【MACRO Insight】Safe-Haven Choices in the Financial Market - The Performance of Gold and Digital Currencies

Gold, with its unique investment characteristics, has always been favored by investors. It not only serves as a safe haven for wealth but also provides protection against inflation. Reasonably including gold in an investment portfolio can effectively reduce the losses that other asset classes may bring, making it of significant value to asset allocation.

However, despite gold always being an object of consideration for investors, the significant rise in gold prices in recent months has made it a focal point in the market, attracting widespread attention from both experienced investors and novice traders. This trend began on March 8th, when the gold price reached its first high for the year. Subsequently, a month later, the gold price broke this record and set new highs again in late May and late August, reaching a historical peak of $2,530 per ounce. Although the gold price has declined somewhat since then, it remains close to its historical high, contrary to the usual trend of gold prices declining when inflationary pressures ease. As September approaches, we may continue to witness a bull market in the gold market.

In the investment field, Bitcoin is often hailed by its supporters as “digital gold” and is considered a potential safe-haven asset. However, recent market performance shows significant differences in price dynamics between Bitcoin and gold. While gold prices continue to hit new historical highs, Bitcoin has been stuck in a trading range after reaching its historical peak in March.

According to Dow Jones Market Data, gold futures prices set a record of $2,550.60 per ounce on Tuesday, marking the 30th historical highest settlement price for the most active futures contract this year. Joseph Cavatoni, a senior market strategist at the World Gold Council, pointed out that the strength of gold is mainly due to the purchasing behavior of global central banks, as well as the demand for gold as a safe haven by investors amid market volatility and geopolitical tensions. In contrast, Bitcoin's trading price has mostly fluctuated between $50,000 and $72,000 since April. As the U.S. presidential election approaches, cryptocurrency investors are concerned about the uncertainty of central banks potentially selling seized Bitcoin and the regulation of digital assets, thus showing hesitation in their investment decisions.

Cavatoni also mentioned that Bitcoin and gold are fundamentally different assets, with gold being much less volatile. Over the past five years, Bitcoin's average daily volatility has been about 60%, while gold's has been 15%. Analysis by the World Gold Council shows that including gold in an investment portfolio, regardless of the proportion, can increase the risk-adjusted return of the portfolio and reduce volatility. However, the allocation of Bitcoin in an investment portfolio only increases the risk-adjusted return when it reaches a certain proportion (for example, 2.5%), and exceeding this proportion may lead to increased volatility and a decrease in return.

Aurélie Bessell, Chief Research Analyst at cryptocurrency analysis firm Nansen, believes that for Bitcoin to become a safe haven, it requires broader institutional adoption and lower volatility. She pointed out that Bitcoin prices can sometimes drop by 80% within a year, making it difficult to consider it as a safe haven.

In terms of market dynamics, the recent cryptocurrency market has generally shown a downward trend. Bitcoin prices fell by more than 5%, breaking through the $60,000 mark, and Ethereum also suffered a significant setback, with a one-day drop reaching 10%. Federal Reserve Chairman Powell's speech last Friday hinted at plans to cut benchmark interest rates from historically high levels, causing major tokens to give back gains. Market analyst Tony Sycamore stated that the Federal Reserve's policies affect many assets, and Bitcoin breaking through the 200-day moving average price is a worrying signal.

In addition, the challenges faced by Ethereum cannot be ignored. Although the Ethereum blockchain accounts for most of the decentralized financial activities, its native token, Ether, is looking for a new growth narrative. The rise of Layer-2 chains such as Arbitrum and Optimism has begun to erode transaction fees on the Ethereum network, leading to questions about Ethereum's deflationary attributes. Research firm Messari pointed out that the shift of economic activities from Ethereum to Layer-2 chains has raised concerns about Ethereum's future development.

On the other hand, a significant event that could greatly impact cryptocurrencies is underway! According to international media reports, Russia, a country that was once the initiator of anti-cryptocurrency legislation, is about to launch a pilot project aimed at alleviating the payment challenges faced by domestic enterprises due to international sanctions through cryptocurrency transactions and digital token cross-border payments. Anonymous sources disclosed that Russia may start this experiment on or before September 1st. During the testing of the payment and trading platform, Russia plans to use its national payment card system to facilitate the exchange between rubles and cryptocurrencies. This system was chosen because it already has the capabilities for interbank settlement and clearing and is fully under the supervision of the central bank.

The success of this experiment could provide Russia with an alternative cross-border payment solution. Currently, due to payment issues, it has become difficult for Russian citizens to purchase foreign goods, and exporters have also encountered many obstacles in receiving payments. In June of this year, with the United States imposing new sanctions on foreign lending institutions friendly with Russia, Russian enterprises faced more severe payment challenges. Due to the dependence on the US dollar, many institutions had to cut off business ties with Russia under the threat of secondary sanctions.

For example, although the renminbi plays an important role in the Russian economy, most Chinese banks have stopped making renminbi payments to Russia. In addition, due to Russia being excluded from the SWIFT international banking system, it cannot rely on the US dollar and other Western currencies. Russia may adopt digital currencies more actively, marking a significant shift in its stance on cryptocurrencies. For many years, Russia has been opposed to cryptocurrencies and proposed a complete ban on cryptocurrencies in 2022. Although cryptocurrencies are used in Russia's international payments, their domestic application is still limited.

On August 8th, Russian President Putin announced that creating a cross-border cryptocurrency framework is legal, marking a significant shift in legislation. He also signed a bill allowing cryptocurrency mining in Russia. According to sources, Russia may allow the Moscow Exchange and the St. Petersburg Currency Exchange to establish cryptocurrency trading platforms next year. As for traditional cryptocurrency exchanges, Finance Minister Anton Siluanov stated that it is currently unlikely to happen.

In the current complex international situation and financial environment, gold and cryptocurrencies, as investment tools, each show unique characteristics and challenges. Gold continues to be favored as a safe-haven asset due to its historical value and stability, while cryptocurrencies are looking for their place in the financial system amidst volatility and regulatory uncertainty. As technology advances and the regulatory environment evolves, gold and cryptocurrencies may appear in new forms and uses. Investors need to stay vigilant, continuously learn and adapt, to seize investment opportunities and manage risks.