GOLD V. BITCOIN

Can bitcoin outrun gold again in 2021?

WHAT DIGITAL GOLD WILL BE IS ONE STANDARD, ONE DENOMINATION, STORED WHERE IT'S QUOTED TO BE STORED. YOU NEVER HAVE TO MOVE IT, BUT IT'S ON THE BLOCKCHAIN…. THE TWO (BITCOIN AND GOLD) ARE GOING TO COME TOGETHER. — PETER GROSSKOPF, CEO OF SPROTT INC.

“Looking ng ahead, we extions expect rotations will continue to come in fits and starts, largely driven riven by virus-rews virus-related news about economic activity.”

In other er words, then, the tug-of-war ar between stayd stayhome and reopening stocks isn' t over, er, which could prompt more scrutiny of what's under nder the hood of stocks.

Investors, ors, for instance, may want nt to be leery of betting too oo much on either a pure reopening eopening or pure stay-at-home ome play. As an execreational example, recreational travel could bounce unce back when COVID-19 9 is tamed, but business travel may not ree-pandemic return to pre-pandemic levels.

A more re “back-to-thepproach “back-to-thebasics” approach could set in by the e second quarter of 2021, Schwartz said, depending deon on the direction of the pandemic. emic.

“We've seen in this marzero market, with zero interest rates and really y nothing else to buy, that some stocks just keep going ng up,” Schwartz said. “If you're going to own these e companies, don't just buy them because of a theme, really eally understand it.”

There are some sectors that investors may have been neglected in the coronavirus-related rally thus far that may have room to run.

Banks have grappled with low interest rates, higher credit costs and restrictions on dividends and stock buybacks during the pandemic, but now that loan-loss reserves have been built up and regulators are breathing easier, a 2021 renaissance isn't out of the question.

A recent report from analysts at CIBC Capital Markets predicted financial stocks are likely to outperform in 2021, based in part on the anticipated arrival of a vaccine and a “large-scale reopening of economies'' by the middle of the year.

“As such, we would expect an outflow away from the `stay-at-home' trade … and into the `old economy' names that have thus been avoided,” the analysts wrote.

Strategists at U.S. investment bank Morgan Stanley saw things similarly in their 2021 investment outlook, favouring stocks that have traditionally done better early after a recession, such as smaller firms.

“The early-cycle playbook also favours high-quality cyclicals, such as U.S. and European financials, materials, and segments hard hit by COVID-19 lockdowns, such as travel and leisure,” a recent research piece from the bank stated.

But those predictions and any attempt to say for certain whether the stayat-homes or the reopening stocks will prevail in 2021 need to be taken with a grain of salt.

That's because, for now at least, COVID-19 is still calling the shots.

Exactly one year ago, Peter Grosskopf, chief executive of Sprott Inc., a Toronto-based gold fund, was eagerly anticipating the next 12 months: interest rates were low and government debt was growing, strong signs in his eyes that gold would run.

Grosskopf, it turned out, was right. The price of gold reached a record high of US$2,070 per ounce on Aug. 6, before pulling back to US$1,895, leaving the yellow metal up 20 per cent for the year.

What he didn't foresee was that gold's performance would be overshadowed by an order of magnitude by that of its younger cousin, the digital currency Bitcoin, which soared 220 per cent in 2020 to break the US$23,000 threshold.

Th e d i s p a r i ty has breathed new life into a debate about whether gold, an ancient precious metal with a mature $10-trillion market capitalization, or the digital upstart currency born in 2009 under still mysterious circumstances and currently worth around

US$400 billion, makes a better hedge against the slew of risks lining up as we head into 2021, most notably inflation and a drop in the U.S. dollar.

“I'm going to repeat my comment, that everything is aligning for gold,” Grosskopf told the Financial Post in a recent interview. “Because the money growth is not going to stop.”

But even Grosskopf, an avowed Bitcoin skeptic, had to acknowledge that the cryptocurrency enjoyed a “phenomenal” year in 2020 and that his gold investors are increasingly asking to have it added to their portfolios.

Bitcoin's latest surge has come amid a slew of high-profile endorsements from business leaders such as Tesla chief executive Elon Musk and influential investors, adding legitimacy to a still young market around which there are many doubts.

After all, Bitcoin, is just a string of numbers and an algorithm, whose value as a store of wealth and hedge against risk only works as more people acknowledge its value, something that is increasingly happening.

"Frankly, if the gold bet works, the Bitcoin bet will probably work better,” U.S. billionaire Stanley Druckenmiller told CNBC in November.

Druckenmiller said he holds more gold than Bitcoin, but both offer a hedge against inflation, which is a rising concern as governments around the world inject stimulus into the economy. The preference for one or the other sometimes comes down to age, with younger investors and those in the tech industry showing up for Bitcoin, while older investors tend to prefer gold.

Fred Pye, chief executive of 3iQ , which in April launched a Toronto-listed Bitcoin fund that has grown to roughly $400 million in market capitalization, thinks Bitcoin has an edge because it can more easily be used to conduct transactions.

“Gold's use case is largely a store of wealth, and then it's jewelry and possibly gold colouring for windows — there's not a lot of uses," Pye said.

He added that supply and demand factors should work in Bitcoin's favour as well.

As gold prices go up, it becomes economical to mine gold deposits that were previously considered too lowgrade to profitably exploit. That means increases in the price of gold should help the supply grow.

Meanwhile, Bitcoin's supply growth rate is algorithmically fixed to drop in half every four years.

Right now, Pye said, the supply of both gold and Bitcoin is growing at about four per cent per year.

While that may persist for gold, new Bitcoin will become much harder to come by when the growth rate drops to two per cent in 2024.

“I think there's some short-term risks to Bitcoin, but the reality is the long term is so rosy,” he said. Pye forecast that in 2021 the price of Bitcoin would hover between US$20,000 and US$30,000 and that by 2022, it would reach $50,000.

Grosskopf, meanwhile, said he believes that gold has a digital future that will improve its value as a currency as well.

“I'm still a huge begest believer liever that the biggbegest biggest thing that will ever h hapl happen pen to gold is it will willhapl go digital,” he said, noting notting that such a move woould would allow the metal too to be stored in a central loship location cation while ownersloship ownership is being tracked onn on a blockchain ledger muuch much the way Bitcoin is. is “What “WhatW digital gold will be is one standard, one denomination, stored where it's quoted to be stored. You never have to move it, but it's on the blockchain…. The two (Bitcoin and gold) are going to come together.”

Grosskopf is not the only one bullish on gold's more immediate prospects.

Sean Boyd, chief executive of Agnico Eagle Mines Ltd., the largest gold miner in Canada, told the Financial Post this fall, he could see gold push up to US$2,500 per ounce amid all the uncertainty in the world.

That may depend on the timeline for the end of the pandemic and a return to normalcy. Gold's retreat below US$1,900 per ounce came as prospects for a vaccine improved.

Some of those who see money supply as the main determinant of gold prices may feel the damage has already be done.

At Velocity Trade Capital, analyst Michael Siperco wrote in December that the U.S. monetary supply has grown 1,600 per cent since 1975 whereas gold supply grew only 100 per cent in the same time period.This year, the U.S. money supply grew by 20 per cent, and his firm predicts gold will reach US$2,100 per ounce by 2021 and US$2,500 per ounce by 2025.

“If you're trying to make an intelligent decision on whether to buy gold or Bitcoin, chances are you own both,” Pye said. “If you like gold, you' ll love Bitcoin — that's the ad we're running on TV.”