Recession fears tell a tale

The top seven U.S. tech companies lost a combined $1 trillion in market capitalization after recession fears pushed Japan’s Nikkei lower. Bitcoin followed the lead of the global markets, opening the day at 58,137 before plummeting 15% to 49,647 in 12 hours. Meanwhile, gold showed relative strength, losing just $32 an ounce in value, equating to 1.3% of its spot price. Across the globe, markets showed panic. South Korea halted sell orders twice as its market plummeted. Traders began pricing in a nearly 60% chance of a rate cut happening by the end of that week, which would have required an emergency meeting of the Federal Reserve.

Stability vs. volatility

Analyzing gold’s potential upside and risks compared to Bitcoin with a 5% and 10% portfolio allocation tells an important story. Regardless of whether allocating 5% or 10%, gold provides annualized returns of 6.7% with maximum drawdowns of about 19%. Bitcoin, however, showed much more significant discrepancies on both ends, opening investors to a potential 25% drawdown during times of volatility.

“To truly be a safe-haven asset, the right kind of performance during significant market drawdowns is key,” the report reads.

Diversification myth

“Bitcoin doesn’t offer any genuine diversification: The addition of Bitcoin is the same as increasing exposure to high-risk equities,” wrote senior market strategists Joseph Cavatoni and John Reade.

Bitcoin is a deflationary asset by nature and has consequently been touted as an inflation hedge by many speculators. However, its wild swings continue to throw retail investors for a loop, and it has yet to draw any real correlation to the current inflationary economy. Experts believe its value is more closely tied to its blockchain technology, which has uses beyond currency.

Looking back for answers

Historically, gold has proven to be the winner during significant unrest, such as the 2018 Bitcoin pullback when the digital currency lost nearly 50% of its value, while gold gained 7% in 12 weeks as investors flocked to the store of value. During the COVID-19 pandemic, gold eked out 2% gains as the economy experienced extreme deflationary pressure, while Bitcoin lost 30% of its value. In 2022, Bitcoin lost nearly 60% of its value, while gold dropped only 8%.

“Allocating gold to the portfolio provides an increasing level of risk-adjusted return at any level of allocation. Holding it for the past decade (rebalancing as required) would have increased the risk-adjusted returns and lowered volatility,” the report states.

Full report - World Gold Council