Get Bitcoin and Gold in September

Some investors perceive Bitcoin as risk-on and gold as risk-off. This is a mischaracterization, however. Bitcoin and gold are actually quite similar and are necessary during a time when the Federal Reserve is about to embark on an interest rate cutting cycle.

Here’s the backdrop. In a speech at Jackson Hole in Wyoming, Federal Reserve Chairman Jerome Powell effectively set the tone for the rest of 2024 in terms of monetary policy. Powell declared, “The time has come for policy to adjust,” and added, “The direction of travel is clear.”

However, Powell then followed up those statements with, “The timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks.” Presumably, he was referring to the employment data for August, which will be released prior to the September FOMC meeting.

Despite Powell’s suggesting that the “timing and pace of rate cuts” will be data-dependent, the financial markets didn’t wait for the Federal Reserve to provide more signals. The bond and housing markets reacted quickly, pricing in their assumptions of swift, imminent interest-rate cuts.

Mike Fratantoni, chief economist of the Mortgage Bankers Association, observed that the “immediate reaction to the speech resulted in some reductions in longer-term Treasuries and secondary mortgage market yields.” Fratantoni concluded that “mortgage rates may be somewhat lower in the near term,” and he “continues to look for mortgage rates to drift down closer to 6% over the next 12 months or so.”

Courtesy: Yahoo Finance

Meanwhile, Treasury yields across the yield curve got slammed in the wake of Powell’s Jackson Hole speech. The yield on the 10-year Treasury note declined by around 6 basis points to approximately 3.8%, and the yield on the 2-year Treasury note slid by nearly 10 basis points to 3.913%.

You’ll notice, by the way, that the 2-year Treasury yield is still greater than the 10-year Treasury yield. This yield-curve inversion has been in effect for many consecutive months, a phenomenon that typically signals a recession.

In any event, none of this should have been very surprising to astute investors. The minutes from the July FOMC meeting had already indicated that the “vast majority” of central bank officials “observed that, if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting.”

Still, even though the coming interest-rate cuts have been telegraphed for a while now, Powell’s Jackson Hole speech provided a sense of relief and confirmation that the market had been looking for. Consequently, an “everything rally” ensued, with stocks, gold, silver, Bitcoin, and bond prices (which move inversely to bond yields) all surging in tandem.

This might seem odd, since gold is supposed to be risk-off and Bitcoin is supposed to be risk-on. Really, though, they’re both risk-off since the big Fed pivot to interest-rate reductions is about to commence.

Courtesy: MarketWatch

There’s no denying that, historically speaking, Bitcoin has been more volatile than gold. Indeed, gold is generally less volatile than the U.S. stock market, and that’s one of many reasons to own gold in your portfolio along with stocks.

Here’s what’s likely to happen in the coming months. Bond yields will fall, so government bonds will become less attractive as income-yielding assets. The U.S. dollar will also decline in relative value, and investors can have some “dry powder” but shouldn’t be overloaded with too much cash.

The government will continue to print money, of course, and the Federal Reserve will flood the U.S. banking system with cash through large-scale bond purchases. This, along with interest-rate cuts, will be the Fed’s pivot from tight to loose monetary policy.

All of this adds up to a massive devaluation of the dollar. Sure, Bitcoin is volatile, but it’s also a smart dollar-debasement hedge. Gold, the less volatile asset, is also a good hedge against fiat-currency devaluation.

The takeaway is that a well-balanced portfolio will have a mix of high-volatility and low-volatility assets. Gold can be your portfolio’s anchor, and a moderately sized allocation in Bitcoin would further protect you against the relentless and inevitable failure of fiat money.