Inflation problems have led to more volatility in the stock and bond markets of late. That should be good news for gold, a tangible asset with a limited supply that often does well in times of inflation. Central banks can always print more money. Miners can not only magically create more gold.
But gold has recently lost some of its luster thanks to a new financial child in town: bitcoin. Gold prices are falling by about 9% this year and traded almost 15% during the peak time of more than 2000 dollars per ounce last summer.
Meanwhile, bitcoin has risen almost 70% and is currently hovering just under $ 50,000 per coin – not far from the record high it reached last month.
Still, gold fans believe that the yellow metal is due to a rebound – although bitcoin continues to march higher as well.
he tried true inflation hedging
Gold is a classic horror trade. Prices stopped last year on concerns about coronavirus outbreaks that are destroying the global economy. But gold also does well when investors worry about inflation – as they are now.
In addition, the price volatility of bitcoin can make it less attractive than gold for many large institutions that want to protect their cash, despite the recent decisions by such as Tesla and MicroStrategy to keep bitcoin on their balance sheets.
“Investors need serious protection against inflation, and bitcoin may not offer it,” Ipek Ozkardeskaya, a senior analyst at Swissquote, said in a recent report.
Some investors believe that fears of inflation could pick up again if the US Senate passes President Joe Biden’s proposed $ 1.9 trillion stimulus package. There are questions about whether so much money is really needed now that there are more Covid-19 vaccines and more people are returning to work.
The concern is that all federal stimulus money will eventually lead to the economy overheating, leading to even higher inflation. This in turn can further increase gold prices.
“The reason we see higher gold prices is also mainly because US House approved the stimulus package. We have a real fear of higher inflation, “said Naeem Aslam, chief analyst at AvaTrade in a report, adding that more stimulus will” just fuel “inflation.
Analysts at European asset manager Amundi are also worried about a sudden rise in inflation due to higher interest rates as the US economy recovers.
They argue that investors need to be “vigilant” and get past the inflation scenario and that buying gold is one way to do that.
“Gold can also provide support among abundant liquidity in the current environment,” Amundi’s analysts wrote in a report.
Analysts from UBS Global Wealth Management also said in a report on Tuesday that the recent decline in gold looked “excessive” and that – “spikes in market uncertainties … may offer support in the short term.”
But bitcoin can beat gold for good reasons
Still, a gold return does not have to coincide with a bitcoin decline. In fact, cryptocurrencies may continue to be a good bet at a time when bond yields are expected to continue to climb.
“Gold is good for slightly higher inflation but not necessarily much higher real interest rates,” said Brad Neuman, marketing manager for Algiers, in an interview with CNN Business.
Neuman said that although inflation is often accompanied by rising interest rates, the problem is that interest rates can rise dramatically and hurt the return on gold. That may be one of the reasons why it has released bitcoin recently.
As such, Neuman believes that bitcoin – like cryptocurrency-related companies like PayPal, which now allows users to trade and hold bitcoin on the platform – can be even better than gold.
Bitcoin supporters also point out that the cryptocurrency is likely to remain popular with investors who see it as a safe haven during inflation – just like gold.
The main reason why bitcoin has increased this year probably has more to do with the fact that investors have realized that the cryptocurrency is even scarcer than gold or other precious metals.
There is a ceiling of only 21 million bitcoins built into the source code. And about 18.6 million are already in circulation.
“There are a limited number of coins. That’s why bitcoin can replace gold, says Steve Ehrlich, CEO of Voyager Digital, a cryptocurrency brokerage firm. “It’s more like digital gold and not necessarily a payment medium.”
It is unlikely that most consumers will use gold or bitcoin to actually buy anything, but both assets may become investment winners at a time when consumer prices are rising.