Even as Bitcoin Price Surges Past All-Time Highs, Gold Is the Only True Safe Haven
Bitcoin and gold have some major differences, though they can both co-exist in a single portfolio.
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Unlike physical demarcations and deep-rooted cultural and religious differences where there can be no turning back, bitcoin and gold can co-exist as brethren in the precious metal world.
Gold is seen as the safe haven of the two. One cannot fault that perception, as it has been a mature asset class since the 1970s and a prudent choice for asset allocators looking for diversification from traditional equities and bonds, especially during times of crisis and recession. Bitcoin, however, is much newer, fancier and brighter — after all, it's trading only came into existence in 2012. It is the parabolic moves on the way up and its attractive proposition away from fiat currency debasement and toward total decentralization that has attracted its almost cult-like following.
Taking a step back, all precious metals like gold, silver and, honorarily, bitcoin benefit from the same total fiat currency debasement theme. After all, central banks are cutting rates at a time when inflation is still around 3% year over year and showing great signs of stickiness. We also have a bloated central bank balance sheet which will only get larger by multiples as the U.S. government goes on a new spending binge and the only buyer left to soak its debt will be the U.S. government itself.
The future is about more quantitative easing and rate cuts further eroding the purchasing power of currencies. There is no other way. The sad reality is that economists talk about productivity, but every time a crisis hits, we have to print yet another $5 trillion or so to jumpstart the economy. Today, we have the highest debt-to-GDP ratio since World War II, and we have not even hit a recession yet. Given the U.S. interest rate debt expense and tight U.S. consumers and SME businesses, the Fed — as alluded to during its FOMC meeting in November — is looking for any justification to cut rates, not raise them, no matter how loose financial conditions may seem. This is a Fed that is eager to inflate the debt away and inflate assets even more.
Gold has had an incredible year, as it was up 35% year to date prior to the Trump win. Now, it is down 7% from its highs as the Trump trades have caused assets like bitcoin and stocks like TSLA to rally as part of the beneficiaries of the Trump presidency mandate. Each asset class has its own merits. Bitcoin is seeing more and more adoption, as funds like BlackRock IBIT and Michael Saylor's MicroStrategy MSTR build up massive reserves of bitcoin, not to mention Trump wanting to build a bitcoin strategic petroleum reserve as well.
In a market that will only ever have 21 million coins in limited supply, demand becomes exponential. Gold is the much safer choice with perhaps less absolute percentage gains, but one that is still seeing global central banks diversifying and adding to their strategic reserve, especially since the Russia/Ukraine war began.
It is important to keep in mind that bitcoin is not really a safe haven asset, it is an asset that purely benefits from global liquidity and any pullback of that causes it to fall harshly. We saw what happened in August when the dollar/yen carry trade unwound as the yen rallied 12% in one day and bitcoin fell 20%!
Let's call a spade a spade: It is one big risk-on trade on an asset that is slowly growing into becoming a mature asset class. It is still in its novice stage. But make no mistake, gold is the only true safe haven currency and it also benefits from inflation picking up or more fiat currency debasement. Both can co-exist in a portfolio, it is only the size that matters and how much volatility one can stomach. It boils down to one's investment mandate and their risk limits.
At the time of publication, Bengali had no positions in any securities mentioned.
