The debate between BitcoinFor years, debate has raged about gold vs. inflation. Some may disagree with this view, however, Analysts in investmentPredict that Bitcoin will continue taking. Market shareFrom gold as a result of wider adoption of digital assets and possibly due Bitcoin-specific scaling solutions. Others argue it’s because the crypto market is down since the start.
Some, like Adam Perlaky, senior analyst at the World Gold Council suggest that they can co-exist in a portfolio.
Perlaky stated to GOBankingRates that gold is a different asset than cryptocurrencies and that the demand for it is much more varied, with almost half of its demand coming from the technology and jewelry industries. A Jan. 2022 World Gold Council Report shows that consumer demand for jewelry increased by 52% in 2021. This was after fully recovering 2020 losses, and then rebounding to match 2019, according to Perlaky.
Bitcoin demand is, however, almost entirely tied to investment and often focuses solely on price performance. Perlaky said that gold is also a reliable hedge against market risk. Bitcoin has yet to act as a hedge against market turmoil.
The Similarities and Distinctions of Gold and Cryptos
The argument that cryptos and gold are similar hedges seems to be based on perceptions of their scarcity as well as their role in the market as alternatives to fiat currencies. According to a February 2 blog post, the World Gold Council considers such a comparison too simplistic. They also overlook fundamental differences between cryptocurrencies and gold, not just in terms of market dynamics but also in terms performance and role in portfolios.
Perlaky explained to GOBankingRates that cryptocurrencies and gold are two different assets that serve different purposes. Due to limited supply, cryptos often find themselves in the same conversation as gold. Partly because of the extreme volatility, cryptos are still not an established medium of currency.
He said that cryptos increase portfolio volatility in a meaningful way, while gold historically has had higher risk-adjusted return.
He also said that crypto-investors who choose to invest in them should have additional gold in their portfolios to reduce portfolio volatility.
Trillions upon Trillions in Gold for Investment Purposes, Bitcoin Catching up
Zach Pandl, a Goldman Sachs analyst, wrote in a January note to GOBankingRates that the World Gold Council estimated that 44,000 metric tons (or more) of gold are owned by the private sector for investment purposes. This includes privately-held bars and exchange traded funds (ETFs). This means that the public holds approximately $2.6 trillion in gold for investment purposes. Pandl compared this to the fact that Bitcoins’ float-adjusted capitalization is currently just below $700 billion.
Pandl stated that Bitcoin currently holds a roughly 20% market share in the store of values (gold plus Bitcoin).
Hypothetically, Bitcoins market share would rise to 50% in five years with no growth of overall demand for store of values. This would mean that its price would rise to just over $100,000, resulting in an annual compound return of 17-18%, according Pandl.
It is also worth noting, that although 2021 was a wild ride in cryptos, Bitcoin finished the year lower than expected and outperformed both gold as well as the stock market for the third consecutive year.
A rising interest rate environment could be a headwind to gold’s 2022 outlook. Perlaky said that the effect of such increases is often limited, especially in a period with historically low absolute rates and negative real rates.
Inflation has been rising in recent years, making equity pullbacks more frequent and more severe. This will likely keep gold demand as a hedge. Strong jewelry and central bank demand for gold may provide long-term support. He stated that understanding trends is more important than investing because of the unique nature of gold’s demand. This is why it is an effective strategic component to portfolios.
Although gold may experience some volatility in the near future, bar and coin demand remain strong.
Craig Erlam, OANDA’s senior market analyst, stated in a February 3 note to GOBankingRates, that gold is currently in trouble as tightening continues.
Gold appears to be in consolidation again and is even a bit lower today, after paring some of the losses last week in the early part. Central banks raising their game is not good for yellow metal, and we are seeing it across the board, with the Fed possibly raising interest rates five more times, the Bank of England possibly doing the same, and even the European Central Bank joining in a lesser degree, Erlam wrote.
Another trend that is changing for gold is the outflow of gold-exchange-traded funds.
Perlaky reported that the global gold ETFs recouped almost a third of the outflows in January 2022. This was due mainly to U.S. listed funds and continued inflation concerns.
While there were net inflows in 2021 they were not as large as the record setting year of 2020’s inflows. Investment demand for gold isn’t limited to ETFs. Bar and coin demand are another form of investment demand. Gold investmentHe stated that the, rose 31% last fiscal year, with record purchases in the U.S.A. and Germany.
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This article was originally published on GOBankingRates.com: Can Bitcoin and Gold coexist with high inflation? Why both are important investments