Why Gold and Cryptocurrencies Are Not “Inflation-Resistant” Investments

Gold and cryptocurrencies are often bundled together as inflation-resistant investments, but with prices rising at their fastest pace in decades, neither asset has performed well amid rising inflation in 2022.

Bitcoin, the world’s most popular digital currency, is down nearly 71% from its all-time high of $65,000 in November, as of September 23. Gold prices are also down nearly 20% as of Friday, from their recent March peak.

Cryptocurrencies are often referred to as “digital gold” because, like gold, they are speculative investments that can theoretically be used as currency.

In addition, the supply of gold and cryptocurrencies such as bitcoin is much more restricted than the supply of US dollars, which the Federal Reserve can easily increase. In theory, this scarcity should make these assets more resistant to rising inflation.

But with prices rising at their fastest pace in decades, that wasn’t the case.

How will cryptocurrency as an investment perform in 2022

Cryptocurrency prices took a hit earlier this year, after the Federal Reserve began raising interest rates to combat inflation. Bitcoin price has dropped to nearly a third of the early pandemic peak and was just above $18,000 as of September 23.

“I think the rally in cryptocurrencies prior to this year was due to very low interest rates, which makes risky assets attractive,” says David Haas, Certified Financial Planner (CFP) at Cereus Financial Advisors.

“People can borrow with little or no interest and invest in cryptocurrencies and other assets. As interest rates rise, this liquidity suddenly disappears and the demand for [these] Assets disappear.”

Haas says the value of these assets may stabilize and improve later in a recession, when the Federal Reserve cuts or stops raising interest rates.

How did gold perform in 2022

Despite gold’s long history as a rare commodity, gold prices fell to $1,645 as of September 23, far from March’s peak of $2,069.

Historically, gold has had a mixed track record as an inflation hedge.

“Gold appears to protect purchasing power over a long period of time — say, more than 100 years — but provides very little protection against inflation in the short term,” says Kevin Lum, a CFP and founder of Foundry Financial.

One of the main factors in gold’s performance was the strength of the US dollar, which reached its highest point in two decades this week. With the economic slowdown in China and Europe, investors flocked to the dollar, which is considered a safe haven in times of global economic uncertainty. However, gold investments tend not to perform well when the dollar is strong.

When asked why gold is so popular as an inflation hedge, Lum replied that modernity bias might be a factor.

“Between 1972 and 1980, gold rose from $38 an ounce to more than $600. For anyone who has lived through that period of history, you will be forever convinced that gold is the ultimate inflation hedge.”

He says that gold prices during that period were the result of an asset bubble related to the end of the gold standard in the US. Since that time, gold has proven to be an unreliable hedge against inflation.

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