Some investors think that gold is not the safe-haven asset it used to be.
As a reminder, safe-haven assets are the ones that the market tends to purchase and hold through times of crisis or high uncertainty.
Gold, the US dollar, and the US government debt have been included in this group.
In the past, gold had a special place in investors’ portfolios. It didn’t usually move alongside the market, meaning that if market indexes dipped, gold would not follow them. This offered diversification benefits.
Gold has also been considered the ultimate “inflation play.”
Inflation erodes the value of paper (or “fiat”) money. But gold isn’t issued by any government. And nobody except for market participants can control its price.
These two features—inflation protection and gold’s decentralized nature—may no longer be unique to the yellow metal. Or so some suggest.
Cryptocurrency has become popular, and some of the most popular and liquid cryptos also don’t have a central body that issues it.
Does it mean that gold is obsolete?
We will look at this question in a moment.
Another question that investors are asking themselves is: can gold still protect them from inflation?
Because if it has lost its “alternative currency” features, it may not have the clout it once had.
Let’s see what’s going on with gold, which has recently broken through its $1,900 per ounce level.
Did Bitcoin Kill Gold?
Articles that suggest bitcoin made gold obsolete have gotten a lot of attention.
For years, the crypto market had outperformed gold.
In 2021 alone, gold lost about 4% of its value while bitcoin appreciated by 60%.
And throughout the year, especially in the second half, inflation started biting customers’ purchasing power and dealing some damage to investors’ portfolios.
Gold should have performed better, the thinking went, but bitcoin outperformed it handily.
The conclusion many investors made was that bitcoin is a better inflation hedge than gold.
But then 2022 happened.
At the beginning of the year, inflation caused a massive selloff in tech stocks.
Right now, the tech-heavy Nasdaq index is down 12% year-to-date.
Bitcoin is down 13%.
And gold is up 4%.
In other words, this “stress test” showed that when inflation soars and high-risk tech stocks become volatile, gold tends to move in the opposite direction.
Now, the market seems to be treating bitcoin like it’s a part of a larger “tech” group of investments.
This is an important observation.
You can argue about what bitcoin really is, but it’s also helpful to see how its price responds to shocks like inflation.
And so far in 2022, it has responded just as Nasdaq did. It slid, and it did so to a similar extent.
Meanwhile, gold has crossed $1,900 an ounce and outperformed tech-focused investments.
In other words, it has been doing the exact same thing it did in the past.
It moved independently of the rest of the market (which at this point is tech-heavy, given the immense growth in the Big Tech stocks). And it has performed well in light of rising inflation.
Speaking of which…
Gold and Inflation: The Relationship Has Been Working in 2022
Inflation pushed the price of gold up this year.
But does it still have any upside?
In our view, it could be the case.
Other commodities, for example, oil, have been on a tear over the past twelve months.
Oil is up over 21%, while gold is up just 4%.
And analysts at Bloomberg point out that gold is trading closer to its long-term averages (based on relative valuation) than its peaks.
Plus, there’s little extra supply of gold, as opposed to fiat money, which is easy to create artificially.
Bloomberg points out that central banks’ balance sheets are almost seven times bigger than in 2005. But the supply of gold has been up just 28% since then.
In other words, there’s less gold per dollar on the central bank’s balance sheets than there was in the past.
This could be a bullish sign for the yellow metal.
To put it in perspective, the total value of gold above the ground is about $12 trillion.
Meanwhile, the total market capitalization of the “Big Tech” and other popular companies (Apple, Microsoft, Amazon, Alphabet, Meta, and Tesla) is almost $10 trillion.
You can make your own decision about where gold is headed…
But regardless of what most investors think, the “yellow metal” is here to stay.
Thank you for your loyal readership,
The Financial Star team