[Interest Rate Cycle] How to deploy US interest rate cuts
[Interest Rate Cycle Investment Guide] Gold vs Digital Currency, Which Is Better?
AMPLE LIQUIDITY TENDS TO FAVOR ASSETS SEEKING HIGH RETURNS DURING INTEREST LOSS CYCLES. So, how will digital currencies and gold interpret their respective rises during this special period?
It is clear that assets with reactive liquidity tend to perform better during interest rate reduction cycles, so we contrast the situation with digital currencies and gold in interest-rate cycles.
We can compare the historical situation in recent years:
During the Interest Rate Increase Period
Gold, as a traditional safe haven asset, shines even more brightly. As interest rates rise, market concerns about the economic outlook intensify, and gold, with its unique hedging properties, is an ideal choice for investors to combat inflation and financial market volatility.
In contrast, the speculative nature of digital currencies is strong, and under tight monetary policy, investors' risk preference is to cool, causing this emerging asset class to face greater selling pressure.
For example, from the beginning of the last round of interest rate hikes to near the peak, that is, between November 2021 and December 2022, Bitcoin's decline could reach about 70%, while gold's maximum decline was only about 15%.
The blue line in the diagram is the BTC Bitcoin closing price line and the purple is the GCmain gold main (2412) closing price line
During the Interest Reduction Period
Relaxed monetary policy reduces the opportunity cost of holding interest-free assets, at which point the appeal of digital currencies is highlighted. The low interest rate environment encourages investors to pursue higher returns, while the digital currency market, due to its high volatility and potential high yield capacity, has become a haven for those willing to take on extra risk for excess returns.
Against this backdrop, while gold remains robust, its relatively conservative rate of return hardly compares to the explosive growth of digital currencies.
The chart below shows an example of Bitcoin's biggest gain of 320% from January 2023 to August 2024, and from January 2023 to August 2024, Bitcoin's maximum gain was 320%, far outpacing gold's gain of around 35%.
The blue line in the diagram is the BTC Bitcoin closing price line and the purple is the GCmain gold main (2412) closing price line
We believe that the main reason for the above-mentioned period being in a cycle of interest rate cuts is due to the slowdown in global economic growth and the easing of inflationary pressures. Each central bank acts to stimulate economic growth, choosing to lower interest rates to encourage consumption and investment. INTEREST RATE REDUCTIONS CAN REDUCE BORROWING COSTS, INCREASE THE WILLINGNESS OF BUSINESSES AND INDIVIDUALS TO BORROW, THEREBY BOOSTING ECONOMIC ACTIVITY.
Meanwhile, at the recent Johnson Hall Bank meeting, the Fed chairman stressed that “now is the time for policy adjustment. The direction forward is clear, and the timing and pace of the rate cut will depend on upcoming data, the changing outlook and the balance of risks.” This undoubtedly further raises the possibility of a September rate cut.
In addition, with the fall in commodity prices, inflationary pressures have eased, making interest rate cuts a viable policy option.
Therefore, if we determine that during the interest-rate cycle, increased liquidity makes digital currencies more attractive than gold. In an environment of low interest rates, investors seeking high returns are more inclined to accept the high volatility of digital currencies.
While gold remains robust, the potential of digital currencies should not be overlooked at this time, however, we also need to remain vigilant about the sustainability of crypto as we maintain the enthusiasm for digital currencies to prevent the risk of underlying logical collapse.
Thus, in an age of monetary looseness, the brave chase the dream of numbers, while the wise look for the true “golden key” in fluctuations.
