Traditional economic theory and relationships have definitely been challenged this year, with all asset classes rallying amid high inflation and higher for longer interest rate environment, says Isaac Lim, chief market strategist at Moomoo Singapore.
The story of 2024, much like 2023, has seen sticky inflation figures, which has resulted in the US Federal Reserve (US Fed) keeping interest rates higher for longer. Traditionally, when the US Fed takes on a hawkish approach, stock markets begin to sell off and the US dollar should appreciate alongside more demand for US treasuries.
Economics theory posits that as a result, non-interest-bearing financial asset classes such as gold will start to come down. "That's the traditional co-relation that many people in my generation and before have learnt — that when interest rates are up, the US dollar should go up, gold prices come down, and stock markets should come down," says Lim.
Yet, in 2024, all such assumptions have collapsed. Despite persistent inflation and a hawkish US Fed, markets have moved in unison, defying expectations. Asset classes that historically moved in opposite directions — equities, gold, the dollar, and even Bitcoin — have all rallied simultaneously, challenging long-standing investment strategies.
The numbers paint the picture, says Lim. By December, the S&P 500 had risen 25% y-t-d, gold prices had surged by 28%, the US dollar index had gained 4.8%, and Bitcoin had reached record highs. Just on Dec 5, the most traded cryptocurrency in the world crossed the US$100,000 ($134,269.64) mark.
"What is more surprising is that in the rising interest rate environment, gold is actually the strongest performer out of the different asset classes," Lim adds.
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Investors have relied on predictable correlations for decades to construct their portfolios, but these correlations are no longer reliable. This simultaneous rally across asset classes highlights the fragility of traditional correlations and underscores the need for a fresh investment approach.
"If anything 2024 has taught us is to keep a very open mind," says Lim.
But how should investors approach this great economic disruption where they can no longer rely on established norms? In this chaotic environment, they may find that the resilience of both gold and bitcoin can present as indispensable portfolio hedges, the chief market strategist at Moomoo says.
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Gold, the safe haven asset class
No doubt, investors who have made bets on the S&P 500 have seen impressive portfolio returns in 2024. The focus on the "Magnificent Seven" among inventors has flooded headlines as artificial intelligence as a theme exploded over the last two years amid a broader insatiable appetite for tech stocks.
Yet, one asset class has outperformed the S&P 500 — gold. Gold futures are up 28% y-t-d, and if investors kept an open mind and not bought into the hype around equities, they might have had better returns if they made proper allocations, says Lim. "28% is a lot better than 25%," he quips.
Gold, long regarded as a reliable hedge against inflation, currency debasement, and economic turmoil, continues to offer stability amid widespread volatility this year. One of gold's enduring strengths is its intrinsic value. Unlike fiat currencies or digital assets, gold is not only a financial instrument but also a physical commodity with applications in jewellery, technology, and manufacturing.
The metal's scarcity further enhances its allure. While discoveries, such as a significant gold deposit recently found in China, occasionally challenge perceptions of its rarity, they do little to diminish its role as a store of value.
Lim notes that gold is also universally recognised and easily liquidated in nearly every market, making it a practical asset in times of crisis.
Investors can also take comfort in the relative stability of gold prices, which are far less volatile than other newer asset classes. Yet, for this reason, gold lacks the dynamic growth potential that has made Bitcoin increasingly popular.
Bitcoin, the new gold
Often referred to as "digital gold," Bitcoin shares some similarities with its physical counterpart but offers unique advantages. Like gold, Bitcoin is finite in supply, with a cap of 21 million coins, which ensures built-in scarcity and, therefore, makes it a good hedge against inflation as well.
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Lim says both assets are also decentralised in nature, and their prices are not easily manipulated by any governments worldwide, making them resistant to political and monetary manipulation.
This year, the world's first cryptocurrency gained significant credibility after two key events. First, the Spot Bitcoin ETF was approved, and major financial institutions such as BlackRock and Fidelity participated. Second, Donald Trump, who has been a big supporter of Bitcoin in his campaign, won the US presidential election.
"Now, not only are the big financial institutions considering Bitcoin as an investable asset class but also the most important and probably the biggest government in the world is starting to consider cryptocurrency as an asset class," says Lim.
While gold and Bitcoin might appear to be opposing investment choices, their differences are precisely what make them complementary, says Lim. Gold's stability provides a counterbalance to Bitcoin's volatility, creating a balanced hedge within a diversified portfolio. In uncertain times, gold ensures steady performance, while Bitcoin offers the potential for outsized returns during periods of market optimism.
Allocating a portion of a portfolio to Bitcoin can deliver significant returns without exposing investors to excessive risk. At the same time, gold acts as a stabiliser, mitigating the impact of market volatility. The combination of these two assets appeals to a wide range of investors, from conservative individuals seeking security to younger, tech-savvy investors drawn to the innovation of digital currencies.
Portfolio allocation
Research conducted by Morningstar suggests that a 5% allocation to Bitcoin strikes the right balance, says Lim. Allocating more than 5% may introduce diminishing returns relative to the risk while allocating less fails to capture meaningful benefits.
Yet direct exposure to Bitcoin remains a risky business. "It is still very much a "wild west" market out there for cryptocurrency exchanges; you don't know who is on the other side of the trade, who could be doing something illegal or is out to scam you," says Lim.
In addition, direct holdings in cryptocurrencies require investors to self-customise, which could pose a risk if investors lose their passwords to their digital wallets or if the provider of the digital wallet has a weak cybersecurity infrastructure.
On the other hand, investing in regulated avenues such as the Spot Bitcoin market, Bitcoin ETFs, and CME Bitcoin futures is a safe way for investors to gain exposure to the asset class.
The US Securities Exchange Commission highly regulates these platforms and has a direct reporting line should any issues arise with the trade. Exchanges are conducted in fiat currency.
Lim adds that trading CME Bitcoin futures provides a complementary alternative for investors who prefer to hold the asset independently. It hedges against price movements in actual Bitcoin holdings.
With the economic uncertainty of 2024 unlikely to dissipate anytime soon, the dual strategy of investing in gold and Bitcoin offers a compelling solution for investors. These assets continue to empower investors to navigate turbulent times with resilience, ensuring portfolios remain protected and positioned for growth.
