While much of the world still struggles to come to grips with the societal and economic effects of the coronavirus pandemic, swathes of investors have turned to gold and cryptocurrencies as a hedge against equity and foreign exchange market risks.
This massive surge in interest in recent months has led to spectacular gains in both the cryptocurrency and gold markets, further solidifying their attractiveness as a store of value over fiat currencies during a time where many people are suffering from significant financial losses.
From recovery to profitability
Almost immediately after the World Health Organization declared the coronavirus to be a global health pandemic, practically all financial markets witnessed one of the most dramatic selloffs in recent history.
Between mid-February and mid-March, the SPDR S&P 500 Exchange-Traded Fund SPY and its associated index fell by a staggering 34% to reach the lowest value in over three years, while the Dow Jones Industrial Average ^DJI fell 37% to its lowest value since December 2016.
On the other hand, Japan's Nikkei 225 ^N225 Index fell by 30% over the course of a month, one of its worst selloffs ever. But as of mid-August, nearly all major stock indexes have recovered to close to or just above their pre-crash value.
The SPDR Gold Trust GLD hit a new nine-year high of about $194 per share before pulling back to the current level of about $186.
It's associated commodity momentarily fell from $1,700 to $1,491 per ounce between February and March. On the other hand, on average, cryptocurrencies lost more than half of their value over the same period in one of the worst crashes of the last decade.
Since then, both gold and cryptocurrencies have experienced one of the most prolific bullish rallies ever seen in the financial markets. Gold is now trading at $1,935 an ounce after reaching its highest ever value of over $2,000 last month.
The price of the yellow metal is still projected to climb even further, whereas the cryptocurrency market is now at its highest value since June 2019.
As a result, popular cryptocurrencies like bitcoin and Ethereum are up 60% and 194% year to date, whereas Chainlink is up more than 700% over this period. As such, those hedging their portfolio with gold and cryptocurrencies have generated a substantial return on their investment, and are still performing well in 2020despite the prevailing dire economic circumstances.
The advent of gold-backed tokens
The popularity of both gold and cryptocurrencies has also given rise to assets that have the properties of both these are known as gold-backed tokens.
Much like standard cryptocurrencies like Bitcoin and Litecoin, gold-backed cryptocurrencies benefit from blockchain-based security and extremely low transaction fees but are backed by a fixed quantity of gold. These are used by investors that want to benefit from the appreciation of gold but don't necessarily want the hassles that come with dealing in physical gold.
(Source: CoinGecko)
Gold tokens have seen large improvements in both price and trading volume over the last three months.
Since each gold-backed token is backed by physical gold, transferring these tokens is the equivalent of transferring a set quantity of gold. In the case of CACHE gold (CGT), each token represents 1 gram of pure investment quality gold. As such, sending 10 CGT is equivalent to sending 10 grams of gold, which can then be either kept as a store of value, traded on the open market just like any other cryptocurrency or redeemed for physical gold stored in CACHE's vaults.
As such, gold-backed tokens represent an easy way for cryptocurrency holders and traders to easily speculate on the price of gold and diversify their portfolio, while fiat holders have the opportunity to invest in one of the most reliable assets in terms of price stability and resistance to economic decline. This, along with their impressive liquidity, underscores why gold-backed tokens now form part of more investment portfolios than ever before.
Disclosure: No positions in the stocks mentioned.
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