ALTERNATIVE MARKETS UPDATE – END APRIL 2024

​Gold started surging substantially in March and April 2024 and reached a new record high of $2,401 per ounce. At the time of writing, gold is trading slightly lower at $2,335, as shown in Figure 1. Gold reaching high prices seems reasonable in the current state of the economy. However, the exact timing does not support this breakout. Gold flourishes in high inflation, high uncertainty, and recession ecosystems. High uncertainty is certainly true with continued geopolitical tensions, e.g. Russia-Ukraine, Israel-Palestine-Iran, etc. While there is no recession currently, indicators imply a recession for years now, which is further supported by the growing tensions around the world. High inflation was present, and inflation is still moderately high. Nonetheless, interest rates, even on a real basis, are high, which historically has shown to behave anticyclical to gold. The current view on a “higher for longer” ecosystem, which implicates high interest rates for a longer time, also does not favour gold. While uncertainty and a potential recession are valid reasons for increases in gold prices, it further benefits from the fact that the asset will likely perform well whether there is a recession or not, which not many other assets can claim. Additionally, central banks have been accumulating a lot of gold, especially China and Eastern countries. Perhaps, Eastern central banks have acquired the amount of gold Western countries are ready to sell, which leads to a shortage of supply and increasing prices.

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RESEARCH PERSPECTIVE VOL. 226 April 2024 Alternative Markets Update Gold started surging substantially in March and April 2024 and reached a new record high of $2,401 per ounce. At the time of writing, gold is trading slightly lower at $2,335, as shown in Figure 1. Gold reaching high prices seems reasonable in the current state of the economy. However, the exact timing does not support this breakout. Gold flourishes in high inflation, high uncertainty, and recession ecosystems. High uncertainty is certainly true with continued geopolitical tensions, e.g. Russia-Ukraine, Israel-Palestine-Iran, etc. While there is no recession currently, indicators imply a recession for years now, which is further supported by the growing tensions around the world. High inflation was present, and inflation is still moderately high. Nonetheless, interest rates, even on a real basis, are high, which historically has shown to behave anticyclical to gold. The current view on a “higher for longer” ecosystem, which implicates high interest rates for a longer time, also does not favour gold. While uncertainty and a potential recession are valid reasons for increases in gold prices, it further benefits from the fact that the asset will likely perform well whether there is a recession or not, which not many other assets can claim. Additionally, central banks have been accumulating a lot of gold, especially China and Eastern countries. Perhaps, Eastern central banks have acquired the amount of gold Western countries are ready to sell, which leads to a shortage of supply and increasing prices. Figure 1: Gold Price and Its Performance Since January 2023, Source: Investing, April 2024 Uranium has seen increased interest over the past few months, due to strongly soaring prices. As of March 2024, the prices of uranium nearly doubled since January 2020. Uranium miners saw an even bigger increase by growing nearly 4x at their peak in early 2024, as shown in Figure 2. Uranium came into focus when the sanction against Russia were put into place and Europe realized its strong dependencies on Russian fossil fuels. Additionally, climate goals are ambitious and difficult, if not impossible, to reach with the current energy production. Uranium and nuclear power allows for more independence as a form of energy and its relatively environmentally friendly compared to other energy sources, such as coal. Thus, many countries are at least planning or building new nuclear power plants, and are re-instating shut down facilities. Figure 2: Uranium Commodity and Uranium Miners Price Development (Indexed) Since January 2020, Source: Federal Reserve Economic Data & Yahoo Finance, April 2024 On 19th April 2024, the long-awaited Bitcoin Halving took place and will reduce the rewards for mining Bitcoin (BTC) from 6.25 to 3.125 BTC. While the Halving typically has a short-term negative effect, it marks an important point historically. BTC usually soars ahead of the Halving followed by a moderate decline, as most traders see it as an attractive exit point. In the prior Halvings, this effect was much more pronounced, due to almost exclusively retail traders being involved. With more institutional investors in the space, especially with the recent spot BTC ETF approval, and a broader public being aware of the Halving, the historical effect of the Halving is less severe. As shown in Figure 3, the immediate effect of the Halving was small. As of the time of writing Bitcoin is trading at $62k with a market capitalization of $1.2tn. Alongside the Halvings, the cryptocurrency market can be categorized into three phases. Phase 1 denotes the time ahead of the Halving, while Phase 2 marks the time after the Halving. Phase 1 is characterized by gains through recovering prior losses and anticipation of the Halving. Phase 2 usually indicates the strongest bull run in the cycle, which occurs after the Halving. After Phase 2, crypto markets usually crash quite significantly. Figure 4 shows these cycles since 2014 with a distinction between Bitcoin and Altcoins. Interestingly, BTC usually dominates the first phase. One reason is that this phase starts after a substantial crash, which when investor confidence is low. In such an ecosystem, investors gravitate towards BTC, as the most “stable” currency in the market. Additionally, the Bitcoin Halving is directly affecting BTC. The second phase has historically been dominated by altcoins instead of BTC. A large portion of this behaviour stems from investor confidence in the market. In this state, investor confidence is high, and investors seek alternative investments with higher upside potential, which leads to significant inflows into other tokens. Figure 5 shows a table with the historical growth of Bitcoin and Altcoins in the past two Halvings. Figure 3: Bitcoin Price Development Since January 2023, Source: CoinMarketCap, April 2024 Figure 4: Altcoin Market Share Through Bull Cycles from 2014 to 2024, Source: Pantera Capital, February 2024 Figure 5: Growth of Bitcoin and Altcoins Through their Two Phases in the Bull Cycles from 2014 to 2024, Source: Pantera Capital, February 2024 Ethereum also posted strong gains so far. To date, ETH is up 150% since January 2023 and 43% since January 2024, as shown in Figure 6. Ethereum has been relatively quiet since its latest “Dencun” upgrade in March 2024, which addressed its scalability process. More recently, a spot Ether ETF has been approved in Hong Kong, which is officially available on 30th April 2024. Additionally, a crucial approval spot Ether ETF is also pending in the US with an estimated decision by the SEC in May 2024. However, most market participants expects that these ETFs will not be approved, even VanEck, one applicant, shares this sentiment. Among the key reasons of a potential denial is that the SEC classifies “the vast majority” of crypto assets as investment contracts and potential difficulties approving the “Proof-of-Stake” consensus algorithm. While an approval by the SEC does not seem imminent, the approval by Hong Kong boosted the token slightly and its effective impact can be observed, once the ETFs are launched and how much capital they attract. Despite the mixed signals regarding ETH, the token is likely seeing further price increases based on very attractive returns during the past BTC Halving cycle, and the fact that ETH has not reached its previous high of $4,891. Figure 6: Ethereum Price Development Since January 2023, Source: CoinMarketCap, February 2024 Solana (SOL) has been in the spotlight recently, due to FTX’s sale of its token holdings. The now defunct crypto exchange, FTX, holds approximately 10% [41.1m coins] of the total supply of Solana. Due to its bankruptcy, the company is now selling its SOL tokens. In a first offering, FTX sold SOL tokens at a price of $64, or at a 68% discount at the time of the transaction. These tokens are locked for a pre-determined period of time. Some of the largest managers in the space, such as Galaxy Digital and Pantera Capital, acquired a significant portion of these tokens. Through this initial sale, FTX was able to sell around two-thirds of its SOL holdings. Figure 7 shows the price development of SOL since January 2023 and the price of the initial sale. While the performance is enormous with 1,500-2,000% since January 2023, it needs to be highlighted that the price back in January 2023 was close to its low-point, at which the token lost around 95% of its value it held previously. The remaining SOL tokens are currently being sold through an auction open to creditors. It is unknown whether the entire SOL supply can be sold through this auction, and current information points towards further auctions to sell the remaining tokens. Figure 7: Solana Price Development Since January 2023 & the Price per Solana Token from FTX’s Initial Sale, Source: CoinMarketCap, February 2024 STONE MOUNTAIN CAPITAL Stone Mountain Capital is an advisory boutique established in 2012 and headquartered in London with offices Pfaeffikon in Switzerland, Dubai and Umm Al Quwain in United Arab Emirates. We are advising 30+ best in class single hedge fund and multi-strategy managers across equity, credit, and tactical trading (global macro, CTAs and volatility). 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