As we enter a critical phase for Bitcoin and Gold, investment management consultant MATTHEW FEARGRIEVE considers what Q2 2021 will bring for these assets and how you can prepare your portfolio for their changing fortunes.
The year 2020 will go down in history as an annus horribilis in many respects, certainly for several asset classes and investment strategies. But not for Bitcoin and Gold, which enjoyed stratospheric price hikes, particularly over the last two quarters of the year. Both assets - one a new-fangled, alternative cryptocurrency; the other, a precious metal of old and traditional Safe Haven in times of market volatility - posted record highs during the course of the year.
Many of us will have increased our gold holdings in 2020, as stock markets tanked in reaction to the First Wave of the coronavirus pandemic hitting Europe and North America. But as 2021 seems to herald the beginning of a return to some kind of normal, it is time to recalibrate your portfolio's exposure to gold and gold producers.
At the same time, as institutional allocators trim their gold holdings and move money into Bitcoin, making your first foray into crypto, or increasing your Bitcoins, will be forefront in your mind as Q2 gets underway.
Gold
Gold had a good Covid-19 crisis which, as a Safe Haven asset, it was destined to have. In direct correlation to the mood of the markets, the price of gold has declined from an August peak of US$2,000 per ounce.
Gold is an in-and-out asset, a Safe Haven for mitigating mainstream asset losses during periods of market volatility. Gold undoubtedly had a good 2020, gaining about a fifth in value. Somewhat unusually it moved in tandem with stock markets for much of the year, after the latter had registered big falls in March.
Lately though that rally has petered out, raising questions about gold’s continuing ability to live up to its status as a safe haven, inflation hedge and ultimate “reserve currency”, even as central banks continue to print paper money at a breathtaking pace.
Gold prices seems likely to take a breather while the roll-out of vaccines and lockdowns are eased. There is however still support for gold prices. The dollar is weak right now and that tends to boost gold prices as it becomes cheaper to foreign-currency buyers. Additionally, interest rates remain very low and inflation, while ticking higher, still sits below historically normal levels. This reduces the opportunity cost of holding gold.
A rule-of-thumb for gold weightings in a retail portfolio is between 5% and 7% of the overall value of the portfolio. Trimming your gold holdings in such a way is what a number of notable professional fund managers were busy doing over 2020 Q4, as market volatility lessened.
Resist trimming your exposure to gold and gold producers more substantially, and do not cut gold out of your portfolio altogether. This could be a move you come to regret if 2021 is characterised by rising unemployment, Covid-19 slipping out of control and the decision of governments to curtail central bank stimulus.
Bitcoin
In August 2020 Bitcoin pushed through US$12,000 against the US Dollar for the first time in 2020 and its best effort since the previous high of 2018. And most recently it smashed through US$50,000 in February.
Following months of healthy rallies across equity markets, traders were beginning to step back as they weighed the long-term economic impact of the Covid-19 pandemic. As investor hopes swelled for a market recovery, gold correspondingly dipped to its lowest price since April 2020, closing the year around 10% from its all-time high in August.
As well as hedge funds and mainstream allocators, Bitcoin has been endorsed somewhat spectacularly by MasterCard and PayPal.
Bitcoin's ability to qualify as a safe haven asset is doubtful. Safe havens provide protection from adverse events elsewhere. Given its historic volatility, Bitcoin is a problematic proposition for many investors seeking the stability and protection of a safe haven asset, like gold has been historically. Gold, on the other hand, provides the desired degree of stability and acts as a safety valve in the context of an investment portfolio comprised of shares and bonds. It also has the capacity to provide some protection against inflation, an important consideration in today’s investing environment.
Notwithstanding the (seemingly inherent) volatility of crypto, some institutional investors were showing signs in 2020 of treating it as a bedfellow of, or alternative to, gold as a safe-haven asset.
Bitcoin's potential for resistance to inflation is an undeniable attraction. Investor interest has been growing in Bitcoin as a way to safeguard against rising inflation. Expectations of higher rates of inflation have been growing in recent weeks, fuelled by the prospect of a stronger global economic recovery in 2021 thanks to vaccines and central bank (including Fed and ECB) stimulus packages in the US and Europe.
As inflation (and unemployment) may now be on the horizon, many investors will turn to gold. Large scale government spending programmes in the wake of the pandemic, a Chinese economy back close to pre-pandemic levels of activity, rising commodity prices and an anticipated release of pent-up consumer demand once lockdowns get lifted all point to inflation rising at some point over 2022.
As progress on a covid vaccine fires up the global economic recovery and stokes inflation, this may well make Bitcoin and crypto in general seem less risky to mainstream investors who have been impressed by its meteoric rise in 2020.
Bitcoin also has the added advantage of being beyond the control of governments and central banks, meaning that its price cannot be manipulated by governing institutions seeking a particular exchange rate.
The test for Bitcoin - of rather, for the nerve of those institutional players who are backing it right now - is how far mainstream asset valuations and stock market volatility stabilises over 2021.
You can read more about the possible trajectory of Bitcoin prices over 2021 in my earlier blog here.
Bitcoin and Gold: correlation in 2021?
You can read more about the relationship of Bitcoin and gold as 2021 plays out in my earlier blog here.
2021: Time to Rebalance your Portfolio
Aside from selling, buying and trimming investments based on past performance and market projection, the New Year is a good time to recalibrate your portfolio's exposures to the individual assets, sectors and geographics that it will quite naturally have assumed over the preceding twelve months.
You will be surprised how far its equity-debt weightings and other pre-determined biases that you once had in mind have changed since you set your investment objectives and risk tolerances earlier in the year (or, if you are lazy like me, two or more years previously).
You can read my suggestions for how and when to rebalance your portfolio here.
MATTHEW FEARGRIEVE is an investment management consultant. You can read his personal finance blog here and see his Twitter feed here.
