A pivot will benefit gold more than stocks and cryptocurrencies

A pivot will benefit gold more than stocks and cryptocurrencies

18 January 2023 from Mikael Syding

At the end of November 2022, Bitcoin traded at USD 15,480. Since then, the rate has risen by 23 percent to USD 19,097 (January 12, 2023). It is thus officially a bull market in crypto! Ether has fared even better, which makes perfect sense given the transition to POS which draws much less energy than Bitcoin's POW. Ether is now 34% higher than in November and a full 63% higher than the bottom in June. Anyone who has followed a strategy to accumulate ETH, or the relative instrument ETH/BTC, probably feels the hope sprouting again.

That's really surprisingly strong, given everything that has spoken against crypto investing lately, with NFT collapses, exposed fraud, margin calls and collapsed pyramid schemes left and right, not to mention increasingly vocal calls for tighter regulation. The old price records are so high that you risk drowning in your own stingy water when the imagination is lifted +250% against 70,000 in BTC and 5000 in ETH (probably in such cases even more for ETH, as the challenger inexorably eats into Bitcoin's share of the crypto cookie)

Even the price of real physical gold has gained momentum this winter. In September, the precious metal touched a low of 1617 dollars per ounce and today (January 13) reached 1910 USD/oz, i.e. +18% calculated in the same currency as the comparison objects BTC and ETH.

The question is how to interpret these movements. One perspective is that concerns about lasting inflation have decreased, which has led to lower interest rates (higher value of bonds) and increased investment appetite in general. For example. shares, as measured by the S&P500, have risen 14% since mid-October. However, the narrower technology index Nasdaq, which usually moves more than the S&P 500, is only up 9% during the same period, which indicates continued skepticism towards fast-growing companies with innovations and technology that are expected to deliver significant cash flows only a few years into the future.

I think it is reasonable to have a scenario where austerity due to higher interest rates and energy prices ultimately results in a sharp slowdown in the economy. That would explain both lower interest rates and a "risk-off" trade with a higher gold price, as well as the Nasdaq underperforming the S&P 500. I also think it is logical with rising prices for oil companies and banks and some other more or less defensive stocks. On the other hand, I am much more negative towards, for example, cyclical engineering industry and service companies, not to mention corona-infected "stay at home" companies or hyped so-called cloud services with double-digit sales multiples. Namely, I see a severe recession, a serious recession even, as largely inevitable. It is definitely not priced in today.

The way I see it, you have to make up your mind: do you A) think the economy is staying decently strong, perhaps thanks to a boost from China that has just opened up, or do you think B) that the downward spiral of lower consumption and higher unemployment has only just started and that the Fed's stubbornness and lagging econometric models will worsen the situation further.

If you belong to the slightly more positive phalanx in A, you have to be prepared for both higher inflation and higher policy rates all the longer. It just pushes the problems ahead, with a much-needed recession to bring down inflation expectations before they take hold; not to mention the difficulty of defending some of the highest Price/Sales (P/S) ratio and Market Cap/GDP valuations in history in the US at the same time as shockingly high mortgage rates and energy prices.

The negative group in B, to which I myself belong, sees the Fed making a classic mistake. They do not take sufficient account of the backlogs in their own actions. They kept interest rates low until they actually saw inflation in the numbers instead of starting to tighten a few years in advance. And now they continue to raise interest rates, based on notoriously late-cycle strong job numbers, when for the sake of the economy they should have paused at least six months ago. Right now, consumers' savings rates are extremely low, which works for a while because they still have plenty of cash and other assets in store.

It is an unsustainable situation; because the savings rates will normalize sooner or later, which then gives a negative impulse to the economy. But even without normalization of savings, the corporate sector is dangerously close to pulling the brakes and starting mass layoffs. The companies have held back until the end in the hope of renewed momentum in the economy, but it is very close to the breaking point in profitability due to higher input costs, not least for loans and premises. I think we will first see slightly increased savings rates among consumers and reduced consumption, at the same time with sales to reduce retail stocks. It is likely to force a wave of layoffs in tandem with further reduced consumption at an increasing rate. It hardly helps that credit card debt is at an all-time high in the US and that interest rates are 2% points higher than 95% of US mortgage borrowers would be able to refinance their loans.

The IMF seems to have sniffed this out, and has e.g. recently lowered the growth forecast for the world to 2.7% in 2023 (3.2% in 2022, previously 2.9% in 2023). At any time, there could also be a single extremely weak jobs figure that triggers an official Fed pause. Normally it takes 6 months for the reductions to start, but this time it could very well be faster. After all, the macro swings have become faster and larger and more synchronized around the world due to digitization, financialization and a de facto paradigm of large government incentives. It should surprise no one that extreme interest rate hikes after years of extreme stimulus will have an extreme (negative) outcome as consumers and businesses adjust, but the stock market seems clueless. This is likely to lead to an extreme (negative) stock market year in 2023 - and hardly on the upside after we leave the optimistic January and Q4 reports behind us.

If you're trying to buy the dips instead of selling the dips in the stock market, it can be painful to hear that the S&P 500 bottoms out on average 16 months after the interest rate change begins, or 10 months after the first cuts. About a year from now. It is important not to burn all your dry powder on the way, but you want to be able to go all in when there is actually a sale on the stock market, not just fairly valued.

After weakness and a series of stimulus measures and chain of bubbles, the mountain of loans and deficits is such that the authorities are forced to control the entire yield curve. This means a rapidly falling price of money and currencies. The mirror image is higher prices for real assets such as gold and commodities, from food to energy and battery minerals. But risk assets such as shares in sectors other than these will see a substantial relative appreciation. This is true even if the Fed cuts interest rates back to zero, as the reason would be discussions of asset deflation and perhaps even negative inflationary pressures.

Gold and oil, gold mines and oil companies are obvious then. But should you have digital gold in this scenario? I do not think so. I think the crypto winter will continue until the economy shows signs of stabilizing and other risk assets, like stocks, bottom out. It may well be a whole year until then. The reasons are that I believe that the tops and bottoms of crypto prices are mainly driven by the availability of surplus capital, of easy and cheap money that does not need to be prioritized over other more essential things such as rent, interest, heating and food. When you cannot increase the loan on the house at a low interest rate, or when one party in the household becomes unemployed, or when the food bill increases by 20% at the same time as the stock portfolio and the house have fallen in value, then it is not crypto-assets that you chase up in price.

There have never been crypto assets in a market with high interest rates or falling asset prices. It is only in 2023 that the thesis will be tested if crypto is mostly a high-beta asset (albeit with a strong positive underlying drive, but which does not manifest in prices seriously other than in bull markets) or can break free and constitute a store of value in difficult times . I may of course accumulate crypto in weak months in 2023, but in the choice between gold and Ether, gold (and silver) is my clear winner this year. Where crypto stole some of the interest in gold in 2021, the roles may be reversed in 2023 – after all, you get a concrete stone for your money, not just a picture of one.


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03/02/2023 11:15:53


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