Gold, ‘Digital Gold’ and Inflation

This has been a long and eventful week.  It seems like ages ago, but it was less than seven days since we saw a 10% downward weekend move in bitcoin.  Though it was quite significant at the time, the second down move in two weekends proved only to be a precursor for the eye-watering down move and partial recovery that we saw in cryptocurrencies on Wednesday.  We all know that bitcoin has been a recent underperformer this month, but the following graph illustrates just how much:

SPX, NDX, Bitcoin and GLD Normalized Month-to-Date

Source: Bloomberg

We see that major indices like the S&P 500 (SPX) and NASDAQ 100 (NDX) are relatively stable this month, bitcoin has been a significant underperformer.  It is down by about 1/3 this month!  Interestingly, while “digital gold” has been under significant pressure, gold prices (using the GLD ETF as a proxy) have been ticking higher.  For the past few weeks, gold has started to follow the CRB index, which measures commodity price inflation, more than acting as the “anti-dollar”.  This is a change from when we checked in about 6 weeks ago.   That was around the time that investors began to get concerned about inflation, and gold had only just begun to follow the key inflation measure after ignoring it for the prior months.  The chart below shows how the general trends have begun to follow each other, though the correlation of daily percentage moves remains low:

GLD vs CRB Index with Linear Regression

Source: Bloomberg

A few weeks of general trend following with a low actual correlation is hardly a foolproof trading signal, but it is notable that investors may be focusing on gold as an inflation hedge after looking elsewhere.  Certainly those who looked to bitcoin as an inflation hedge in recent weeks have been severely disappointed.  That said, even after the recent declines, bitcoin remains a star performer year-to-date:

SPX, Bitcoin, GLD, CRB Normalized Year-to-Date

Source: Bloomberg

Bitcoin is still up about 30% this year.  That would normally be considered stellar performance, but it pales somewhat when we consider its volatility. The problem is especially acute when we consider that many crypto investors were late to the game.  I wrote about this phenomenon on April 19^th, just after bitcoin peaked:

… my wife’s explanation … “on Wednesday, my financially illiterate trainer finally heard about Bitcoin and recommend that I should invest in it because she heard was impossible to lose money doing so.”  That was roughly the top of bitcoin, at least for now.  A similar recommendation from a shoeshine boy allowed Joseph Kennedy to largely avoid the stock market crash of 1929.

As of now, my wife’s trainer top-ticked bitcoin and proves inversely prophetic.  I don’t want to blame her, though.  She was repeated what she heard from other excited clients who had recently bought bitcoin and had been profiting from the crypto’s rise until then. 

Also bear in mind that while gold has been performing better lately, it is still down marginally this year and has not kept pace with a CRB Index that is over 15% higher.   There is no perfect hedge for commodity price inflation other than buying the commodities themselves.  But that’s not a hedge, that’s either investment or speculation. 

As of now, the steady year-to-date 11% appreciation in SPX has been a solid winner for many, even despite this month’s flattish performance.  It may seem dull relative to other investment choices, and there may be bumps in that index ahead, but it is proving to be a winner so far.