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It's been a heck of a week for alternative assets as gold and bitcoin have surged to record highs — and it's only Wednesday.
But analysts are cautioning investors to be wary of rushing in. All that glitters, after all, isn't gold.
What's happening: The price of bitcoin surged past $44,000 early on Wednesday. It hasn't been close to this level since May 2022. That's when Terra — a popular "stablecoin" that was meant to retain a $1 price point — lost its peg, and when the connected Luna cryptocurrency dropped 99% in a matter of days, bringing down most of the crypto market.
The recent swell in crypto is a result of investor optimism that the Federal Reserve will cut interest rates in 2024 and that the Securities and Exchange Commission will approve a bitcoin-focused exchange-traded fund, making it easier for mainstream investors to get involved. The SEC faces a January 10 deadline to approve the application.
Gold prices, meanwhile, rose to a never-before-seen high of $2,135.40 on Monday as investors price in larger rate cuts by the Fed. Prices fell on Tuesday, but bullion's value remains elevated.
Crypto and precious metal advocates were gung-ho on Tuesday, claiming that this could be the dawn of a new era, a resurgence in alternative assets.
"Bitcoin is so back," Tyler Winklevoss, co-founder of crypto exchange Gemini, posted on X. "Bitcoin at 42k is the answer to the ultimate question of life, the universe and everything."
John Reade, a market strategist at the World Gold Council, an association of gold producers, told CNN that, with investors predicting several rate cuts over the next year, gold prices could "quite possibly" shoot above Monday's record high.
But a few days does not a sea change make. Advocates may be getting a bit ahead of themselves.
Here's why.
No interest paid on gold: Yes, gold technically hit an all-time high this week, but there's some context that needs to come with that statement.
Gold doesn't pay any interest, so "although we have hit all time highs in nominal terms, we are over 20% below the inflation-adjusted peak seen in 1980," wrote Jim Reid at Deutsche Bank in a note Tuesday.
So while gold may seem like a great way to hedge inflation, "it only keeps pace with inflation if you buy it at the correct time," said Reid. "In reality, it trails traditional assets over almost all medium- to long-term time periods."
A recent study by Deutsche Bank found that since 1800, gold has had an inflation-adjusted return of 0.32% a year. That's compared to a 3.07% return on Treasuries and a 6.83% return on equities.
"It struggles on a competitive basis," said Reid. "You can be a long-run inflationist but still be a bit underwhelmed by Gold as an investment."
Crypto uncertainty: Despite the buzz around the expected green light of a spot bitcoin ETF in January, there's no guarantee that the SEC will give its nod of approval. And even if it does, there's no guarantee it will send digital currencies soaring.
Much of the price inflation comes from investors front-running the SEC's likely approval, said Antoni Trenchev, co-founder and managing partner of the crypto lender Nexo. That begs the question of whether this is a "buy-the-rumor, sell-the-news event" he said.
There's a danger that investors will "rush for the exit when it happens," he said, similar to when the first ETF for bitcoin futures was approved in the fall of 2021 and prices quickly plunged 87%.
Trenchev also pointed out that bitcoin often goes "into reverse" after it breaks key thresholds. "Two weeks after bitcoin pierced $40,000 for the first time during the last bull market in 2021 it sunk below $30,000," he said.
A cautious Fed: The Fed is probably done hiking interest rates to fight elevated inflation, at least for this cycle. But that doesn't mean it's necessarily cutting them anytime soon.
A number of Fed officials, including Chair Jerome Powell, have indicated in recent weeks that it's still too early to debate rate cuts. Instead, policymakers will focus on whether the current fund rate is sufficiently restrictive.
"It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease. We are prepared to tighten policy further if it becomes appropriate to do so," said Powell during a discussion at Spelman College last week.
Other Fed officials have backed that stance.
"I'm not thinking about rate cuts at all right now. I'm thinking about whether we have enough tightening in the system and are sufficiently restrictive to restore price stability," said Federal Reserve Bank of San Francisco President Mary Daly in an interview last week. "Discussion about interest rate cuts is not particularly helpful at the moment. We should continue to focus on lowering inflation."
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