ASX gold shares have finally been playing catch-up with the rest of the market and investors can thank cryptos like bitcoin for the outperformance.
Cryptocurrencies have been one of the drags on the gold price as some experts believe digital currencies are a good substitute for the yellow metal.
This is why the brightening outlook for gold coincided with the crash in the crypto market. The price of bitcoin and ether both tumbled by around 30% to 40% in a day, reported CNBC.
Gold rises as cryptos like bitcoin crashes
There are a few reasons for the sudden reversal in sentiment towards cryptos. Unfavourable tweets by Tesla Inc’s (NASDAQ: TSLA) founder Elon Musk and warnings by China that it won’t accept digital tokens for payments were two big drivers.
Meanwhile, the gold price jumped to a more than four-month high when it hit around US$1,882 an ounce at the end of last week.
Gold has been rising steadily for most of this month.
ASX gold shares are shining bright
This helped major ASX gold shares, like the Newcrest Mining Ltd (ASX: NCM) share price, the Evolution Mining Ltd (ASX: EVN) share price and Northern Star Resources Ltd (ASX: NST) share price outrun the S&P/ASX 200 Index (Index:^AXJO).
While the big sell-off in cryptos won’t discourage the legion of fervent supporters, it only goes to show why digital tokens aren’t ready for prime time.
If anything, recent events show why cryptos are not a good replacement for gold – at least not yet.
Crypto fails test as a gold substitute
Investors buy gold for safety during times of fear. It has been trusted as a store of value for over 3,000 years.
The wide gyrations of cryptos undermines the belief that they can protect your wealth. This is particularly so if the asset class can be rocked (or rocketed) by a single tweet!
Cryptos hardly fit the definition of a safe haven.
Right investment, wrong reason
Don’t get me wrong, there are plenty of Ferrari-driving millennial millionaires thanks to the crypto craze, but they bought in to make big profit, not as a hedge.
The truth is, you don’t buy gold to become an overnight rich-lister. That’s not what investing in gold is all about.
This is a lesson many investors are about to learn, regardless of where cryptos trade next week or month.
Can ASX gold shares keep outperforming?
Another factor that is likely to drive investors away from cryptos and back to gold is waning risk appetite.
There is a clear trend showing capital flows are draining from more speculative assets, including high-flying tech shares.
For these reasons, we could see ASX gold shares continue to outperform in the short- to medium-term.
Beware making investment decisions that are based on the wrong reasons.