Investment management consultant MATTHEW FEARGRIEVE explains why Bitcoin and Gold are becoming the primary Safe Haven assets for investors in India, and explores the symbiosis growing between the novel cryptocurrency and the precious metal revered by Indians.
Readers will be familiar with the impressive rise over 2020 of that bellwether of market stability, gold. The price of gold broke through a record high of US$2,000 per ounce in August as investors rushed into the precious metal and other safe haven assets amid concerns about China-US tensions, a spike in COVID-19 infections around the world and a lack of political progress in Washington on a Fed stimulus package bill. A weak dollar in the middle of the year, with the greenback being down against most other currencies, was a another key catalyst for the metal's advance.
While gold’s rise has been impressive, the rise of Bitcoin has been positively meteoric. As traders started to step back from gold in Q4 as markets were buoyed by vaccine hopes and Biden's victory in the US presidential elections, Bitcoin launched itself into a parabolic curve. Hitting an all-time record high of US$19,510 in mid-November, the cryptocurrency was then pushed through a jaw-dropping US$23,000 in December by hedge funds and institutional allocators. Some commentators are forecasting US$70,000 to US$90,000 as a "realistic target" for Bitcoin by the end of 2022.
In INR terms, market commentators in India believe the Bitcoin price bracket for early 2021 could be between ₹50 lakh and ₹1 crore, owing to the growing global institutional demand that is fuelling the cryptocurrency, with the price of 1 Bitcoin potentially being anywhere in the range of single-digit crore in the next five to ten years.
Demand for Bitcoin is continuing to outstrip supply and institutional investors continue to seek exposure to the cryptocurrency as a hedge against inflation. If this trend continues over 2021, then Bitcoin's price sustainability seems assured. Such an economic environment will also be conducive to gold prices. So can gold and Bitcoin co-exist harmoniously as safe haven assets? And how attractive and accessible will they be to the average consumer in India?
India and Gold: a Special Relationship
India is one of the largest markets for gold, and growing affluence in the country’s cities is driving demand. Gold has a central role in the country’s culture, considered a store of value, a symbol of wealth and status and a fundamental part of many rituals. Among the country’s rural population, a deep affinity for gold goes hand in hand with practical considerations of the portability and security of jewellery as an investment.
Gold is considered to be auspicious, particularly in Hindu and Jain cultures. The ancient law-giver Manu decreed that gold ornaments should be worn for important ceremonies and occasions. Aside from Diwali, one of the most important dates in the Indian calendar, regional festivals across the country are celebrated with gold: in the south, Akshaya Tritiya, Pongal, Onam and Ugadi; in the east, Durga Puja; in the west, Gudi Pavda; and in the north, Baisakhi and Karva Chauth.
Gold is also central to people’s life events. Gifting gold is a deeply ingrained part of marriage rituals in Indian society, with weddings generating around a half of the annual gold demand in India.
2020: Retail demand for gold in India falls
In normal circumstances, the demand for gold in India rises in the three months between October to December due to festivals such as Dussehra and Dhanteras (the first day marking the Diwali festival) as well as a busy wedding season. But the high gold prices of 2020 and the impact of the coronavirus pandemic has impacted consumer sentiment and demand. Covid-19 lockdowns in India have slashed growth prospects and left millions unemployed. A combination of continued social restrictions in many markets, the economic impact of lockdowns, and all-time high gold prices have proved too much for many jewellery buyers. The World Gold Council (WGC) believes this trend will continue into 2021. (You can read our blog about the Indian government’s response to coronavirus here).
The WGC has reported that jewellery demand in India between July to September fell 48% on 2019 levels, from 101.6 tonnes to 52.8 tonnes. There were signs of an uplift in Q4, however, as India learns to live with the virus and the easing of lockdowns, but concerns about a Second Wave have left the markets lacking clear sight of many variables on consumer behaviour, compounded by volatile prices, and it looks likely that the pandemic impact on the annual retail gold demand in India for 2020 will leave it at a multi-year low.
2020: Wholesale demand for gold in India rises
In contrast with the retail position, gold’s safe haven status, and an anticipation of price rise, have paved the way for an increase in investment demand for gold bars and coins, which has risen 52% on 2019, to 33.8 tonnes so far this year.
That said, the pandemic’s impact is still being felt in the global gold market, and the WGC outlook for gold in 2021 is a cautious one.
Bitcoin: a parabolic surge
In contrast with the Q4 position for gold, Bitcoin prices have been pushed through an all-time high of more than US$23,000 against the US Dollar, propelled by increasing numbers of hedge funds and traditional institutional investors who have been pouring into the cryptocurrency.
These investors have cast aside some of the concerns that have dogged Bitcoin since its inception; that it is a purely speculative, bubble asset, with no intrinsic value and no regulatory overlay; that it lacks a track record of being a stable store of value, exhibiting a profound tendency to fluctuate in a range that is much bigger than competing assets like gold. And the 2020 rally has not made concerns about its susceptibility to fraudsters go away. Many asset allocators remain wary.
Nonetheless, demand for Bitcoin is so far this quarter outstripping supply and institutional investors continue to seek exposure to the cryptocurrency as a hedge against inflation. If this trend continues over 2021, then Bitcoin's price sustainability seems assured. Such an economic environment will be conducive to gold prices, also. So can gold and Bitcoin co-exist harmoniously as safe haven assets?
Bitcoin and Gold: a Symbiotic Relationship for 2021
In a previous blog, we noted that Bitcoin's position relative to gold as the traditional bellwether of market volatility has become increasingly more interesting as the pandemic has progressed. Notwithstanding the (seemingly inherent) volatility of crypto, some institutional investors were early on showing signs of treating it as a bedfellow of, or alternative to, gold as a safe-haven asset, according to a report by JPMorgan, a trend that was seemingly not been discouraged by a 50% slump in Bitcoin's value in March. It will be interesting to see what impact the recent price surge will have on this school of thinking, but the stage seems set for Bitcoin to enjoy an added dimension as "safe haven asset".
Enter Goldman Sachs, who have reassured their investors that Bitcoin does not pose an existential threat to gold, (Bloomberg reports 18 Dec): "We do not see evidence that Bitcoin’s rally is cannibalizing gold’s bull market and believe the two can coexist".
Goldman did, however, admit that Bitcoin’s ongoing rally could steal some demand from gold investors: "Gold's recent underperformance versus real rates and the dollar has left some investors concerned that Bitcoin is replacing gold as the inflation hedge of choice. While there is some substitution occurring, we do not see Bitcoin’s rising popularity as an existential threat to gold’s status as the currency of last resort".
This, from Goldman Sachs, is clearly significant. The traditional move in markets as tumultuous as 2020's would be to hedge against stock volatility with gold. This has proven an effective method in the past, but Bitcoin has ushered in a new era of digital currencies. As the leading cryptocurrency, Bitcoin has many of properties of a currency, but with some unique features that can make it a viable safe haven.
You can read my blog about buying and selling Bitcoin and gold in 2021 here.
How does Bitcoin compare to Gold?
What are the salient characteristics of Bitcoin and gold?
Security. It is difficult to steal gold, to pass off fake gold or to otherwise corrupt the metal. Bitcoin enjoys similar in-built defences, due to an encrypted, decentralized system and complex algorithms. That said, several years after the Mt. Gox incident, some investors are sill wary about the soundness of the cryptocurrency's operational underpinning.
Value. Gold has historically been used in many applications, from luxury items like jewellery to specialized applications in dentistry, electronics, and more. In addition to ushering in a new focus on blockchain technology, Bitcoin itself has tremendous baseline value as well. Billions of people around the world lack access to banking infrastructure and traditional means of finance like credit. With Bitcoin, these individuals can send value across the globe for close to no fee. Bitcoin's true potential as a means of banking for those without access to traditional banks has perhaps yet to be fully developed.
Liquidity. Both gold and Bitcoin have very liquid markets where fiat money can be exchanged for them.
Volatility. One major concern for investors looking toward Bitcoin as a safe haven asset is its volatility. We need only look to the price history of Bitcoin since 2017 for evidence. Clearly, the parabolic surge in Bitcoin prices in Q3 and Q4 2020 have allayed the concerns of many institutional and retail investors; but many investors, big and small alike, will be wondering if a 2017-style slump is lurking around the corner, particularly if mainstream asset values stabilise in line with the hoped-for economic recovery beginning in 2021.
Bitcoin has historically proven itself to be subject to market whims and news. Particularly as the cryptocurrency boom swept up a number of digital currencies into record-high prices around the end of 2017, news from the digital currency sphere could prompt investors to make quick decisions, sending the price of Bitcoin upward or downward quickly. This volatility is not inherent to gold, making it arguably a safer, safe-haven asset.
In recent years, a number of alternative cryptocurrencies have launched which aim to provide more stability than Bitcoin, some linked with the U.S. dollar in much the same way that gold was prior to the 1970s. A challenge that may lie ahead for Bitcoin, as a first-mover, is the attractiveness that these competing cryptocurrencies may enjoy as a product of Bitcoin's rise, particularly for investors looking for a safe haven asset with lower intrinsic volatility.
Bitcoin in India
Investor enthusiasm for Bitcoin in India has been tempered with degree of scepticism about cryptocurrencies on the part of the Reserve Bank of India (RBI), which in 2018 tried to strangle the system by prohibiting banks and payment entities to deal with cryptocurrency exchanges, before the Supreme Court intervened and required the government to promulgate a regulation policy. There is now talk of the government maybe moving ahead with some kind of ban. The government’s response to cryptocurrencies has been inconsistent. A committee was set up with a view to regulating cryptocurrencies, and the government is purportedly trying to promote the blockchain technology that supports the currency.
Blockchain development and cryptocurrency often go hand in hand. China, which has allowed cryptocurrency exchanges to flourish, is also the home of the largest number of blockchain start-ups. And if a government is provided with the digital tools to confirm trader identity, it makes little sense to ban their trade.
Moreover, by banning, rather than regulating cryptocurrency trading platforms, the Indian government would inadvertently giving a free hand to foreign multinational companies to develop their assets and move in once a ban is removed, leaving the government with only residual control over the market. If the Indian government wants to be a partner in crypto development, it must be able to understand how it works, otherwise it will be singularly unqualified to assume the role of regulator.
More fundamentally, Prime Minister Narendra Modi needs to reconcile his schizophrenic Make in India worldview with the obvious and vital role that foreign technology companies can legitimately play in the development in India of cryptocurrency trading platform infrastructure and blockchain systems. You can read our blog about why atmanirbhar bharat is a dangerous barrier to foreign investment into India here.
Outlook for Bitcoin in India
The extent of the institutional money that has been allocated to Bitcoin over Q3 and Q4 has taken everyone by surprise. Players like Grayscale Bitcoin Trust and JPMorgan point to Q3 2020 inflows that were three times larger than last year's, with Grayscale reporting Q3 inflows from professional investors in the region of US$1bn (taking Grayscale's AUM to US$10bn). The cryptocurrency has been enjoying a tailwind since the start of the year, when hedge fund managers Paul Tudor Jones and Stanley Druckenmiller gave it a degree of endorsement. In October PayPal announced that it had pivoted to implement the acceptance of cryptocurrencies. And Facebook will be launching its digital currency Libra next year.
Analyses of the origin of inflows into Bitcoin over 2020 reveal a trend that has gained momentum quarter on quarter: that institutional investors (including pension plans and family offices, for which crypto can act as a hedge to interest rates and equity markets) and retail investors have come to displace hedge funds as the biggest makers of long-term bets on the cryptocurrency. Inflows from retail investors have been significant. In a post-Covid era of low economic growth, high unemployment and inflation, both gold and Bitcoin are poised to establish themselves as the primary safe haven assets available to savers and investors worldwide. And that includes India.
You can read my investment blog about buying and selling Bitcoin and gold here.
MATTHEW FEARGRIEVE is an investment management consultant. You can read his blog here and see his Twitter feed here.
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