JACKSON HEWETT: Is gold losing its glitter among the crypto craze? And can it get it back?

Donald Trump’s victory has unleashed investors’ “animal spirits” but is gold becoming lead in the saddle.

After doubling in price in the past year, gold’s shine is now wearing off, down nearly 5 per cent in the past week.

Australia’s gold miners took a big hit, with a series of big names sold off by more than 5 per cent.

Gold was a core component of the so-called “Trump trade” — a bet by hedge funds and institutional investors that his election would unleash “animal spirits” in the market, but also commit the US to a fiscally profligate, inflation-boosting debt spiral that would boost gold as a hard asset.

Risk on, gold off

The “animal spirits” element is going strong. Across the globe investors are piling into any appreciating US asset they can find.

It’s a bit like rolling up to the race track and assuming half the horses to win or place.

Chief among the winners are Bitcoin and small and mid-cap US stocks. Serious investors have been rotating out of the top end of the market, and are chasing value in America’s smaller companies, while punters are putting their bets on cryptocurrencies.

This week Blackrock, one of the world’s largest exchange-traded fund providers, saw Bitcoin assets under management blow past gold holdings. As of last Friday, Blackrock’s iShares Bitcoin Trust had $US34 billion ($52b) in holdings, compared to $US33b in its gold ETF.

In Australia, crypto exchanges are seeing inflows up 70 per cent in this quarter alone.

From an investor-as-gambler perspective it makes sense to ride the boom – Bitcoin is up 44 per cent this month alone. In the eyes of speculators, gold, being an actual physical asset, can’t compete with the seemingly limitless potential of ones and zeroes.

Gold miners are even less appealing. Their returns fit into analysts’ models and are limited by the laws of finance. Even at double the revenue, they still have to get it out of the ground and can only produce so many ounces at a quantifiable margin.

Don’t give up on gold just yet

From a trader’s view point, holding gold and watching other assets appreciate makes no sense. In a bull market like this, reputations will be made. Telling clients to sit on underperforming assets is not going to cut it when they’re watching stratospheric gains elsewhere.

But analysts are saying don’t write off the precious metal yet.

The fundamentals behind gold’s rise are as important, if not more than they were a year ago.

America’s deficits are near record highs, and if Trump goes ahead with his tax cut and tariff campaign promises are forecast to go $US7.8 trillion higher.

If debt keeps going up, the US will find it harder and harder to find institutions to buy US government bonds to fund its spending.

That would lead to a “debasement” of the US dollar – basically a refusal by other countries to buy US treasuries and prop up the dollar. Central banks around the world have already been buying gold in record amounts influence by such concerns.

If the dollar did debase in such a scenario gold would soar. Bitcoin would soar also as it is also seen as a hedge against US dollar decline.

But all this is currently at least two months away and maybe more. Trump won’t take office until January so the gold traders won’t have much to work with until then.

Markets will likely continue to go up as animal spirits dominate but they are getting frothier and frothier.

On a price-to-earnings basis US stocks are more expensive than the days before the crash of the Great Depression and approaching the dotcom crash of 2000.

If Trump can’t unleash an earnings miracle to satisfy the markets, equities have a long way to fall. In that instance, go for gold.