Asset Classes of 2021: Bitcoin's Rise Leaves Gold in the Dust

Gold is among the worst-performing major asset classes of 2021 despite accelerating inflation, as the precious metal's luster has faded alongside what some see as its digital equivalent, Bitcoin.

The precious metal, often touted as an inflation hedge, has fallen 5 percent this year even as investors seek protection as consumer prices rise worldwide. In contrast, Bitcoin has enjoyed a large, albeit volatile, rally in 2021, with an appreciation of 65 percent year to date.

Francisco Blanch, a strategist at Bank of America, said the Federal Reserve's withdrawal from crisis-era stimulus and higher U.S. bond yields had caused "big headwinds" for gold. A stronger dollar, making the metal more expensive for international investors, also weighed on its performance, he said.

“Some flows that may have flowed into gold in the past may have flowed into crypto assets,” Blanch added. Institutional investors' allocation to digital assets has increased "across the board" over the past year and a half, he said.

Bitcoin enthusiasts see what they call “digital gold” as a bulwark against inflation and point to its limited supply. However, cryptocurrencies such as Bitcoin and Ethereum are more like "risk assets" than havens, said Blanch, who described them as highly volatile and increasingly "correlated to stocks and risk" through their increasing use in some investors' portfolios.

Bitcoin's risk-adjusted returns, which account for volatility, show much smaller gains of 0.9 percent, lower than most other asset classes, according to Goldman Sachs calculations. Its price fell by $10,000 in an hour in early December.

Nikolaos Panigirtzoglou, cross-market analyst at JPMorgan, said Bitcoin's high volatility is "not incompatible" with a store of value thesis, which "has more to do with the belief that assets like Bitcoin or gold retain their value if something systemic happens or the financial system goes into crisis."

Elsewhere, US energy stocks and oil prices performed strongly as the year saw a reopening of the economy. “Monetary and fiscal support coupled with the rollout of vaccinations” increased the mobility of people and goods, which drove up energy demand, said Gregory Perdon, co-chief investment officer at Arbuthnot Latham.

Although the emergence of the Omicron coronavirus variant casts doubt on the forecasts, analysts remain optimistic. “We are much more excited about cyclical commodities [than gold] because we think the economic cycle will continue into next year,” Blanch said.

Real estate stocks also benefited from the reopening, with the S&P 500 sector adding 41 percent on a total return basis. According to JPMorgan, real estate investment trusts have historically outperformed public stocks when inflation and growth are either above average or above 3 percent.