The stock market rally should pause as investors weigh the timing of the first Fed rate cut this
cycle. So far this year, the S&P 500 has achieved 16 new all-time highs amid steady economic
growth, improving inflation, and the ongoing rally in tech stocks. Many other asset classes have
also contributed to portfolio gains in this environment. Both gold and Bitcoin, for instance, have
also reached new highs in recent weeks, rising above $2,185 and $68,399, respectively.
The
underlying economic trends are in favor of lower rates but recent economic data have sent mixed
signals as to the exact timing. For example, the latest report from the Bureau of Labor Statistics
showed that 275,000 new jobs were added in February, well above what economists expected. A strong job market means that the Fed can hold off on cutting rates, since it suggests the economy
is doing fine even with tight financial conditions.
In theory, gold can benefit from rate cuts just as the stock market does. Lower interest rates make
bonds and cash relatively less attractive, leading investors to seek alternative ways to preserve
wealth. This is especially true when investors are worried about the country’s fiscal discipline and
geopolitical risks in the Middle East and Ukraine. The accompanying chart shows that gold has
gained about 35% since its lowest point in 2022 when the Fed was hiking rates rapidly. At the
moment, Dover does not have an allocation to gold within our portfolio strategies.
We still favor an overweight in equities and Interestingly, the S&P 500 has outperformed gold over
this period with a gain of 44% with reinvested dividends. This is partly because gold does not
always behave as one might expect or hope. In times of high inflation and economic distress, hard
assets such as gold and other commodities are expected to outperform. While gold did rally in
early 2022 when inflation was accelerating, gold prices then pulled back and did not recover until
the middle of 2023. Gold also provides no income benefits which makes it less attractive if interest
rates remain higher for longer.
Thus, while gold has experienced a strong rally and is hovering near all-time highs, it’s important
to keep its relative performance in perspective. The choppiness of gold prices over the past few
years shows that while it can act as both a hedge during inflationary periods and serve as a store
of value, this can reverse quickly as conditions change. Like all asset classes, gold is perhaps most
valuable as part of a diversified portfolio rather than as a standalone investment.
Whether the rallies in Bitcoin and other cryptocurrencies continue is unclear given the uncertain
nature of the asset class, especially after the various corporate collapses, scams, and criminal
convictions in the ecosystem over the past few years. Still, the rapid recovery from the 2022 crash has no doubt attracted much investor attention. Bitcoin is also becoming the leading indicator of investors appetite for pure speculation and at the moment market participants seem to be gorging
themselves.
So, Bitcoin can be thought of as another asset with specific characteristics. The question of whether and how much to invest in this asset should be no different than deciding on any stock,
bond, currency, commodity, real estate property, etc. Careful analysis and risk management are needed to understand the potential risks and expected returns relative to other investments. While
the Dover Investment Committee has studied Crypto assets for the last five years, we share the
opinion of many thought leaders out there like Jamie Dimon or Warrren Buffett that there exist a
high probability that it could go to zero one day.
performs is far more important – not just in terms of returns but its risk profile too. So, while Dover
has ridden large cap tech stock wave, we will not lose sight of the many other parts of the market
that could also benefit from rate cuts, ongoing economic growth, easing inflation, a strong labor
market, and more.
The bottom line? The choice to invest in gold, bitcoin, tech stocks, or any other asset
should be viewed in the context of a diversified portfolio rather than as a standalone
investment. When appropriate, doing so can help to balance other asset classes,
creating a smoother ride toward long-term financial goals.
Dover Advisors, LLC (“Dover”) is a registered investment advisor. Advisory services are only
offered to clients or prospective clients where Dover and its representatives are properly licensed
or exempt from licensure. For additional information, please visit our website at
https://doveradvisors.com/.
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