After reaching a record more than a year ago, gold has struggled to get over $2,000 per ounce, and Wells Fargo says this is because of competition and not because of gold’s fundamentals numbers.
And this competition is, of course, bitcoin.
Gold was trading near $1,800 for the past couple of weeks, unable to break that level after the past flash crash at the start of August.
“All of that is happening even when quite favorable economic conditions exist, which should have boosted gold upward,” said John LaForge, a Wells Fargo real asset strategist.
“Gold has had a bad 12 months. At this time in 2020, gold sold close to $2,000 per ounce. Today, it sits nearer to $1,800 an ounce. Probably the most weird thing about gold’s sagging performance is that its fundamentals are quite good,” LaForge said. “Normally, lower interest rates, excessive money printing, a commodity bull cycle, and high inflation rates would have pushed gold higher, not lower.”
This is why LaForge stressed that it is not the Gold fundamentals but new competition behind the metal’s problems. “The bottom line — gold’s new struggle might not be because of fundamentals, but new competition,” he said.
The main competition versus last year has been the increase use of cryptocurrencies, specifically bitcoin’s surging popularity, LaForge said.
“While some cryptos can store value, we believe the higher volatility, and nontraditional returns justify our decision to classify them as alternative investments. We continue to see digital assets as an alternative investment for investors through a well managed fund,” he said. “The industry’s market cap has quintupled since Aug. 2020 to close to $2 trillion.”
When it comes to storing value, bitcoin fits the bill the best — from how it is being used by investors to how it works.
“Bitcoin is the largest and oldest in the industry, and it is usually compared to gold as a ‘means of storying value’ asset. Supplies for these two assets are scarce and take a lot of effort to extract, and higher prices do not lead to more production,” LaForge said.
Author: Blake Ambrose