In uncertain times, gold and Bitcoin show their mettle
The current economic uncertainty has seen stock markets experience unprecedented volatility, with many investors looking for safe havens for their funds until the storm created by the COVID-19 pandemic dies down.
Emerging market economies have been particularly hard hit as investors retreat into the relative safety of the major currencies, including the dollar and euro. This has seen the rand drop to historic lows against most key currencies.
“This is not, however, a new phenomenon and it was only a matter of time before one crisis or another triggered a significant drop in the currency,” explains AltCoinTrader CEO Richard de Sousa. “The combination of government policy, corruption and aggressive political rhetoric have created a climate of economic uncertainty in the country and this is something that investors don’t take kindly to.”
The net result of this was the series of downgrades from the global ratings agencies, with Moody’s and Fitch just the latest to downgrade the country’s status.
“With all this uncertainty and no solution in sight from government, South African investors have been looking for any way to cushion themselves from the inevitable drop in the value of the rand, with the most viable options being asset classes that carry an international value such as gold and Bitcoin,” he explains.
He adds that while other emerging currencies are likely to recover from the shock of COVID-19, it’s unlikely that the rand will, given the inherent weaknesses in the economy.
Gold and Bitcoin were not immune to the massive selloff in the middle of March, with the price of gold dropping almost $200 in just a few days. It recovered quickly and is currently trading around the same value that it was at the beginning of March.
“The value of gold as a rand hedge is well established. For investors looking to ensure that their investments are protected it allows them to retain the dollar value of their investments, while the rand value of investments in gold have reached all-time highs. So when equity investments are losing value, gold has proven its worth,” De Sousa comments. “The moves by central banks to loosen monetary policy is only going to strengthen this trend.”
He adds that as those who can are moving their investments offshore, this has a knock-on effect on the local economy, with less capital available to drive growth and a negative impact on the rand creating something of a vicious cycle.
Bitcoin has, in the past five years, risen to prominence as an alternative safe haven from the vagaries of global currency markets. It also saw its price drop in the middle of last month, but De Sousa says this short-term volatility is something that is inherent to the Bitcoin market.
“Bitcoin has always experienced short-term volatility, but it has outperformed every other asset class for each of the last five years. Those that understand Bitcoin and how the market moves have a mature view, and by retaining their Bitcoin holdings through the volatility come up smiling on the other end. An indication that investors still have faith in Bitcoin is that trading volumes are higher than usual and we are now seeing the price trending upwards.”
The ability of Bitcoin to retain value over the long term is intrinsically linked to the growth of the underlying blockchain technology in business applications. Although not at the same level of hype seen two years ago, De Sousa says there is still strong interest in taking advantage of the inherent strengths of blockchain to drive innovative new business models, especially in applications linked to the fourth industrial revolution.
“The other factor remains regulation. Once governments start to effectively regulate the way new stores of value are used, I expect that what was once seen as a fringe investment opportunity will supplant the traditional markets,” he says.