Gold still holds the value of a hedging instrument simply because it lacks credit or default risks. Gold prices rise when the interest rate falls; which is directly proportional to the strength of the economy. So, in a broad sense, gold is a hedge against a declining economy.
Gold is also widely used as an inflation hedge. Durable assets, such as natural resources, including gold, silver, and real estate, have intrinsic value because of their limited supply. It is interesting to note that when a crisis frightens the financial markets, gold becomes a good hedging asset to absorb shocks in the equity, bond and oil markets.
People see gold as a way to pass on and preserve their wealth from one generation to the next. When the official currency loses its purchasing power due to inflation, gold tends to be valued in the base currency (mainly the US dollar) and, therefore, tends to rise in local currency. Additionally, gold is considered to store good value against the local currency.
Although the price of gold can be volatile in the short term, it has always maintained its value over the long term.
However, in recent times, critics are developing unfavorable sentiment for the bullion and its ability to hedge against movements of other assets, such as stocks, as well as against inflation. While this is a reasonable long-term (decades) store of value, it is less reliable in most smaller investment horizons. Bullion lost ground in 2021 as the recovery from the pandemic gained ground and Treasury yields increased. However, it still showed a strong inverse relationship with the US currency. In the current scenario, gold should be viewed as a hedge of the dollar.
Economists believe that stocks or Bitcoin are now better positioned to protect against long-term inflation for investors. Carefully selected stocks can certainly protect you against inflation in the long run. Equities produced the highest inflation-adjusted return of any major asset class over the long term.
However, Bitcoin’s history is short to draw solid conclusions about its inflation-hedging capabilities.
Bitcoin has become an alternative anti-fiat asset. It has been popular because of the libertarian anti-government ideas that have accompanied the digital currency since its inception. Bitcoin can facilitate instant cross-border payments and remittances without restriction from central authorities.
There is circumstantial evidence that money flowed directly from gold to Bitcoin. Institutions appear to be making the decision to allocate money to Bitcoin as a hedge against a collapse in fiat.
Bitcoin’s performance over the past year is directly aligned with the evolution of bond yields. When returns rise, so does Bitcoin. This implies that digital currency directly benefits from “reflation trading” – or the belief that inflation is coming.
Bitcoin and gold are both susceptible to inflation, but gold is happiest when the world faces a downward spiral. In contrast, Bitcoin prefers a stronger economy, when the yield increases.
Gold is good for slightly higher inflation, but not necessarily much higher real interest rates. Gold, which is a hedge against uncertain economic conditions, is now less favorable due to an increased risk appetite fueled by fiscal stimulus programs by central banks around the world. While the precious yellow metal can also have large withdrawals, nothing like the epic losses that bitcoin periodically inflicts on its holders before regaining the upper hand.
As Bitcoin declines tend to be three times larger, the risk can be equalized by holding three times as much gold as Bitcoin.
Demographic trends confirm that the tide is turning, with many young investors preferring digital assets over metals. For example, only 7.5% of millennials aged 25 to 34 own gold and silver, while among affluent millennials 25% own cryptocurrency (and 31% are interested in to acquire). Bitcoin exhibits many symptoms of a speculative mania; like gold, its value is in the eyes of the beholder.
It has no intrinsic value. Bitcoin is not easy to fall back on. Official action could easily limit the use of the digital asset if it grew large enough to challenge the government’s monopoly on issuing currency. It is estimated that 20% of all Bitcoins are stuck in wallets to which people have lost the keys. Most places don’t accept Bitcoin, and transactions are often slow and expensive, sometimes taking days or costing over $ 25 each when the network is congested.
The calculations required to maintain the Bitcoin blockchain alone consume as much electricity as a medium-sized country, which has a significant impact on the climate.
The supply of gold is not completely static, it increases by around 1.25% per year as mining progresses. It can be expensive to store and difficult to transfer in its physical form. It is easily confiscated and cannot be divided and distributed in a hurry. Bitcoin has none of these drawbacks.
The supply is inelastic and capped (only 21 million digital coins will ever exist, of which 18.638 million Bitcoins have been mined through February). You can send it anywhere as easily as an email (as long as you don’t lose the codes that allow you to access it). It is fungible, resilient, verifiable, independent of any government and above all, easily divisible.
Cryptocurrency analysts and investors expect higher targets for Bitcoin in the long run if Bitcoin becomes a ‘gold disruptor’, and no upper limit at all if it ends up being commonly used as a network of payment rather than just another asset to hold onto and pray for.
Demand for gold is driven by its perception as a superior “anti-fiat” asset. If people are concerned about the long-term purchasing power of government-issued currencies, they will be willing to pay more for gold, with its role seen as a store of value.
Large debt borrowed by governments around the world and by corporations also raises the specter of repayment tension, as gold once again could come back in favor.
At this point, gold has many advantages over cryptocurrencies as a store of value and medium of exchange. These advantages make it hard to believe that gold will ever lose its luster as a store of value and inflation / currency hedge.
- Long-term price stability.
- Secure storage in safes.
- Monitoring by the custodian of individual retirement accounts in gold or silver.
- Real-world industrial utility.
- Longevity proven for millennia.
Mature investors want a portfolio protector that has a record of several millennia in the first place of safe haven.
This is where gold performs well. With gold, volatility can be managed because production can speed up or slow down in response to demand, but you don’t have it for bitcoin. Compared to other assets, it might continue to be slightly more volatile, even after the market structure has fully matured.
Given the growing popularity of bitcoin, investors could continue to buy them (like stocks) in good times and in rising return scenarios, while gold could continue to be the ultimate hedge against bad times. , inflation and currency degradation.