Both gold and cryptocurrencies have performed poorly in the face of growing prices in 2022, despite the fact that they are commonly combined as investments that are resistant to inflation.
As of September 23, Bitcoin, the most well known digital currency in the world, had fallen roughly 71% from its record high of $65,000 reached in November. As of Friday, gold prices had fallen by about 20% from their March peak.
Cryptocurrencies are commonly referred to as “digital gold” since they are speculative investments that might theoretically be utilized as money. Additionally, the supply of gold and cryptocurrencies like bitcoin is much more constrained than that of the U.S. dollar, whose number can be easily increased by the Federal Reserve. Theoretically, because of their scarcity, these assets ought to be more resistant to growing prices.
That hasn’t been the case, though, since prices are rising more quickly than they have in years.
how well cryptocurrencies have done as investments in 2022
Cryptocurrency prices fell earlier this year as a result of the Federal Reserve’s decision to combat inflation by raising interest rates. As of Sept. 23, the price of bitcoin was just over $18,000, down almost a third from its early summer top.
According to David Haas, a certified financial planner (CFP) with Cereus Financial Advisors, “I think the surge in cryptocurrency prior to this year was due to the extraordinarily low interest rates, making risk assets attractive.”
“People have access to low- to no-interest credit to invest in cryptocurrencies and other assets. The demand for [these] assets abruptly declines as interest rates rise due to the disappearance of this liquidity.”
According to Haas, when the Fed either reduces or ceases raising interest rates during a recession, the value of these assets can stabilise and increase.
The performance of gold in 2022
Despite gold’s lengthy history of being a rare commodity, prices have fallen to $1,645 as of September 23, much below a top of $2,069 reached in March.
According to Kevin Lum, a CFP and founder of Foundry Financial, “Gold seems to retain purchasing power over a long period of time, say, 100 years or more, but gives very little protection against inflation in the short term.”
The strength of the U.S. dollar, which this week reached its highest level in two decades, has had a significant role in gold’s performance. Due to the economic crisis in China and Europe, investors have rushed to the dollar, which is viewed as a safe haven during times of global economic uncertainty. However, when the dollar is strong, gold investments typically don’t do well.
Lum responds that recency bias may be a contributing reason when asked why gold has a reputation for being an inflation hedge.
Gold’s price increased from $38 per ounce to nearly $600 between 1972 and 1980. Anyone who experienced that time in history would be convinced for the rest of their lives that gold is the best inflation hedge.
According to him, the collapse of the US gold standard caused an asset bubble, which resulted in a spike in gold prices at the time. Since then, gold has proven to be an untrustworthy inflation hedge.
