Keep clear of crypto and concentrate on commodities

Bitcoin fell further below the US$50,000 (HK$390,000) mark over the weekend, and I still hold my opinion from last week that it will be no surprise if it goes down to US$30,000 in the short term, given that the cryptocoin was trading at that price at the start of the year, and as low as US$3,000 a year ago.

So, investors should definitely stay away from cryptocurrencies for now.

While cryptocurrencies have now been engulfed in gloom, commodities have been enjoying a quiet revolution. This validates my thoughts that if the main reason for investing in cryptocurrencies was to hedge against devaluation pressures on the US dollar, euro and other currencies brought by quantitative easing policies, then why aren't commodities - gold, silver, copper, iron, tin, oil, etc - better choices?

Because cryptocurrencies are not yet widely used to pay for goods and services, but commodities and energy products have real uses, especially when countries are increasing infrastructure spending to boost their economies, which is really good for commodity prices.

Moreover, in comparison to the crazy performance of cryptocurrencies over the past year, commodity prices have really lagged behind.

While the CRB Index reflects that commodity prices rose more than 70 percent over the past year, if you look a little deeper, you will find the index has only returned to its 2018 high.

This means there's room for a more than 50 percent increase to the levels reached in 2014.

If you look at the performance of the index between 2009 and 2014, you would find that the monetary policies of central banks affected the prices of commodities.

In early 2009, after the US Federal Reserve launched a QE program to rescue the economy and financial institutions, the CRB Index bottomed out and recovered immediately reaching the level of 210 points.

It rose to 370 in 2011 and fluctuated between 270 and 310 until 2014, when the Federal Reserve said it would tighten monetary policy, and the CRB officially entered a bear market and kept falling.

Of course, some analysts will argue that the trend of the index from 2009 to 2014 was just a "dead cat bounce" thanks to the Fed's policies after the 2008 financial tsunami, because the index did not return to historic highs of more than 400 points seen in early to mid-2008.

But if we look the index's performance between 2001 and 2008, we find that the real driving force behind its rise was in fact the Fed and other central banks.

After the 9/11 terrorist attacks on America in 2001, the Fed slashed interest rates significantly to one percent. This increased liquidity, stimulated the stock market and commodity prices, and led to a seven-year-long bull market.

The CRB Index rose sharply from 120 points at the end of 2001 and the beginning of 2002 and did not stop until the mid- 2006 when the Fed continued to tighten monetary policy, and it began to weaken at 320 points.

However, since the market was in a crazy state at that time, it rose again in early 2007 along with the prices of stocks and other assets.

It rose to a record 470 points in July 2008, only to fall sharply after to the collapse of Lehman Brothers. However, from 120 points at end-2001 to a peak of 470 in 2008 meant a cumulative increase of close to 400 percent over a little more than six years.

Now, with central banks boosting QE due to the pandemic and governments rolling out infrastructure plans, as well as low commodity prices over the past 20 years, the CRB Index should see a significant rise - and not merely a rise of less than double as of now - after dropping to 110 points last year.

The biggest reason for this was that a lot of money was locked in cryptocurrencies, and commodities and some stock markets did not fully benefit from relative factors, though central banks around the world rolled out far more stimulus than when QE was first launched back in 2009.

Therefore, while cryptocurrencies appear to be falling, the CRB seems to be breaking through the resistance brought by the Fed's retreat in 2015, so it won't be difficult for the index to rise another 50 percent from its current level.

So, pay more attention to commodity prices and energy stocks for the rest of the year as investment products.

And when will the rally end? The key is when central banks such as the Fed tighten monetary policy, but that is unlikely to happen in the next six months. I shall talk about it with you next week.

Andrew Wong is chairman and CEO of Anli Securities