Having served an eventful tenure as the head of sales at the Wealth Management Division of UBS, the world’s largest wealth management bank, I learned that the speed of adjustment of the client portfolio in moments of crisis can have a crucial influence on its overall long-term performance.
The key problem is how to switch. When everything is on fire, it is difficult to see what will save your savings. Everybody is looking for the safe-haven assets negatively correlated to the overall market. Many of us hoped it would be crypto. We hoped “digital gold,” bitcoin (BTC), would always move in the opposite direction to the general market. Yet, recently we learned bitcoin could fall from the sky like any other asset. On March 12, it dropped about 50 percent, in line with other financial assets.
Looking at the price development of bitcoin in the last 10 days, to me it looks like the high level of volatility is here to stay. Will bitcoin surge back to $20,000 or more, supported by further money printing, the collapse of the banking system or the halving event in May? Or will it keep crashing like last month with volatility spikes attached?
Gold prices over time, via MacroTrends
Nobody knows for sure. But one thing is clear. In times of crisis, holding too much in crypto is not advisable. Even for me, as an outright Bitcoin maximalist, and holding the majority my savings in cryptocurrency, I must say: Now is the time to hedge.
But what does this hedge look like? If it is not the US dollar and real estate, what else is out there for us? The natural answer is gold.
Let’s look at the historic correlation between gold and the stock market. In a crisis, it tends to be negative, meaning that gold’s price rises as stock markets fall. Through wars and the worst recessions – including the Great Depression in the 1930s – we have experienced a massive rise in the price of gold. During the last two recessions of 2000 and 2008, gold protected the portfolios of investors like no other asset. During the Global Financial Crisis, gold’s price grew by more than 200 percent. This is why gold is generally referred to as a safe-haven asset or chaos hedge.
Why now is a good time
The stock market collapse, in which S&P 500 slipped around 30 percent since its peak in late February, has yet to see its counterbalance in the corresponding rise in gold’s price. So far, the gold price is up 10 percent during the last two weeks. Why hasn’t this happened yet? The reason is that during the initial stage of a stock market crash, market participants need to unbundle leveraged positions, liquidating – among other assets – their gold positions. The price is flat on the year-to-date basis, hovering at around $1,500/oz at the time of writing.
Another metric, the total holdings of gold, reveals that investors have been preparing for a shift in the economic cycle for a while now. The total holdings of bullion-backed exchange-traded ETFs are at the record high, having doubled from 1,450 to 2,700 tons during the last four years, according to Bloomberg.
One can expect further devaluation of the greenback in the near future.
Lastly, there is a rather inverse relationship between the value of the US dollar and gold. The US dollar lost 93 percent of its value over the last 100 years. And this journey is long from over. Looking at the US’s massive $23 trillion national debt and the recent monetary policy decisions by the US Federal Reserve, one can expect further devaluation of the greenback in the near future. As a matter of fact, last week, the US Federal Reserve decided to lower the benchmark interest rate from 0.25 percent to 0 percent and relaunched its quantitative easing program and other programs mounting to $2 trillion stimulus package.
The role of blockchain
Today, the predominant way to get gold exposure is through physical gold-backed exchange-traded funds (ETFs). To invest in these ETFs, you either need to have an account in the bank that offers such instruments or open an account on a trading platform offering gold ETFs. This is the old world. Decentralized finance does away with barriers like these.
Both physical gold ETFs and tokenized gold represent ownership rights in physical gold stored at some secure vault. Also, both can be traded on exchanges and represent a relatively liquid asset. The difference between ETF and tokenized gold is that traders can send the token globally, peer-to-peer, in a few minutes to anybody anywhere who has a blockchain address. No bank account necessary.
Tokenized gold can be used not only as a store of value but also as a means of payment, whereas it can travel completely outside of the banking system. It becomes the type of money we used before Bretton Woods did away with the Gold Standard. Should state defaults and bank runs become daily news, it could be the money the world turns to again.
While governments are looking at ways of tokenizing national currencies, and companies like Facebook are working on digital corporate money, all of this might come too late. The world in crisis will need a fast and reliable transfer mechanism for stable money that everyone trusts. This is how the global financial crisis might become that catalyst that catapults blockchain-based digital assets such as tokenized gold to mass adoption.
For this to happen we need three things: token issuers, exchanges and trust. The role of token issuers is to reliably put appropriate amount of precious metal behind each token issued. Exchanges enable trade and provide liquidity. (Paxos was an early pioneer, issuing the gold-backed PAXG token, which is today the only fully regulated gold token that you can redeem for accredited gold bullion bars.) The recent addition is Switzerland-based SMART VALOR, where I’m CEO. Last week it became the first European crypto exchange to embrace PAXG and enable direct on-ramps and trading in Swiss Franc, GPB and EUR via bank wire or credit card payment.
The third component – trust – will be hardest to achieve. In the eyes of traditional investors, crypto exchanges are not a place of trust. You could see this last week as the streets of many European cities were filled with people lining up in front of gold shops. Clearly, they do not trust their banks to hold that gold ETF for them. But many of us in the crypto space may trust tokened or digitalized gold ownership. We trust decentralized networks, we trust the technology and we’re prepared to be early adopters.