2020 when the world was hit by pandemic.

The United States has so far unveiled the world’s fastest vaccine rollout as per Bloomberg, placing itself in a good position for a full re-opening of the economy. The latest vaccination rate stands at 3,053,566 doses per day, meaning it could cover 75% of the population, or the so-called herd immunity number, in just three months.

Generally, the global rollout is progressing at an admirable clip despite the presence of numerous hiccups. As of 14th April 2021, 841 million Covid-19 doses had been administered globally. That equates to 11 doses for every 100 people, though a stark gap remains between vaccination programs in different countries, with many yet to report a single dose. Seychelles leads all countries with 68% of its population having been vaccinated while the figure stands at 37% in the United States.

A vaccinated person refers to someone who has received at least a single dose of a vaccine.

With the pandemic risk becoming increasingly subdued, safe haven investors might be losing interest in gold.

Bitcoin safe haven

But even more devastating for the bulls is that investors appear to be turning to bitcoin as the new safe haven.

Back in September, alternative investment firm iTrustCapital reported doing brisk business at a time when the stock markets were floundering.  iTrustCapital, the leading investment platform for alternative assets including cryptocurrencies and gold, said it had completed more than 10,000 transactions so far in the year with the majority coming from investors moving their 401(k) and IRA retirement accounts from traditional securities such as stocks and bonds to alternative investments like Bitcoin.

Over the past few years, the digital currency has become a hot favorite for a motley crew of exotic quants, speculative pros and retail players, while traditional investors have tended to remain on the sidelines. But that appears to be changing with institutional investors such as Guggenheim Partners LLC, Paul Tudor Jones and Stan Druckenmiller lately jumping into the Bitcoin bandwagon.

Indeed, JPMorgan Chase & Co has reported that smaller funds have been steadily selling their gold ETFs and buying Bitcoin. Funds have sold nearly 100 tons of gold worth some $5 billion since early November at a time when Grayscale Bitcoin Trust, the preferred vehicle for institutional investors, has seen its value double in dollar terms.

Even Millennials now favor Bitcoin over gold

As former commodities hedge fund manager Jean-Marc Bonnefous has noted, gold was the leading safe haven of the past world and baby boomer generation but is now being replaced by automated assets like Bitcoin.

A recent global survey by deVere, one of the world’s largest independent financial advisory and fintech organisations, has revealed that millennials really do prefer bitcoin to gold as a safe-haven asset.

In the deVere survey, more than two-thirds (67%) of the 700+ millennial respondents said that they think Bitcoin simply is a better safe haven compared to gold.

According to de Vere: “From Ancient Egypt onwards gold has always had immense value and has long been revered as the ultimate safe-haven. It’s always been a go-to asset in times of political, social and economic uncertainty as it is expected to retain its value or even grow in value when other assets fall, therefore enabling investors to reduce their exposure to losses. But, as this survey reveals, Bitcoin could be dethroned within a generation as millennials and younger investors, who are so-called ‘digital natives’, believe it competes better against gold as a safe-haven asset.”

A big reason why Bitcoin is winning over gold is due to better transparency.

With Bitcoin, all transactions can be viewed and verified on the blockchain whereas gold is kind of like a blackbox whereby investors have to rely on the custodians to learn anything about inflows and outflows into the market.

Gold Could Suffer for Years 

JPMorgan is one of the growing number of Wall Street who are turning bullish on Bitcoin’s future prospects.

 

Indeed, JPM has predicted that the rotation from gold to Bitcoin is only going to gather momentum, meaning gold could be in the dog house for years.

 According to the bank’s quantitative strategist Nikolaos Panigirtzoglou:

“The adoption of bitcoin by institutional investors has only begun, while for gold its adoption by institutional investors is very advanced.” 

Not everybody is sold on the Bitcoin-is-better-than-gold theme though.

Sanford C. Bernstein strategist Inigo Fraser-Jenkins says there’s room for both assets, especially if inflation and debt start getting out of hand.

Plurimi Wealth LLP’s Chief Investment Officer Patrick Armstrong notes that gold also has a long history as a store of value that Bitcoin simply can’t match, not to mention the ever-present risk of a central-bank backed, digital currency supplanting the leading crypto.

Bitcoin remains far more volatile than gold, a risk factor that has kept mainstream investors at bay. However, the upside potential for Bitcoin could be huge if the developing trend truly takes off considering the gold market is about 30x bigger than Bitcoin’s.

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