There is always a search for “somewhere to hide”. And this market is no different. With elevated (and persistent) inflation pressures alongside the war in Ukraine (and the threat of escalation to a NATO member), the environment appeared to be tailormade for a radical outperformance from gold and bitcoin.
After all, both are supposedly inflation hedges and/or doomsday hedges. As it turned out, gold spiked and then declined back to its pre-invasion level rather quickly. And bitcoin meandered sideways with significant chop before breaking higher as rumors of a ceasefire trickled out.
That’s what happened. But what might happen moving forward?
If there is such a thing as a “known” in this market, it is that Fed tightening is coming. When it comes to rate hike cycles, there is no automatic takeaway for gold prices. Gold prices increased during the hiking cycles of the late 70s and early 80s with similar price action during the lead up to the GFC.
But the best returns for gold come during periods of loose monetary policy. Post-GFC monetary policy saw multiple rounds of QE, and the fear of inflation always looming in the near future. And that is what really matters for gold – the expectation of inflation. If the expectation of future inflation begins to decline, so does the price of gold.
Which brings us to one of the most intriguing charts out there. The ebbs and flows of searches for inflation hedges overlaid with gold, crypto, and bitcoin. Until recently, the search trends were rather synchronized. Searches for all four tended to go in waves together. That changed during the war in Ukraine. Gold broke higher while the others stayed in a downtrend.
That is likely due to the media attention paid to Russia’s gold reserves, but it remains intriguing.
In January, our “flight to safety” was to hide in commodities. It turned out to be a good place to hide. U.S. Treasuries did not get the typical geopolitical bid due to the Fed’s pivot to an inflation first mandate. With the Fed in “do whatever it takes” mode against inflation, it is going to at least take some of the shine from gold.
On a related note, we also confirmed something about bitcoin and crypto. It is a “tip of the spear” risk asset. When the risk trade is on, crypto is on fire. When it’s a risk off world, crypto does not necessarily perform as advertised. There is a time to trade gold and crypto. But it is not as simple as “inflation!” and “war!”.