All that glitters ain't gold

Amid all the commotion in the equities and cryptocurrency markets, the yellow metal has looked somewhat neglected of late. At the height of the coronavirus crisis, gold was the asset everyone wanted for its reputation as a store of value and inflation protector. But between the vaccine roll-out, higher US Treasury yields and central bank intervention, the quintessential safe haven has since fallen out of favour. Gold is now down almost 15% from its August 2020 highs, and many are worried that this could be just the beginning. But what if they’re wrong?

Digital gold vs the real McCoy

The eyes of much of the world have been fixed on the cryptocurrency space this past year… and with good reason. Bitcoin is up almost 1000% over the last 12 months, and Ethereum even more so. As such, the long-espoused opinion that these big-name digital currencies could be shaping up to replace gold as the go-to hedge is gaining some serious traction. 

While nobody knows what the future holds, it’s hard to see how this can happen while crypto remains so inherently volatile. An asset class with such a high alpha is certainly an attractive investment prospect for the risk-on investor but perhaps not the safest bet for storing value long-term. 

Once the hype surrounding digital assets subsides a little, one can’t help but think that both retail and institutional investors will look at the gold price and decide to increase their allocation in the commodity with thousands of years of experience under its belt.

Yield of dreams

One of the biggest shocks in recent weeks has been the sharp rise in government bond yields. For instance, 10-year Treasury notes are up almost 50% YTD, while their 30-year counterparts have risen by nearly 40% over the same period. Analysts have largely attributed this to increased optimism surrounding global vaccination efforts and the gradual opening of economies, which has, in turn, sent gold into a tailspin. But with central bank interest rates so low (and likely to remain so for the foreseeable future), such movement in an otherwise mostly stable instrument can’t be explained away by mere positive sentiment.

There’s a convincing view, albeit among a minority, that the T-bill yield spike is, in fact, a precursor of significant inflation on the horizon. While gold does, indeed, tend to exhibit an inverse correlation with government bond yields, its positive correlation with inflation is far more robust and historically better documented. In this light, it could be just the right time to take those handsome crypto profits and park them in gold — especially since the yellow metal is so attractively priced.

Cycle of life

As you’re probably aware, commodities aren’t at all like stocks. They don’t rise 400% in a month and then drop 50% over the next. This is because they have a real intrinsic value, and the businesses that use them in their products rely on a certain level of price stability.  Nevertheless, they do go through cycles of elevated and depressed values. The general consensus among experts is that we are at the dawn of a commodities ‘super-cycle’ that will be driven by the global economic recovery, massive government spending and green energy policies. Indeed, JP Morgan wrote in their latest report that “a long-term boom across the commodities complex appears underway, and there could be big gains ahead for the entire sector”.

We are already seeing this prophecy come to fruition in other precious metals. Platinum, for instance, has rocketed nearly 100% in the past 12 months, while Palladium is up around 70% over the same period. With all other factors as they are, it looks like it’s only a matter of time before gold catches up to the pack.

Trade gold with Libertex

It’s normal to be concerned by the big swings in commodities, but don’t forget that, as a trader, volatility is your best friend. At the end of the day, it doesn’t really matter which way the market is moving as long as it is moving. With Libertex, you’ll always find a lucrative opportunity wherever you think Gold prices are headed. Since we offer both long and short positions on the yellow metal, you’re bound to find something to tickle your fancy. And if you want to maximise your potential gains, you can always take advantage of our generous leverage facility. Get online and register your very own Libertex account now. There are no lengthy verification procedures, and sign up only takes two ticks. Before you know it, you’ll be trading Gold with one of the most trusted brokers in the business!