The Old Playbook… Or the New?

The pursuit of profit in down markets has always been difficult.  Academics have searched for years to find assets that go up in down markets or down in up markets.  Market technicians have been scanning charts and data for decades in pursuit of durable patterns and inflection points with the hope of finding better hedges.  They use measures of volume and direction to determine what happens next. 

While some have been successful, historical patterns are only durable until enough market participants figure them out.  At that point, correlations change and the pattern that was, becomes something completely different. 

Academically, we still teach the idea of uncorrelated assets benefits to the efficient frontier as a panacea of portfolio management.  The idea of course is to add as much value to a portfolio as is possible with as few units of risk.  We pursue this ourselves with private assets where there is some durability to correlations because private assets are not available to everyone. 

But in periods of perceived strain, investors have historically scooped up large positions in gold as the tangible nature of the precious metal gives people comfort as a store of value.  As a commodity that is priced in US Dollars, this has been thought of as a wonderful hedge against inflation as well. 

Intuitively, the last several years should have been amazing for gold, but the dollar churned higher and the emergence of a new hedge against the US Government (or any government) absorbed many of the dollars that ordinarily would have been committed to the commodity. Crypto currencies have been the hot and VERY controversial new (on a relative basis) hedge for nervous markets and as evidence, Bitcoin tokens are currently up close to 45% since the banking crisis started in March. 

That may sound impressive, but since the market topped out in November of 2021, Bitcoin pricing is still down more than 50%. 

So why would these two perform so differently while also providing some level of protection around panicky markets?  The answer is about taste.  While the hype around cryptos included institutional investors in 2021, the more recent price movements are all about retail investors.  

Institutional investors generally don’t like volatility as it wreaks havoc on their calculations of risk and return.  Therefore, it is not surprising that as Bitcoin’s track record builds, institutional investors would shy away from the asset and pursue a more established market like gold when looking for safety. 

Source: Barrons

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