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What the battle between gold bugs and crypto bros tells us about commodities


Commodities have long been sold to investors as a way to hedge inflation and of the raw materials, gold has usually been presented as the best inflation-hedging asset.

But investors need to understand that commodities are not a homogeneous asset class, and rather than a mere reaction to inflation, they need to take various market drivers affecting natural resources into account.

Take gold. The yellow metal lagged behind almost every other commodity during the recent rally since 2020. It is true that the precious metal recently got to around $2,080 per ounce, but in real terms this is below the high of 2011, that would be equivalent today to around $2,300. And if we take the high of the inflationary 1970s, as a benchmark, that would now be almost $2,950. Miners and gold-related ETFs also showed an initial rally that later disappointed.

This is because gold bugs faced new competition from the rise of the crypto bros. From March 2020 to November 2021, the size of the cryptocurrency market surged more than 19 times to $2.9tn. Bitcoin’s price increased from a low of about $3,800 to a peak of about $69,000 by November 2021. That is, more than 18 times from trough to peak. Other cryptocurrencies, such as ethereum, did even better.

Cryptocurrencies attracted investors, many in the younger bracket who were not particularly tempted to invest in gold, with some seeing the mining industry as both dirty and outdated. Some crypto fans were drawn to a similar libertarian narrative as the gold investors, but with the added allure of a decentralised asset having no physical presence. Others liked the technological aspect of blockchain compared with a simple piece of metal.

Of course, the size of the gold market is nearly four times that of the cryptocurrencies market at the peak at $11tn, and the shift in monetary policy has led to a sharp correction in crypto markets along with the tech sector stocks. Gold has rallied, but it is unclear how long this revival will last and both precious metals markets and stocks of those who mine them are still trading in the same range as they have been for almost two years.

Meanwhile, other commodity markets including energy, metals and crops, have been rallying largely due to the fundamental factors affecting supply and demand of the actual materials. These include aggressive biofuels policies, the energy transition, bad weather affecting crops, the Covid-19 pandemic, and now the war in Ukraine.

These underlying factors have been behind the widespread strength in most commodities markets, alongside an increase in money supplies that drove inflation to unpredicted levels. But market moves in commodities including inflation-led rallies which are not caused by supply and demand changes are less intense.

As such, it is important to remember that energy, industrial metals, precious metals, minerals and crops have their own dynamic.

Although long-lasting commodities bull markets generally tend to be based on fundamentals, inflation can undoubtedly help in adding strength to such a rally. Energy and precious metals correlate better in some specific periods with general price increases

As ever with investing, timing is everything. An adjustment upwards in inflation expectations may incentivise a rush to commodities. If you enter a position before such a change and fundamentals support the rally, the strategy will work. But if you build the position too late, once future inflation is discounted and fundamentals start adapting, be ready for losses. A strong correlation of commodity prices and inflation is not enough to guarantee a good passive hedge.

Undeniably, there are reasons to buy some commodities for hedging purposes at specific times. However, fundamental drivers of this complex asset class should always be considered and trading must not just be a mere reaction to inflation.

Alan Futerman and Ivo Sarjanovic are co-authors of a forthcoming book Commodities as an Asset Class: Essays on Inflation, the Paradox of Gold, and the Impact of Crypto


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