Gold Makes The Ugly Beautiful

Forbes Indonesia, November 2018. By: Alberto Migliucci

In The 17th Century, the French poet Moliere was most likely not thinking about tech stocks when he penned the words “Gold makes the ugly beautiful”. However, he would not have been surprised to hear of gold’s standing as a safe-haven asset. When risk is perceived as high, investors tend to engage in lower-risk investments.

This month, as Nasdaq investors pulled their money out of the formerly high flying tech stocks, the tech-centric equity benchmark was on the verge of having its worst day in seven years, plunging to about 10% from its late – August highs. In response, the spot gold price posted its largest single day gain in percentage terms (+2.5%) since June 24, 2016, the day after the UK Brexit vote. Indeed, the precious metal surged above $1,230 as investors began to question the valuations of some of Wall Street’s riskiest assets. The already debilitating world of cryptocurrencies lots a further $18 billion off its entire market capitalisation in just three days, according to Coin-MarketCap.com.

Those who have billed Bitcoin and altcoin markets as a store of value, or “digital gold” may have been especially disappointed by this performance, as Bitcoin dropped to below $6,300 from an earlier 12-month high around $20,000. It is estimated that crypto markets have lost 80% in market value since the highest peak in December 2017. That loss exceeded the loss on the Nasdaq index after the dotcom bubble in the year 2000.

The tech sell-off sent the Dow plunging more than 5% in a two-day rout and the S&P 500 falling the most since February. The China stock market fell to its lowest level in almost four years following concerns about rising interest rates and a bruising trade dispute with the U.S. As gold is historically negatively corelated with risk-on assets, the over-valued tech market and inefficiencies in the cryptocurrency markets may be the catalysts for the rotation of investor dollars back into the yellow metal. Kudos to those early adopters of Bitcoin who had bought their Lamborghini but beware of the lamenting unicorns on the freeway.

Constrained by Mother Earth, the world’s major gold deposits are becoming more difficult to find and extract. Barrick Gold Corp is backing gold’s future with last month’s announcement that it would acquire African focussed gold miner Randgold Resources creating the world’s largest gold producer with a market cap of more than $18 billion. There are plenty of macro risks to come in the months ahead, including the US mid-term elections and the spectre of a weaker green-back, but the shiny metal may be coming back into favour which may signal a change in investor sentiment from crypto-mining back to gold mining.

The tech-centric equity benchmark was on the verge of having its worst day in seven years, plunging to about 10% from its late- August highs.