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August 28, 2019

Gold is Back and We Have Bitcoin to Thank

Disclaimer: The writer of this article may have positions in the securities mentioned in this article. The fact they hold positions in securities has had no impact on the production of this article

By Mathieu Litalien

August 28, 2019

You might be asking yourself, what does Bitcoin have to do with gold’s resurgence? Hear me out.

Gold has long been considered a haven for investors. In a bear market, or when there is significant volatility in the markets, the historical trend was to shift towards the precious metal.

All else being equal, an interest rate cut leads to the devaluation of currency. When this happens, gold becomes more attractive as it has long been considered the premier alternative currency. It is why gold hit all-time highs shortly after the financial crisis.

Over the past couple of years however, there has been a decoupling from the norm. Why? Cryptocurrencies. Go back a year or two, and you will see many bulls touting cryptocurrency, Bitcoin in particular, as the new alternative currency of choice.

Gold was cast aside and cryptocurrencies took center stage.

When market volatility increased, Bitcoin and alt coins were hitting new highs. Gold? It was stuck in neutral, unable to break free of a multi-year sideways trend.

Then, the inevitable happened. The bottom fell out of cryptos.  Fraud was widespread and there were many stories about investors losing large sums of money after well-respected exchanges were hacked. From Mt Gox, to more Quadriga’s missing millions here in Canada, there were several high-profile scandals.

Even the bullish of bulls could not deny that cryptocurrencies carried an inherent risk that was too easily dismissed.

Suddenly the prospect of Bitcoin and alt cryptos acting as safe alternative currencies was in question. Although it has since recovered, Bitcoin still hasn’t regained the respect it commanded in late 2017. It remains unregulated with little oversight. As the saying goes, “fool me once, shame on you; fool me twice, shame on me”.

The shift was noticeable this past fall. It quickly became the hottest trend of the year – gold is back as the alternative currency of choice. Year to date, the precious metal is up 20% and our top 10 gold picks of the year are flying high.

Kirkland Lake Gold (TSX:KL), our top pick is up 86% year to date and one of our original Bull List picks, SEMAFO Inc (TSX:SMF) is up 74% in 2019. These are among the top performing stocks in the industry.

What do gold stocks have in common? They have been chronically undervalued for years. The good news is that the run may be far from over.

Despite the recent run-up, most are still attractively valued. Take SEMAFO as an example. The Company has an ultra low P/E to growth (PEG) ratio of 0.4 and is trading at a low 13 times forward earnings.

As a general rule of thumb, investors should allocate 5% of  holdings to precious metals. In 2019, this has once again proven to be a good hedge against market volatility. 

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Mathieu Litalien

Mathieu is an individual investor and has been investing part-time for the better part of the past 20 years. He is primarily interested in fundamental analysis, focusing on the long-term and his portfolio is composed primarily of dividend-paying equities. Mathieu has a moderate risk profile and also looks for growth and value. His passion for finance and the markets have led him to his MBA and writing for Seeking Alpha, Motley Fool and Stocktrades. Mathieu also focuses primarily on stock research and content production for Stocktrades.ca Premium and the Stocktrades blog.

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