Why Gold and Cryptocurrencies Aren’t “Inflation Resistant” Investments

Gold and cryptocurrencies are often lumped together as inflation-proof investments, but with prices rising at their fastest rate in decades, neither asset has performed well. in a context of rising inflation in 2022.

Bitcoin, the world’s most popular digital coin, is down almost 71% from its all-time high of $65,000 in November, as of September 23. And gold prices were also down almost 20% on Friday, from their recent peak in March.

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

Additionally, the supply of gold and cryptocurrencies like bitcoin is much tighter than that of the US dollar, which can be easily increased by the Federal Reserve. In theory, such scarcity should make these assets more resilient to rising inflation.

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

How Crypto Has Performed as an Investment in 2022

Cryptocurrency prices took a beating earlier this year, after the Federal Reserve began raising interest rates to fight inflation. Bitcoin’s price fell to almost a third of its initial pandemic peak and was just above $18,000 as of September 23.

“I think the rise in crypto before this year was due to extremely low interest rates, making 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 crypto and other assets. As interest rates rise, that liquidity disappears and suddenly the demand for [these] the assets are leaving.”

Haas says the value of these assets could stabilize and improve later in a recession, when the Fed lowers or stops raising interest rates.

How gold fared in 2022

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

And historically, gold has had a mixed record as an inflation hedge.

“Gold appears to protect purchasing power over a long period – say, over 100 years – but offers very little short-term inflation protection,” says Kevin Lum, CFP and founder of Foundry Financial.

A big factor in gold’s performance was the strength of the US dollar, which hit a two-decade high this week. With the economic slowdown in China and Europe, investors flocked to the dollar, seen as a safe haven in times of global economic uncertainty. However, investments in gold do not tend to perform well when the dollar is strong.

When asked why gold has a reputation for being an inflation hedge, Lum replies that recency bias could be a factor.

“Between 1972 and 1980, gold rose from $38 an ounce to over $600. For anyone who lived through this period in history, you will forever be convinced that gold is the ultimate protection against inflation.”

Gold prices at that time were the result of an asset bubble linked to the end of the gold standard in the United States, he says. Since that time, gold has proven to be an unreliable hedge against inflation.

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