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It has been an extraordinary week for alternative assets, with gold and bitcoin both reaching record highs with still two more days to go.
Analysts are warning investors to proceed with caution as the price of bitcoin soared past $44,000 on Wednesday, reaching levels not seen since spring 2022. This is reminiscent of when Terra, a popular "stablecoin" designed to maintain a $1 price, lost its peg and the connected Luna cryptocurrency plummeted 99% in just a few days, leading to a widespread crash in the crypto market. Remember, all that glitters isn't gold.
Investor optimism about potential interest rate cuts by the Federal Reserve in 2024 and the approval of a bitcoin-focused exchange-traded fund by the Securities and Exchange Commission have led to a recent surge in crypto. The SEC has until January 10 to approve the fund, which would make it more accessible to mainstream investors. At the same time, gold prices hit a record high of $2,135.40 on Monday, reflecting expectations of significant rate cuts by the Fed. Despite a decrease on Tuesday, the value of bullion remains high.
On Tuesday, supporters of cryptocurrency and precious metals were enthusiastic, suggesting that this might mark the beginning of a new era and a revival of non-traditional assets.
Tyler Winklevoss, co-founder of the crypto exchange Gemini, expressed his excitement by stating, "Bitcoin is making a comeback. Bitcoin reaching 42k is the ultimate solution to the question of life, the universe, and everything."
John Reade, a market strategist at the World Gold Council, stated in an interview with CNN that with investors foreseeing multiple rate cuts in the coming year, gold prices may potentially surpass the record high set on Monday. However, it's important to note that a few days of activity may not indicate a significant shift in the market. Those confident in gold's prospects may be getting ahead of themselves.
Heres why.
No interest paid on gold: Yes, gold technically hit an all-time high this week, but theres some context that needs to come with that statement.
According to a note from Jim Reid at Deutsche Bank, despite hitting all-time highs in nominal terms, gold does not earn any interest and is currently over 20% below its peak when adjusted for inflation in 1980. Reid suggests that while gold may appear to be a good hedge against inflation, it only maintains pace with inflation if purchased at the right time and generally lags behind traditional assets over most medium to long-term time periods.
Since 1800, gold has only had an annual inflation-adjusted return of 0.32%, while Treasuries have had a 3.07% return and equities have had a 6.83% return, according to a recent study by Deutsche Bank. "Gold struggles on a competitive basis," said Reid. "Even long-term inflationists may find it to be a somewhat underwhelming investment."
Despite the anticipation of a spot bitcoin ETF approval in January, there is no certainty that the SEC will give its approval. And even if it does, there is no guarantee that digital currencies will experience a surge in value.
According to Antoni Trenchev, co-founder and managing partner of the crypto lender Nexo, much of the price increase is due to investors anticipating the SEC's approval. This raises the question of whether this is simply a "buy-the-rumor, sell-the-news event."
Investors could potentially panic and exit their positions when it occurs, much like when the initial ETF for bitcoin futures was given the green light in autumn 2021, resulting in a rapid 87% price drop. Trenchev further highlighted that bitcoin frequently experiences a reversal following the breach of significant levels. "After surpassing $40,000 for the first time during the previous bull market in 2021, bitcoin plummeted below $30,000 just two weeks later," he noted.
The Fed is proceeding cautiously, indicating that they may have finished raising interest rates to counter high inflation, at least for now. However, this does not necessarily mean that they will be decreasing rates in the near future. Several Fed officials, including Chair Jerome Powell, have suggested that it is still too early to consider cutting rates. Instead, their focus will be on determining if the current fund rate is effectively limiting economic activity.
Powell emphasized that it is too early to confidently say we have implemented a sufficiently strict approach or to predict when policy may be relaxed. He also stated that they are prepared to implement even stricter measures if necessary. This stance has been supported by other Federal Reserve officials.
COP out?
"I am currently not considering the possibility of rate cuts. My focus is on evaluating whether we have implemented enough tightening in the system and are sufficiently restrictive to achieve price stability," stated Mary Daly, President of the Federal Reserve Bank of San Francisco, in a recent interview. "Discussing potential interest rate cuts is not particularly constructive at this time. Our attention should remain on reducing inflation."
People walk through the COP28 U.N. Climate Summit, Monday, Dec. 4, 2023, in Dubai, United Arab Emirates.
The annual international climate summit, COP28, convened by the United Nations in Dubai, is currently in progress. It is evident that major energy companies are actively advocating for their interests as the push to reduce or eliminate fossil fuels intensifies.
More than 2,400 individuals linked to the fossil fuel industry have registered to participate in the event, which is nearly four times the number that attended last year's climate gathering, as per an analysis published on Tuesday.
According to a report from a coalition of corporate watchdog and climate advocacy groups, including Global Witness, fossil fuel employees and representatives will surpass the delegations from nearly every country, with the exception of the United Arab Emirates, the host of COP28, and Brazil.
Sultan Al Jaber, the oil executive leading the climate summit, caused a stir when he stated before the meeting that no scientific evidence supports the need to phase out fossil fuels to prevent global warming from exceeding a critical threshold. Al Jabar later clarified that his remarks had been misconstrued.
According to Louis Navellier of Navellier & Associates, the actual result of COP28 is that major crude oil and natural gas producers plan to oversee carbon capture, green hydrogen production, and alternative energy generation. Essentially, the timeline for the transition to green energy will be set by these major energy producers.
Energy companies were not completely free of criticism, with US Special Presidential Envoy for Climate John Kerry specifically calling out Chevron for opting out of a pledge to reduce methane emissions. "We have no real evidence that [Chevron] and a lot of others are doing what every company needs to do," he stated at the Bloomberg Green summit on Tuesday.
Al Gore criticized Exxon Mobil CEO Darren Woods at the summit, emphasizing that Woods prioritizes profits over the survival of human civilization. While acknowledging the criticism, Navellier pointed out that green energy remains expensive and fossil fuels are likely to persist for the foreseeable future.
Aluminum tariffs have cost the US beer industry $2.2 billion
The Beer Institute, a beer industry advocacy group, has recently released new research showing that the aluminum tariffs have resulted in a loss of nearly $2.2 billion for the US beverage industry in the past six years.
In 2018, under Section 232 of the Trade Expansion Act, then-President Donald Trump imposed a 10% tax on aluminum imports from the majority of countries.
According to the Beer Institute, over 74% of all beer made in the US is packaged in aluminum cans and bottles, making aluminum the most crucial input cost in American beer production.
Brian Crawford, president and CEO of the Beer Institute, stated that brewers and many hardworking Americans in aluminum-dependent industries have been enduring significant hardships for an extended period. He went on to emphasize that the tariffs have a negative impact that outweighs any benefits, particularly affecting consumers who are already dealing with the effects of inflation at the cash register.
The United States is home to over 6,600 breweries, with the industry providing support for approximately 2.4 million jobs and contributing $409 billion annually to the US economy.
