What the struggle between gold bugs and crypto bros tells us about raw materials

raw materials have long been sold as a means for inflation protection, and under the raw materials, gold was usually presented as the best asset for inflation protection.

However, investors must understand that raw materials are not homogeneous asset class and that they not only have to be a reaction to inflation, but also have to take into account different market drivers that affect natural resources.

take gold. The yellow metal has lagged behind almost all other raw materials at the youngest rally since 2020. Although the precious metal recently reached around $ 2,080 per ounce, this is real below the high of 2011, which is the equivalent of $ 2,300 today. And if we take the high of the inflationary 1970s as a benchmark, that would now be almost $ 2,950. Mining and gold-related ETFs also showed an initial rally that later disappointed.

This is because gold bugs were exposed to new competition by rise from the crypto brothers. From March 2020 to November 2021, the size of the cryptocurrency market increased by more than 19 times to $ 2.9 trillion. The price of Bitcoin rose from a low of around $ 3,800 to a maximum of around $ 69,000 until November 2021. That means more than 18 times from a low to a high. Other cryptocurrencies like Ethereum performed even better.

cryptocurrencies attracted investors, many in the younger class who were not particularly tried to invest in gold, and some looked at the mining industry both as dirty and outdated. Some crypto fans felt attracted to a similar libertarian story as the gold investors, but with the additional stimulus of a decentralized financial value without physical presence. Others liked the technological aspect of blockchain compared to a simple piece of metal.

Of course, the size of the gold market is almost four times as large as the cryptocurrency market at the height of $ 11 trillion, and the change in monetary policy has led to a sharp correction of the cryptoma markets together with the shares of the technology sector. Gold has recovered, but it is unclear how long this revival will continue, and both the precious metal markets and the shares of those who dismantle them are still traded in the same range as for almost two years.

In the meantime, other raw material markets, including energy, metals and cereals, have recovered, mostly due to the fundamental factors, influence the supply and demand of the actual materials. This includes an aggressive biofuel policy, the energy transition, bad weather that affects the harvest, the Covid 19 pandemic and now the war in Ukraine.

These underlying factors have been behind the widespread strength of most raw material markets in addition to an increase in money quantities that inflation drove to an unforeseen level. But market movements in raw materials, including inflation-related rally, which are not caused by changes and demand changes, are less intense.

It is therefore important to remember that energy, industrial metals, precious metals, minerals and plants have their own dynamics.

Although long -lasting bull markets for raw materials are generally based on fundamental data, inflation can undoubtedly help to strengthen such a rally. Energy and precious metals at times better correlate with general price increases

As always when investing, Timing is everything. Adaptation of the inflation expectations could promote a rush to raw materials. If you enter into a position before such a change and the fundamental data support the rally, the strategy will work. But if you build up the position too late as soon as the future inflation is priced in and the fundamental data begin to adapt, be prepared for losses. A strong correlation of raw material prices and inflation is not sufficient to ensure good passive protection.

There are undeniable reasons to buy some raw materials for security purposes at certain times. However, fundamental drivers of this complex asset class should always be taken into account and trade should not only be a mere reaction to inflation.

Alan Futerman and Ivo Sarjanovic are co-authors of a short-term book Commodities as an asset class: essays on inflation, the paradox of gold, and the impact of crypto