As negative-yielding debt has begun to soar again, gold has caught a bid, but cryptos have been unable to rebound...
And while Bitcoin has been hit recently (back below $33k)...
It's Ethereum that has taken it on the chin overnight (ahead of its imminent fork)...
And while Goldman prefers Ether to Bitcoin (as risk-on devaluation bets), "Gold is a value buy" according to Goldman Sachs' Jeff Currie and his Commodities Research group.
As a result of the recent liquidation of inflation tail risk fears, Goldman argues that gold is now again pricing a Goldilocks scenario of moderate inflation and continued global recovery and is thus trading at a large discount to the current real rate.
They estimate that the current gold price is consistent with a real rate of +10bps, dramatically different from the -87bps that is currently priced by the market.
However, in a scenario where the global economic recovery does not play out as expected or inflation begins to move materially above expectations, Currie sees material upside to gold given its undervaluation and low allocation from the investment community. Specifically, Goldman suggests that gold may be a good strategic purchase here for portfolio managers looking to hedge against tail risks of macro volatility.
Even more bullishly, Goldman notes that if confidence in a global recovery were to be reversed either by a larger-than-expected growth slowdown or a new virus mutation, gold would have considerable room to catch up to the current level of real rates and its dollar implied price of $2,200/toz.
For gold to outperform, Currie and his team suggest an increase in inflation has to be met by a relatively moderate reaction by the Fed, one which the market deems insufficient to cool inflation expectations. In such an environment, gold is likely to disconnect with 10-year real rates and become more sensitive to inflation expectations.
Putting that in context, they argue that if inflation continues to run at 4% and markets start to view this as more permanent, our gold to inflation relationship points to 40% upside from current levels.
With that in mind, we view gold as a relatively cheap debasement hedge offering modest upside in our base case scenario but potential to rally significantly in the event the global recovery is hampered or inflation picks up strongly and the Fed under-reacts.
Both scenarios would likely hurt risk sentiment and incentivize a shift to more defensive assets.
In our view, this implies gold can outperform cryptocurrencies, which we view as more risk-on inflation hedges.
Overall we see crypto still far from becoming a defensive long-term store of value like gold.
And confirming their previous discussion on crypto, where they proclaimed Ethereum as "The Amazon of trusted information" and likely to overtake Bitcoin, concluding that ethereum is the platform that solves economic problems here and now, while bitcoin is "a solution looking for a problem."
Today, Currie lays out the case once again, but prefers precious metals to digital currencies for now...
Together with gold, cryptocurrencies came to be seen as hedges against excessive money printing by governments. Some, like Bitcoin, have fixed supply, while others, like Ether, have limited supply growth. This, together with some regulatory & infrastructure improvements, fueled a large rally in crypto at the end of last year exactly as gold began to underperform, leading to concerns that crypto is pushing out gold.
Things changed over the past three months as gold rebounded while the crypto rally came to an abrupt halt. This then led to the opposite view that flows have reversed and are coming out of crypto and back into gold.
In our view, gold is competing with crypto to the same extent it is competing with other risky assets such as equities and cyclical commodities. We view gold as a defensive inflation hedge and crypto as a risk-on inflation hedge. Indeed, looking at Bitcoin vs gold ratio, one can see that it is correlated with the performance of our strategy team’s risk sentiment indicator.
Therefore, to understand whether Bitcoin or some other crypto currency will work as an inflation hedge, one has to ask what effect high inflation will have on overall risk sentiment. Our strategy team notes that high inflation may negatively impact market sentiment. As such, we have concerns over whether cryptocurrencies will be able to perform well in this environment.
The major reason why crypto so far remains a speculative asset and not a defensive inflation hedge like gold is its high volatility. For gold, the volatility is smoothed due to the presence of a large non-investment demand component. In our view, development of some alternative non-investment uses would also help crypto decreases its volatility and therefore become more appealing as stores of value.
Within the crypto space, Ether currently looks like the cryptocurrency with the highest real use potential as Ethereum, the platform on which it is the native digital currency, is the most popular development platform for smart contract applications. We would therefore not be surprised if in coming years Ether, or some other cryptocurrency with more real use, overtakes Bitcoin as the dominant digital store of value.
This competition among cryptocurrencies is another risk factor that prevents them from becoming safehaven assets at this stage.
So buy gold... and if you need to buy crypto, favor ETH over BTC.